Top of the agenda  

1. Shared Parental Leave - rule changes may be required  

Legislation  

2. Pension Scheme Bill – the latest   

Pensions Ombudsman  

3. Trustees should consider their policy on transfers in light of Ombudsman’s determinations in pensions liberation cases  

Cases  

4. High Court decision on whether the PPF compensation cap contravenes EU Insolvency Directive  

Round-up  

5. Regulations relating to end of contracting-out on a defined benefit basis - revised timetable   

Top of the agenda

1. Shared Parental Leave - rule changes may be required

A new system of shared parental leave ("SPL") will be available to parents of children due to be born or placed for adoption on or after 5 April 2015 under the Children and Families Act 2014. Under the new system, parents will be able to divide leave between them during the first year of a child's life. Parents may opt into the shared parental leave system and share 50 out of 52 weeks of statutory maternity leave, and 37 out of 39 weeks of statutory maternity pay. SPL can either be taken by each parent consecutively, or by both parents concurrently, as long as the combined amount of leave does not exceed the amount which is jointly available to the couple. The pattern of leave must be agreed with the respective employers. If agreement cannot be reached, employees will be entitled to take their flexible parental leave in a single block commencing on a date of their choice. Additional paternity leave and additional paternity pay will be abolished with effect from 5 April 2015. For more on SPL, click here:

Implications for pension schemes

During any period of SPL, the "normal employment" requirements under the Social Security Act 1989 apply in relation to pensions. This means that for any period of paid SPL:

  • In respect of a defined benefit scheme, accrual must continue – the employee can only be required to pay contributions based on the actual pay he/she gets during any period of paid SPL; the employer has to meet the balance of costs for the DB benefits in the usual way.
  • In respect of defined contribution schemes, the employee can only be required to pay contributions based on pay he/she is actually getting during any period of paid SPL; the employer must, however, pay contributions based on the employee's normal pay.

The pension implications for any unpaid period of SPL should also be considered.

Next steps

Although the above provisions are over-riding, changes to pension scheme rules should be made to put the position on a concrete footing. Consideration should also be given to the possibility of a sex discrimination claim if the benefits provided to fathers during SPL are less generous than those provided to mothers under the scheme's maternity leave provisions. The changes should be communicated to members at the earliest opportunity and trustees should ensure that scheme administration systems are able to accommodate the changes i.e. by ensuring that the benefit calculations, and contributions paid by the employer and member properly reflect any SPL taken by the member. Any provisions relating to additional paternity leave should be removed.

2. Pension Scheme Bill – the latest

The Government has stated that the requirement on trustees of defined benefit (DB) schemes to check that the member has received “appropriate independent advice” before transferring a member’s DB benefits to a defined contribution (DC) arrangement or converting their DB benefits to DC within the same scheme will not apply to benefits that have a cash equivalent transfer value of “£30,000” or less.

Comment

A power exists under the Pensions Schemes Bill for regulations to be made to create exemptions from the requirement on trustees to check that advice has been obtained and this will be used to give effect to the exemption. The government has indicated that further exemptions may be made in due course.

The Bill is expected to receive Royal Assent by 30 March 2015 (when Parliament is to be dissolved for the forthcoming general election).

3. Trustees should consider their policy on transfers in light of Ombudsman’s determinations in pensions liberation cases 

By October 2014, the Pensions Ombudsman had received some 140 complaints in connection with pensions liberation. The majority of these were complaints from members that scheme trustees or their pension providers had refused to their request for a transfer because the providers/ trustees believed that the receiving schemes may be pension liberation schemes.

Trustees faced with a request by a member of a scheme which the trustees suspect may be involved in pensions liberation face a major dilemma: if they process the transfer, they could be putting the member’s benefits at risk. If they do not process the transfer, the member could make a complaint that the trustees have delayed or refused to process the transfer.

The first three determinations by the Pensions Ombudsman published recently relate to transfer requests from personal pensions (although the concepts are equally applicable to occupational pension schemes).

Kenyon and Gerrard

Under statutory provisions, one of the ways of taking a cash equivalent transfer is to acquire "transfer credits" under an occupational pension scheme. In both the Kenyon and Gerrard cases, the transfer was to a purported occupational pension scheme. However, on investigation, the Ombudsman held that neither of the schemes to which the benefits were requested to be transferred displayed the characteristics of an occupational pension scheme as they did not identify a clear class or "description" of employments that they were to provide benefits for.  Consequently, there was no statutory right to a transfer.

