Pensions Update April 2014 In this issue High Court rules IBM breached implied duty of good faith Pensions Regulator issues statement following the Budget announcements HMRC confirms changes to pension commencement lump sum ("PCLS") rules DC Quality standards and charge-capping measures confirmed Regulator updates guidance for DC schemes to reflect the revised disclosure regime Revised IORP Directive published Portability Directive provides EU workers fully portable pension rights Budget Consultation Survey - please respond Print link This newsletter is for information purposes only. Its contents do not constitute legal advice and should not be regarded as a substitute for detailed advice in individual cases. If you wish to discuss any of these issues further, please contact your usual Baker & McKenzie lawyer. Jeanette Holland firstname.lastname@example.org Robert West email@example.com Chantal Thompson firstname.lastname@example.org Arron Slocombe email@example.com Budget Consultation Survey - please respond High Court rules IBM breached implied duty of good faith Earlier this month, the High Court handed down its judgment in the case of IBM UK Holdings Ltd and another v Dalgleish and others. The facts of the case are complex but, broadly, the case concerned the actions taken by the company regarding its decision to close its defined benefit ("DB") schemes to future accrual. The lengthy judgment contains much consideration of the historical context of the company's decision and concludes that, given this context, the process followed by the company, and its communications with employees, amounted to a breach of the company's implied duty of good faith and its contractual duty of trust and confidence. Background The company had implemented a number of changes to its DB schemes during the period 2004 to 2011. The most notable historical changes to the DB schemes were implemented as part of Projects "Ocean" and "Soho" and included increases to member contribution rates and members being given the option either to remain in the DB schemes with two-thirds of salary increases being pensionable or to transfer to an enhanced DC plan. The latest exercise to change DB benefits was known as "Project Waltz" and included proposals from the company to close the DB schemes to future accrual and make future pay increases non-pensionable for active DB members. The company also proposed changes to the early retirement policy and to permit former active DB members to join the DC scheme. Judgment Mr Justice Warren determined that the implementation of Project Waltz amounted to a breach by the company of both its implied duty of good faith not to destroy or seriously damage the relationship of trust and confidence between the company and the scheme members, and its contractual duty of trust and confidence. The key factors which lead to this conclusion were: Members had "reasonable expectations" about the future provision of benefits under the DB schemes based on the company's previous benefit change exercises. The company's previous communications from Projects Ocean and Soho were examined closely and the Court concluded that, whilst the company had been careful not to provide any express guarantees as to the future of the schemes, a reasonable member would have formed the reasonable expectation that (a) benefit accrual would continue into the future, unless financial and economic circumstances changed, and (b) the early retirement policy would continue unless there was a relevant justification for a change. The implementation of Project Waltz seriously conflicted with members' reasonable expectations and therefore amounted to "a very serious matter going to the heart of the relationship between [the company] and its employees". The test applied by the Court was one of irrationality and perversity (i.e. whether no reasonable employer could act in the way that the company had acted, given the context of
members' reasonable expectations). The statutory consultation process was not carried out in a way which was open and transparent: members were deliberately given misleading information regarding the timing of the closure to future accrual and the rationale behind the proposals. Internal communications also supported the argument that the company had not kept an open mind during the consultation process. Comments The case highlights the importance of considering whether members may have reasonable expectations of future accrual (or other benefits) based on previous communications or actions taken in relation to the scheme. All future communications to members should be considered carefully in light of the judgment. This case also serves as an important reminder to employers to ensure that the consultation process is genuine, conducted openly and that the result is not pre-determined. A further hearing will be held to consider remedies. We understand that IBM is seeking leave to appeal the decision. > Back to Top Pensions Regulator issues statement following the Budget announcements The Pensions Regulator (the "Regulator") has issued a statement to trustees and those involved in the administration of occupational pension schemes in response to the Government's 2014 Budget announcements. The statement outlines the transitional measures (effective from 27 March 2014) announced by the Government to allow pension savers more flexibility over their defined contribution ("DC") pension savings. The statement also summarises the main features of the Government's consultation on how DC pension savings will be treated from April 2015. For a summary of the transitional measures and the Government's consultation please see our March Pensions Update. The statement advises trustees and those involved with the administration of DC schemes to consult with their advisers to understand how the changes and proposals will affect their scheme. In particular, the statement encourages a review of recent member communications to consider whether these are affected by the Budget announcements. The statement also suggests that members seek their own tax and financial advice where necessary. The statement can be read here. > Back to Top HMRC confirms changes to pension commencement lump sum ("PCLS") rules Following the 2014 Budget announcements, HMRC published an announcement on 9 April 2014 confirming HMRC's intention to relax the PCLS rules for those members who wish to take advantage of the new Budget related flexibilities. This follows the previous announcement that such changes would take place on 27 March 2014. The intended changes will extend the period between receipt of a PCLS and taking an associated annuity from 6 to 18 months. The
