Top of the agenda
Auto-enrolment – thinking about bringing forward your staging date?
The Pensions Regulator has published a statement setting out the procedure for employers to follow to bring forward their auto-enrolment staging dates. Employers with a staging date of 1st October 2012 may be able to bring it forward to 1st July, 1st August or 1st September 2012. Employers with a staging date of 1st November 2012 may be able to bring it forward to 1st July, 1st August, 1st September or 1st October 2012. For other employers, a table has been published setting out the dates (ranging from 1st October 2012 to 1st January 2018 as applicable) to which they can bring forward their staging date. To qualify, an employer must have:
- An existing staging date.
- A pension scheme that can be used to comply with the employer's duties. The employer must also have secured the arrangements with the trustees, managers, providers or administrators of the scheme that the scheme will be used to comply with the auto-enrolment duties from the new, and earlier, staging date.
Employers wishing to bring forward their staging dates must notify the Pensions Regulator by letter, fax or email at least one calendar month before the new staging date chosen. The Regulator will then send an acknowledgement confirming the new staging date and employers cannot then revert to their original staging date.
Although the auto-enrolment requirements place considerable obligations on employers that may have serious cost implications, some employers may still wish to bring forward their staging dates for business reasons, such as avoiding busy business periods. For further information on bringing forward your staging date, speak to your usual contact in the pensions team.
Details now available on technical amendments to be made to the Finance Act 2011
In our March 2012 e-bulletin, we highlighted the measures affecting pensions announced by the Chancellor George Osborne in the Budget 2012. These included making technical amendments to the Finance Act 2011. HMRC Pension Schemes newsletter 53 gives further details about the problem areas under the regime that those technical amendments are going to tackle. The key ones are:
- Changes to how the "Scheme Pays" facility applies in the year in which benefits are taken. Normally when a member wants to use Scheme Pays, the member must, broadly, give notice to the scheme no later than 31 July in the year following that in which the tax year ends in which the charge arises. If a member becomes entitled to all their benefits, however, notice has to be given before the member becomes entitled to their benefits so that any reduction to benefits as a result of paying the annual charge, can be calculated before the benefit comes into payment. However, the legislation currently refers to where the individual becomes actually entitled to all of their benefits in the 'tax year' to which the annual allowance charge relates. Because the member's pension input period may not be aligned with the tax year in certain circumstances, the final annual allowance charge may not arise until after the tax year in which the benefit is taken and, in these circumstances, the members will not be able to give notice for that annual allowance charge before taking his benefits. Regulations will be made to address this issue and will be retrospective.
- A change to the application of the deferred member exemption, which basically provides that a deferred member's benefits are not tested against the annual allowance test providing his benefits are not revalued above a certain specified level. As the legislation currently stands, the exemption is lost if a deferred member transfers his benefit to another scheme or another "arrangement". HMRC is proposing to make amendments to resolve this problem.
The proposed technical amendment set out in the newsletter will be welcomed. However, there are a number of other problem areas under the regime. HMRC have stated in the newsletter that it will have further discussions with the PSS Pensions Industry Stakeholder Forum about these and it will be interesting to see what further technical amendments are proposed and guidance issued in due course. We are currently liaising with HMRC to provide further guidance on some of the outstanding issues.
The Pensions Regulator
The Pensions Regulator's statement on scheme funding
The Pensions Regulator has issued a statement on scheme funding in light of the current economic conditions, in particular, index-linked gilt yields being at an all-time low, which has had the effect of driving up pension scheme liabilities and worsening scheme funding levels.
Aimed at trustees and employers of defined benefit pension schemes who are undertaking their scheme valuations with effective dates in the period September 2011 to September 2012, the Regulator expects that the statement will also be of relevance to all trustees and employers with schemes that provide defined benefits. The statement, running to some 33 paragraphs, covers risk management, technical provisions, and scheme recovery plans.
In relation to recovery plans, the Regulator expects that the current level of deficit recovery contributions have to be maintained in real terms and that most employers of schemes in deficit will not need to make changes to their existing plans. Those that do fall in two camps:
- Employers with significantly underfunded pension schemes for whom affordability of contributions is not a major barrier. Employers in this group are expected to make larger increases in contributions and/or provide security in the form of contingent assets.
- Employers, with deficits, who are expected to find affordability a challenge. The Regulator expects employers in this group to significantly increase their existing deficit recovery plan length and/or make full use of the other flexibilities within the scheme funding framework.
Where deficits have increased, the statement recognises that employers may have significant competing demands, making an increase in cash contribution to the pension scheme difficult. The Regulator expects that in these circumstances, the pension scheme should be equitably treated among other competing demands on the employer's business. Where the employer is using cash within the business at the expense of what could have been affordable pension contributions to the scheme, it is important that this is done to improve the employer's covenant rather than to disproportionately increase benefits to other stakeholders (such as shareholders and other business creditors).