The requirements of an occupational pension scheme, as defined in section 1(1) of the Pension Schemes Act 1993, were discussed at length in the earlier pensions liberation case of PI Consulting v the Pensions Regulator [2013], in which the High Court had ruled that the nine pension schemes in question were occupational pensions schemes. For our briefing on that decision, click here . In that case, the High Court set out that for a scheme to be an occupational pension scheme, it had to meet both the "founder" and the "purpose" tests. The "purpose" test requires that the scheme should be "for the purpose of providing benefits to, or in respect of, people with service in employments of a description". Looking at the receiving pension scheme documentation in the Kenyon case, which the Ombudsman described as "inaccurate and untidy", the Ombudsman held that although there was a reference to an employer, there was no reference to "employment" of any description; the scheme therefore failed the purpose test and was not an occupational pension scheme. The Gerrard scheme was also held not to be an occupational pension scheme.

Stobie

The Stobie determination concerned the Standard Life scheme whose rules expressly provided that Standard Life had to pay the transfer if the member had a statutory right to transfer. The Standard Life scheme also allowed a transfer at Standard Life's discretion.

On the facts, the Ombudsman held that the scheme to which the member wished to make a transfer was an occupational pension scheme as it met the "purpose" and "founder" tests. However, it failed another requirement of the cash equivalent transfer legislation in that the member would not have acquired "transfer credits" in the scheme. Tracking through the legislation, broadly, "transfer credits" means rights allowed to an "earner". In the case of Mr Stobie, he was found not to be an earner in relation to the company in connection with which the pension scheme had been set up as, according to Mr Stobie, he was planning to transfer his main business to that company and only once that transfer had been made would be have had any remuneration of earnings from that company.

The Ombudsman criticised Standard Life as it had not analysed whether there was a legal right to a transfer and merely refused the transfer on suspicion that the receiving scheme was a pensions liberation scheme. With respect to the latter, Standard Life had not followed the guidelines in the Pensions Regulator's pensions liberation guidance as to the checks that should be made to establish the legitimacy of the receiving pension scheme.

As the Ombudsman found that there was no statutory right to transfer, Standard Life was ordered to consider its discretionary powers to process a transfer under the scheme rules. If on exercise of that discretion, Standard Life was minded to make a transfer, the Ombudsman ordered that it should pay the higher of a backdated transfer value and the current transfer value.

Comment

The key message from the determinations is that the trustees of an occupational pension scheme or managers of a personal pension arrangement must check if there is a legal right to a transfer (whether under statutory provisions or under the scheme rules). This may involve detailed analysis of the receiving scheme, for instance whether it is an occupational pension scheme and whether transfer credits are being acquired in the receiving scheme. For transfers to overseas schemes, trustees may be required to check whether the scheme meets the requirements of a QROPs. Trustees may need to obtain legal advice in this regard.

If upon investigation, the trustees find that there is a legal right, the general position is that they have a duty to transfer. If they do not do so, the member could have a successful claim against them for not processing the transfer.

If the trustees suspect that the receiving scheme may be a pension liberation scheme, they should make further enquiries. The Pensions Regulator's pensions liberation guidance has a detailed checklist of enquiries that trustees should make. Whilst suspected pensions liberation activity may justify the delay (where steps recommended under the Regulator's guidelines have been followed), trustees cannot withhold the transfer on those grounds alone. The Regulator has said in its guidance, however, that it would take suspected liberation into account when deciding whether to impose any sanctions on trustees in respect of a non-payment of a transfer.

Pensions Ombudsman  

4. High Court decision on whether the PPF compensation cap contravenes EU Insolvency Directive

The claimant was a pensioner of the T&N Retirement Benefits Scheme. In 2006, the employer became insolvent and the scheme entered a PPF assessment period. The combined effect of the PPF cap and the non-indexation of pre-6 April 1997 benefits reduced the claimant's pension from £56,721 per annum to £20,000 per annum.

The claimant appealed to the PPF for a review of the section 143 valuation of the Scheme. He argued that Article 8 of the Insolvency Directive 2008/94/EC was directly effective and that, following the case of Robins and others v Secretary of State for Work and Pensions[2007] 2 CMLR 13 (in which it was held that protecting only 20% - 49% of benefits did not comply with the requirements of the Directive), the PPF had erred in approving the section 143 valuation under which some members, like him, would receive less than 50% of their benefits.

This argument was rejected by the PPF Board and the PPF Reconsideration Committee. The claimant appealed to the High Court.

(Before the decision of the PPF Ombudsman ("PPFO"), a further ECJ decision was handed down in the case of Hogan and others v Minister for Social and Family Affairs [2013] 3 CMLR 27- in this case, it was found that Ireland had failed to provide sufficient protection for the pension rights of employees and former employees following the insolvency of their employer (our briefing on the decision can be found here). However, this judgment was not brought to the attention of the PPFO).

Interpretation of the Insolvency Directive

Article 8 of the Directive requires Member States to ensure that"necessary measures are taken to protect the interests of employees and ex-employees in respect of old-age benefits (including survivor's benefits)". No guidance is given in the Directive as to the meaning of "necessary measures".