announcement confirms that the new rules will apply to certain individuals who either: received a tax free lump sum on or before 27 March 2014 and either cancelled the associated annuity on or after 19 March 2014 (i.e. Budget day) and within the cooling-off period, or have not yet entered into an annuity contract; or received a tax free lump sum after 27 March 2014. The extended time period will allow those individuals either to take advantage of the flexibilities introduced on 27 March 2014 or wait until April 2015 until the restrictions on DC pensions are removed. The changes will not apply where an individual has received a PCLS, and has started to receive an income and the cooling-off period has ended. The statement confirms that scheme administrators should treat the relevant benefit crystallisation event (BCE) as cancelled where the individual has cancelled their annuity within the cooling off period and returned the PCLS to the scheme. Where an individual has cancelled their annuity within the cooling off period but retained the PCLS, the PCLS should be treated as a BCE but will not count as an unauthorised payment, although the individual will have received the final value of the tax-free lump sum regardless of further changes to their DC pot. The HMRC statement confirms the intention to enact these changes under the Finance Bill 2014. However, we have not seen the draft legislation to implement the changes. The Financial Conduct Authority (FCA) has also released guidance confirming that it expects firms to make the necessary changes to their procedures to account for the pension reforms announced as part of the 2014 Budget and to provide suitable advice to customers. HMRC's announcement can be read here. The FCA guidance can be read here. > Back to Top DC Quality standards and charge-capping measures confirmed . The DWP published its Command Paper "Better workplace pensions: further measures for savers" on 27 March 2014. The paper is in response to the two consultations and OFT survey published last year addressing DC governance issues. Key measures outlined in the paper Minimum quality standards to apply to all DC workplace pensions from April 2015. This includes the introduction of Independent Governance Committees (IGCs) for contract based schemes. From April 2015, in respect of qualifying schemes for auto-enrolment, a 0.75% default fund charge cap on funds under management will apply, excluding transaction costs. Also, the ban on consultancy charging will be extended to apply to all qualifying schemes. From April 2016, active member discount structures and member-borne commission will be banned in all qualifying schemes.
Trustees and IGCs will be required to report on costs and charges. The DWP intends to standardise the disclosure of charges and costs to provide full transparency. Note that the restrictions on charges apply in respect of auto-enrolment qualifying schemes only. The Government will reconsider the charge cap in 2017. The paper outlines a timetable for the implementation of the measures, most of which are intended to be enacted by the Pensions Bill 2013-14 when brought into force at the end of the year. The paper can be read here. > Back to Top Regulator updates guidance for DC schemes to reflect the revised disclosure regime In our November 2013 Pensions Update, we reported that the Regulator had published its Regulatory guidance for DC schemes alongside its Code of Practice 13: Governance and administration of occupational DC trust-based pension schemes. The Regulator's guidance has since been updated, mainly to refer to the updated disclosure regime as brought in from 6 April 2014. The updated guidance also refers to the Government's consultation on allowing members to draw their whole DC pot as a lump sum from age 55 with effect from 6 April 2015. The guidance states that Trustees should ensure "members are made aware of the full range of options available to them, including commutation for small pots and members deferring their pension". The updated guidance can be accessed here. > Back to Top Revised IORP Directive published On 27 March 2014, the European Commission published a proposal for the revised IORP Directive, commonly referred to as IORP II. The proposal contains a number of changes to the IORP Directive, which will: strengthen provisions to remove barriers for cross-border schemes, in particular provide a provision to allow pension scheme transfers across borders; remove restrictions against long-term and cross-border investments; impose a number of new governance provisions, including that persons running an IORP must meet certain professional standards qualifying them as "fit and proper"; and prescribe requirements regarding the provision of information to members. Notably, and helpfully, additional Solvency II capital adequacy requirements have not been included in the IORP regime. Though in the main the existing pension provisions are not anticipated to have to change materially to comply with IORP II, the new requirements will have to be worked through (for example, any change in the ability of non-professional trustees to be able to run the scheme). However, contrary to what was expected, IORP II does not provide for the removal of the requirement for full cross-border
IORPs to be fully funded. According to the proposal, it is anticipated that Member States will be obliged to implement IORP II by 31 December 2016. > Back to Top Portability Directive provides EU workers fully portable pension rights The Portability Directive has been adopted by the European Parliament. The Directive is intended to protect the pension rights of workers moving between Member States. Currently, there is no EU-wide protection of "supplementary" pension rights (i.e. pension benefits provided by an occupational pension scheme) when a member moves abroad. If approved by the Council of Ministers, the Directive will help to prevent the loss of supplementary pension rights when a member moves between Member States. The Directive provides that the period of active membership required in order to attain vested rights (the "vesting period") cannot exceed 3 years. Further, schemes cannot specify a minimum vesting age above age 21. Following the vesting period, schemes will be required to preserve members' benefits and treat them fairly when compared with active members. Schemes will also be required to inform members of the impact on their pension of moving to another Member State. This Directive is unlikely to affect current vesting provisions in England and Wales given the much shorter vesting periods operated by occupational pension schemes. > Back to Top Budget Consultation Survey - please respond We are asking our clients and contacts to complete a questionnaire to support our response to the Government Budget Consultation (Freedom and choice in pensions). We also want to produce an article discussing the results of the survey (on a non-attributable basis). We would be very grateful if you would respond to our survey before Friday 16 May by clicking on the link here. > Back to Top Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Before you send an e-mail to Baker & McKenzie, please be aware that your communications with us through this message will not create a lawyer-client relationship with us. Do not send us any information that you or anyone else considers to be confidential or secret unless we have first agreed to be your lawyers in that matter. Any information you send us before we agree to be your lawyers cannot be protected from disclosure.
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