In relation to technical provisions (which under pensions legislation have to be based on prudent assumptions), the Regulator has warned against schemes making allowance for anticipated improvement in the economic circumstances, in particular increasing discount rates in their valuations based on gilt yields reverting to previous levels. Its view is that it would not be prudent to try to second guess market movements by assuming gilt yields will inevitably improve in the near-term and that any such assumptions are better accommodated in scheme recovery plans, than technical provisions, where later they can be more clearly identified and mitigated if the assumptions turn out to be wrong.
Trustees and employers that follow the guidance in the statement are more likely to reach funding agreements that the Regulator finds acceptable without the need for regulatory involvement. Where an approach is taken by employers and trustees that is not in line with the Regulator's statement, the Regulator will seek to identify such schemes and intervene were necessary. The Regulator has asked that where the sponsoring employer is so weak that trustees are not able to put together a viable plan, that those employers should contact the Regulator promptly.
The Regulator's focus on technical provisions, the lack of any concessions on triggers for review of funding deals or on extending recovery plans will be disappointing to some but it is also fully understandable. In the light of uncertainty about future economic growth, the Regulator is keen that trustees keep pushing companies to reduce deficits while they can. After all, when companies get into financial difficulties it is too late for trustees to seek to tighten assumptions and demand quicker recovery plans.
Yet the statement that the Regulator is keen to ensure that schemes are treated equitably with other stakeholders and that disproportionate value is not leaked to those stakeholders may be reviewed with some scepticism by those other stakeholders. There are often situations where the existence of the pension scheme, and the perceived need to make contributions in accordance with the Regulator's demands, is one of the main factors seen as holding back the financial growth of the sponsoring company, its ability to attract new investment and its ability to deliver a fair return to existing investors.The speed of deficit repayment demanded by trustees, backed by the Regulator, is often seen as disproportionate when compared with the lower returns and greater risks being faced by other stakeholders. Economic austerity is having the effect of increasing the relative value of the trustee claim when compared to that of other stakeholders.The Nortel/Lehmans litigation, and the super-priority of Regulator sanctions thereby created, can give an entirely disproportionate value to the trustee claim, at the expense of other stakeholders.
Pensions Regulator consults on the Determinations Panel procedures and how the Panel's case team operate
The Pensions Regulator has issued two consultations in relation to the Pensions Regulator's Determination Panel (the body responsible for making formal decisions relating to individual cases where the Regulator wishes to exercise its various powers, such as the power to impose financial support directions and contribution notices). The first covers the procedure that the case team will follow in cases that are referred to the Panel. The other covers the procedure by which the Panel makes its decisions.
The case team consultation does not intend to make any substantial change to the way that the case team works but is designed to promote greater clarity and transparency. The proposed procedure lays out what the relevant parties can expect at each stage of the proceedings, from the initial investigations through to referral to the Panel and the case team's role post referral.
The separate consultation on the way that the Panel reaches its decisions is also, to a large extent, reflective of how the Panel currently works. Revisions and refinement to the procedure are based on the Panel's six years of experience of hearing cases. The amendments are designed to ensure that the procedure for cases going before the Panel are as clear as possible to external parties, to both those who are familiar with the procedure and those who are not.
The closing date for both consultations is 29 June 2012.
The case team procedure consultation can be found here and the Determinations Panel procedure consultation can be found here.
Age discrimination : Supreme Court considers the law on age discrimination
In Seldon v Clarkson Wright and Jakes (a partnership)  UKSC 16, the Supreme Court has confirmed that employers need to give careful consideration when seeking to justify mandatory retirement ages. The Court has held that inter-generational fairness and facilitating a dignified exit for employees are potential legitimate aims. However, employers must show that the identified legitimate aim actually applies to their business and that the particular retirement age chosen is appropriate and necessary to achieve that aim - which will remain difficult to establish. For more details about the decision, see our employment monthly briefing.
High Court holds that money purchase benefits cannot be used to secure defined benefits when a scheme winds-up
In Alexander Forbes Trustees Services Limited v John Doe and Richard Roe  EWHC 3930, the High Court has held that money purchase assets can only be applied for the benefit of money purchase members when securing benefits under hybrid schemes that entered wind-up between 6 April 1997 and 5 April 2005, regardless of the priority contained in a scheme's rules. This was because the correct interpretation of the applicable legislation excluded money purchase assets from being applied for the benefit of defined benefit members on a scheme wind-up.
The treatment of money purchase benefits on a wind up of a pension scheme is a highly complex area, given that under pensions legislation, four different statutory wind-up priority orders have operated since 1 April 1997. Broadly, priority orders determine how assets of an occupational pension scheme are distributed among beneficiaries when securing benefits on a wind-up; if any additional assets remain after the statutory priority rules have been applied, the assets are distributed in accordance with the scheme's trust deed and rules.