The meaning of "necessary measures" was first considered in Robins, which was a challenge in relation to the Financial Assistance Scheme. Under the scheme, the two claimants stood respectively to receive compensation of only 20% and 49% of their benefits. The case made several useful findings:

  • Benefits need not be guaranteed in full, nor need they be guaranteed by Member States.
  • The Directive did not establish "with any precision" the minimum level required to protect benefits.
  • Provisions of domestic law "that may, in certain cases, lead to a guarantee of benefits limited to 20 or 49 per cent of the benefits to which the employee was entitled, that is to say, of less than half of that entitlement, cannot be considered to fall within the definition of the word "protect" used in Article 8 of the Directive.

In Hogan, a challenge was made to the Irish arrangements implementing the Directive, under which ten claimants stood to receive between 10% and 41% of their entitlements. The Irish government had put great stress on the preamble to the Directive, which stated that members' benefits should be protected "having regard to the need for balanced economic and social development", and argued that in the circumstances of the post-2008 Irish economic downturn, the protection afforded by Irish law was sufficient. The ECJ disagreed, finding Ireland liable for damages for incorrect transposition of the Directive (under the principles set out in Francovich v Italy). Under those principles, damages are payable if a breach is "sufficiently serious". The ECJ held that, given Robins, the Irish government should have been aware that the correct transposition of Article 8 of the Directive required an employee to receive "at least half" of his or her entitlement.

Decision

HHJ Cooke decided that the insolvency directive does not require the UK to ensure that every individual employee of every scheme receives a minimum of 50% of their benefits.

He distinguished Robins, on the following grounds:

  • The Robins case concerned "the UK legislative scheme as one that might affect substantial numbers of members as severely as the two particular claimants in question".
  • Robins did not mean that "a national scheme is non-compliant with the Directive merely because it can be shown that two individual members of one scheme would still suffer losses of this extent".
  • It was unlikely that the ECJ had intended to lay down a fixed rule; it did not stipulate any precise level of benefits that should be protected. Laying down such a rule would be problematic, and risked frustrating the "moral hazard" regime that the UK government had intended to introduce when setting the PPF cap levels. In particular, the concern was that those effectively in control of the employer and the scheme could award themselves very large promises of benefit from schemes without ensuring they were adequately funded, leaving the shortfall to be made up by those contributing to the PPF.

HHJ Cooke also distinguished Hogan, on the basis that there the court had been presented with a national system providing to the "generality of members" a level of protection which was as low or lower than that held to be a breach in Robins. The court had not been considering whether a state which generally provided a sufficient level of protection could place limits on that protection in the case of particular classes of employee.

Robins and Hogan were further distinguished on the basis that they were claims for Francovich damages – i.e. damages from the state for failing to implement the Directive properly. This case concerned the direct effectiveness of a Directive – the requirement for this was that the Directive had to be clear, precise and unconditional, which would require in this case an "identifiable minimum guaranteed benefit".

Commentary

The decision in this case may come as a surprise to many; following the strong statements made in both Robins and Hogan, it is hard to see how a cap which reduced benefits by over 50% could comply with the Directive. Although the challenge to the PPF cap failed in this case, it is worth noting that the number of those affected is likely to decline when provisions in the Pensions Act 2014 come into force under which the cap is set to increase by 3% for every year of service of the member above 20 years.

The judge in this case was invited to make a reference to the CJEU, but did not. Should the judgment be appealed, the Court of Appeal could well make a reference.

Grenville Holden Hampshire v Board of the PPF [2014] EWHC 4402 (Ch)

Round-up  

5. Regulations relating to end of contracting-out on a defined benefit basis - revised timetable

Last year, the DWP consulted on two sets of draft regulations relating to the end of contracting out on a defined benefit (DB) basis. The expectation was that these regulations would be finalised last year, but this did not happen.

The DWP has now issued a revised timetable for the regulations. The regulations that would enable employers to amend scheme rules, without trustee approval, to reflect the increase in employer National Insurance costs when contracting-out ends, will be published “shortly”, in time for them to come into force before dissolution of Parliament on 30 March 2015.

The other set of regulations governing the rules which schemes that were contracted-out will need to comply with following the abolition of DB contracting-out in April 2016 (and which would replace the current 1996 Contracting-out Regulations) will not be laid until after the General Election on 7 May 2015. The basic provisions floated under these regulations were that accrued contracted out rights: section 9(2B) rights and GMPs would be protected and that many of the statutory provisions relating to them (for instance, calculation of lump sums, provision of widow and widowers’ benefits and revaluation requirements) would continue with some modifications. For our update on the consultation, click here.

The DWP is also expected to issue a short guide on a number of contracting-out-related technical changes that have been made in the last year.

Comment

The purpose of issuing these regulation early is to enable schemes to start preparing for the end of DB contracting-out (which will happen in April 2016).