Since 6 April 2005, a statutory order has expressly stated that money purchase assets within hybrid schemes (schemes containing elements of both defined benefit and defined contribution) can only be applied for the benefit of money purchase members. However, before 6 April 2005, the legislation was unclear as to whether money purchase members of hybrid schemes received the same protection as money purchase assets within hybrid schemes were not explicitly ring fenced. This meant there was the potential that money purchase assets could be distributed in accordance with a scheme's trust deed and rules, which may have resulted in money purchase assets being used to secure defined benefit members' pensions.
The case concerned two hybrid pension schemes that started wind-up on 30 June 2000 and 2 March 2003. Materially the same priority legislation applied to both, and both were single fund schemes (with defined benefit and defined contribution benefits paid from the same investment pot) containing a scheme rule that had the effect that, on a wind-up, money purchase assets would be applied for the benefit of defined benefit members. The independent trustee of the schemes asked the Court to determine whether they should apply money purchase assets in accordance with the scheme rules, or whether legislation precluded this.
The Judge found that the legislation applicable to schemes that started wind-up between 6 April 1997 and 5 April 2005 required the ring fencing of money purchase benefits for the benefit of money purchase members. As a result, the Judge found that the scheme rules were superseded and should not be applied. The Judge held that it would be unjust and absurd to allow defined benefit members to profit from contributions that money purchase members made for their own benefit, especially because of the additional protection afforded exclusively to defined benefit members by the Financial Assistance Scheme.
The decision provides welcome clarification regarding the protection afforded to money purchase members of hybrid schemes. Although the facts were unusual- single fund hybrid schemes that explicitly preference the rights of defined benefit members are rare- the decision should be considered in detail by the trustees of any hybrid schemes that entered wind-up between 6 April 1997 and 5 April 2005 and applied money purchase assets for the benefit of defined benefit members. The case was also notable for its use of fictional defendants to keep costs to a minimum. Although the Judge commended the use of fictional defendants to reduce costs, he noted that different court procedure rules that are available which allow a party to bring an action without defendants and that these should be used in similar circumstances in the future.
Trustee can be joined as an interested party to ITV group's appeal to the Upper Tribunal against FSDs imposed on the ITV companies
The Upper Tribunal has given a direction allowing the trustee of the Box Clever Pension Scheme to be joined as an interested party to the ITV Group's Appeal against the financial support directions (FSD) issued by the Pensions Regulator against the group. For more about the Pensions Regulator's decision to impose FSDs against the ITV companies, click here.
The ITV Group had argued against joinder on several grounds, including that the trustee had no direct financial interest in the scheme and that joinder was unnecessary as it would have led to a duplication of costs. The Upper Tribunal recognised that it had an element of discretion in relation to joinder under Tribunal Procedure rules. Where the matter in issue is financial support for a scheme in deficit, the Judge was of the opinion that the trustee of the scheme is necessarily directly affected. The Judge added that where a party meets the eligibility requirement and has an identifiable interest in the outcome of a reference, then there is a presumption that a party in this position could be joined. The added cost in time and money was not sufficient to prevent joinder.
A full hearing on the appeal is expected later this year.
Member unsuccessful in claim that his pension should be increased by RPI and not CPI
The Pensions Ombudsman has dismissed a claim from a member of the Armed Forces Pension Scheme that his pension should be increased by reference to the Retail Prices Index (RPI) rather than the Consumer Prices Index (CPI).
Mr Clarke retired from the RAF in 1995 having accrued 22 years' service within the Armed Forces Pension Scheme. At the time of his retirement, the scheme booklet given to Mr Clarke stated:
"if you have retired before age 55 your award of Service Pension will remain a fixed amount until you reach age 55 when it will become 'index-linked', i.e. it will be increased to take account of all increases in the cost of living, as measured by the Retail Price Index…and [your pension] will continue to be increased thereafter in line with increases in the cost of living."
Public sector pensions, including the Armed Forces Pension Scheme, are increased in accordance with statutory orders published by the Government which, from April 2011, have adopted CPI as the basis for inflationary increases rather than RPI. When Mr Clarke discovered that his pension would be increased by reference to the CPI rather than RPI, he complained to the Pensions Ombudsman arguing that:
- As he had not been informed of the possibility that the inflationary index could change, the only way he could have understood the information given to him (including that contained in the scheme booklet) was that RPI would always be used.
- Had he known that the inflationary index could change from RPI to CPI, he would not have retired at the date he did so that he could increase his pension entitlement.
The Ombudsman dismissed the complaint, holding the following:
- Mr Clarke did not have a contractual entitlement to an RPI pension increase. The Ombudsman found that the scheme booklet relied on by Mr Clarke did not support his assertion that he was informed that only the RPI would be used to increase pensions as the scheme booklet stated that pension revaluations after age 55 would "continue…in line with increases in the cost of living", rather than by reference to a specific index. In the alternative, the Ombudsman said that Mr Clark "almost certainly" agreed to be bound the rules of the scheme, and that the scheme booklet would "probably" have contained caveats that it did not override the rules, although the Ombudsman declined to investigate this further.
- Mr Clarke was not misled into taking his pension early. The Ombudsman held that the change from RPI to CPI as the basis for revaluation concerns a member's expectation that pension entitlements will retain their value over time, and that the change to CPI does not disappoint this expectation. This is because the CPI represents an alternative (rather than inferior) index by which to measure inflation, and is therefore an acceptable index to use to increase pensions and ensure their value will not diminish over time. The Ombudsman also found that Mr Clarke would probably have retired anyway, even if he had been given a limited caveat explaining the index could change, as he would still have assumed that his pension would be protected in a reasonable way.
Pension Ombudsman finds that bonuses formed part of a member's pensionable earnings, regardless of previous member communications to the contrary
In Mrs C (82933/1), the Pensions Ombudsman has upheld a complaint by a member of a defined benefit scheme against the scheme trustees that the bonuses that she had received were pensionable.
Broadly, the rules provided for members' defined benefits to be based on "gross earnings" but excluding any payments that may be agreed between the member and the scheme employer. The Ombudsman held that "gross earnings" would typically include bonuses and salary. The key issue before the Ombudsman, therefore, was whether the member and the employer had in some way agreed to exclude bonuses and in determining this issue, the Ombudsman considered a number of arguments raised by the defendant trustees. These included whether the annual bonus notices that Mrs C had received stating that the bonus was not pensionable and, in one year being silent on the matter, resulted in the bonuses not being pensionable. The Ombudsman held that the bonus notices were overridden by the provisions of the scheme rules which required there to be an agreement between her and the employer that bonuses should be excluded and on the facts there was no evidence of such an agreement i.e. a written agreement signed by Mrs C and her employer; the receipt of the notices and acceptance of the bonus payments did not amount to such an agreement.
The Ombudsman also rejected the trustees' contention that by passively accepting her bonuses in the light of the bonus statements received by her, Mrs C had in fact impliedly agreed to a variation to her contract that bonuses would be excluded from being pensionable. Passive acceptance by an employee of a proposed variation to their contract is only effective if the variation has immediate practical implications; as the change to the definition of "pensionable earnings" to exclude bonuses only has practical implications when a member leaves the scheme (i.e. has more long term effect), passive conduct was insufficient here to constitute an agreement.
The trustees' additional claim, that the member was estopped from claiming her bonuses were pensionable because she had assumed they were non-pensionable when she accepted them, was also dismissed, as she had done "little or nothing" to act on that assumption.
Consultation to bring disclosure of information requirements in line with the Auto-enrolment regime
As part of the "red tape challenge" to remove unnecessary legislation, the DWP has issued for consultation draft regulations bringing into line the current disclosure of information regime for schemes with the auto-enrolment regime. One of the key provisions of the draft regulations concerns basic scheme information that (currently) has to be provided to new joiners within two months of joining. Under the auto-enrolment regime, employees who are auto-enrolled have one month within which to opt out of the pension arrangement in which they are auto-enrolled. The draft regulations amend the period within which basic information has to be provided to the member from two months to one month to enable members to make an informed decision as to whether they want to opt out or not. The DWP acknowledges that some employees may not receive the information in time, but it considers that a sufficiently high proportion of employees will benefit from the changes.
Doors for responding to DWP's consultation on GMP equalisation now closed
In January this year, the DWP issued for consultation, draft regulations in relation to equalising for the effect of unequal guaranteed minimum pensions (GMPs). For our e-alert on the consultation, click here. The deadline for responding to the consultation was 12 April.
Unsurprisingly, the response from the industry has been unsupportive of the proposals, predicting huge costs to schemes, not only in providing any additional benefits to members as a result of the equalisation process but also the administrative burden of carrying out the equalisation exercise, especially if the method proposed by the DWP for equalising for GMPs is used.
One key concern is that the package of proposals put forward (the draft statutory instrument removing the requirement under the Equality Act 2010 to identify an actual comparator when equalising for GMPs and the method of equalisation proposed) will add further weight to the argument that, under UK law, GMPs do have to be equalised. With respect to the draft statutory instrument, there are concerns that even though the DWP has said that it removes the comparator requirement, its effect is also to render unavailable some defences that the trustees may currently have to a claim from a member if they have not equalised in relation to GMPs. One of those defences is that GMPs are in fact state benefits and therefore outside the scope of the equalisation legislation.