Top of the agenda
1. DWP confirms that GMP equalisation is here to stay and that it will issue statutory guidance on GMP conversion
On 8 April 2013, the DWP issued an interim response to its consultation of early last year on equalising for the unequal effects of Guaranteed Minimum Pensions (GMPs). In the response, the DWP has reiterated its view that there is an obligation both under EC and UK Law (under the Equality Act 2010) to equalise for the unequal effect of GMPs. It has also reiterated that it will not refer a test case to the European Court of Justice on the matter.
The DWP has also stated in its response that:
- It will delay the issuing of the draft regulations which remove the requirement under the Equality Act 2010 for schemes to find a comparator when equalising for GMPs. These regulations will now be issued at a "later date".
- It will not make a final publication of its suggested method for equalising in respect of GMPs.
- It will look at other ways to resolve the issue of GMP equalisation, notably the GMP conversion provisions under the Pensions Act 2007, which allow schemes to convert GMPs into ordinary benefits (subject to various conditions being met). The DWP acknowledges in its response that there are a number of concerns over GMP conversion, which it will look into – these include the actuarial basis for GMP conversion, what spouse benefits need to be provided following GMP conversion and how GMPs can be equalised as part of the conversion process. The DWP intends to provide statutory guidance on GMP conversion and will consult on it beforehand.
It is clear from the DWP's interim response that GMP equalisation is here to stay. Schemes with GMPs will need to consider whether or not to equalise for their effect.
The DWP's decision not to publish a final version of its suggested method for equalising GMPs is to be welcomed, given the administrative burden and costs that schemes could face if they use that method.
But this does leave schemes without any guidance from the government over how to equalise for GMPs – this, particularly, in light of the fact that the DWP has reiterated that it is not going to refer a test case on GMP equalisation to the ECJ (which may have included guidance from the ECJ as to how GMPs should be equalised).
In the meantime, GMP conversion may be the route to go down for schemes. It is hoped that the DWP is able to resolve, in its proposed statutory guidance, the current problems that exist with the GMP conversion provisions. However, it is difficult to see how these problems can be dealt with by guidance alone; changes to the legislation on GMP conversion may be needed.
2. Reforms to Public Service Pension Schemes to go ahead as Public Service Pensions Bill receives Royal Assent
The Public Service Pensions Bill 2013 received Royal Assent on 24 April, becoming the Public Service Pensions Act 2013. The Act provides for major reforms to public service pension schemes.
The Local Government Pensions Scheme will be closed to future accrual from 31 March 2014; other public service pensions schemes, such as the NHS pension scheme and the Principal Civil Service Pension Schemes (PCSPS) will be closed a year later in April 2015. These schemes will be replaced with either new defined contribution schemes or Career Average Revalued Earnings (CARE) schemes. The new schemes will have the following features:
- Where the new schemes are CARE schemes, revaluation of accrued benefits from the date a member becomes a deferred member until he retires will be given.
- The normal pension age (NPA) of civil servants will be tied in with the State Pension Age with certain exceptions such as fire fighters, police force and members of the armed forces who get to keep their NPA of 60 years.
- There will be a cap on employer costs to ensure that the new schemes remain affordable. This cap is expressed as a percentage of a member's pensionable earnings. Broadly, the way the cap will work is that if employer costs exceed the cap, regulations (to be issued) will set out what steps employers can take to bring their costs down; the steps will include making changes to members' benefits and contributions.
The Pension's Regulator's role will be extended to cover governance and administration of the new public sector schemes.
Also in the Bill, is a power allowing regulations to be made to enable continued membership of public service pension schemes for former civil servants who are transferred under TUPE to the private sector. This is to facilitate the government's reforms to the "Fair Deal for staff guidance".
The reforms to the Fair Deal involve scrapping the current requirement under Fair Deal:
- To provide a "broadly comparable" pension arrangement for transferred employees.
- For bulk transfer provisions for those who want to transfer their benefits out of the public sector scheme into the contractor's scheme, that provide for service credits on a "day to day" basis.
Instead, public sector pension schemes will be made available to private contractors to participate in so that the transferred employees can continue in their public sector scheme post-transfer. The Local Government Pension scheme and (to a very limited extent some other public sector schemes, such as the NHS) currently allow private contractors to participate in them. After the reforms, schemes such as the NHS, PCSPS and others will be open (either for the first time or without the current restrictions) to private sector employers. The expected date for regulations allowing private sector employers to join the PCSPS is 13 June 2013.
Opening public sector schemes up to private contractors is to be welcomed. However, the costs of participating in a public sector scheme may be higher for the employer than a corresponding private sector scheme (though with the impending reforms to the public service pensions schemes, this distinction may not be as material as before). It is unfortunate, therefore, that the option for the contractor to set up its own scheme, or use its existing scheme, to provide pension arrangements for transferred employees will no longer exist.
3. Deputy Pensions Ombudsman rules on "protected person" status
In Stoddart (78763/3), the Deputy Pensions Ombudsman has dismissed a series of complaints made by a member of the Railways Pension Scheme, including a complaint that his "protected person" status should have been preserved when he moved from one railway employer to another.
The Railway Pensions (Protection and Designation of Schemes) Order 1994 protected employees who were members of the old British Rail Pension Scheme on 5 November 1993, immediately before the industry was privatised under the 1993 Act.
Protected employees were entitled to pension rights in the new Railways Pension Scheme (established under the 1993 Act) that were "no less favourable" than the rights they had enjoyed under the old British Rail Pension Scheme. However, "protected person" status would cease if continuity of employment was broken or if members left the Railways Pension Scheme, unless there was a transfer of employment between two associated employers. The Order also provided that the members of the old British Rail Pension Scheme at privatisation would have an "indefeasible right" to continue as members of the new Railways Pension Scheme for so long as they continued to work for any railways industry employer.
The Deputy Pensions Ombudsman held that Mr Stoddart had the status of a "protected person" when he was transferred from the old British Rail Pension Scheme to the new Railways Pension Scheme in 1994. When his employer changed from Connex to Thameslink in 1997 the "no less favourable" protection came to an end, because Connex and Thameslink did not satisfy the definition of "associated employers" (although they were both involved in the railways industry). Mr Stoddart was therefore entitled to remain a member of the Railways Pension Scheme under his "indefeasible right" but he was no longer protected by the "no less favourable" test.
Mr Stoddart had also argued, amongst other matters, that the wording of the 1994 Order did not fulfil the assurances given in Parliament at the time that the Order was being introduced. The Deputy Pensions Ombudsman dismissed this argument too because she could only consider the law as it was written, not as Mr Stoddart considered it should have been worded.
This determination turned on the specific wording of the statutory protection given to railways workers. However, it will also be of some interest to other industry schemes which contain protected employees (e.g. electricity and coal), particularly in view of the Ombudsman's comment about trustees not going behind the actual wording of the legislation, and the need for scheme information about protection provisions not to be misleading.
4. Administrator not guilty of maladministration for making an unauthorised payment to the member
In Finn (PO-618), the Pensions Ombudsman has refused to uphold a complaint from a member of a stakeholder pension plan, that Virgin, the provider and administrator of the Plan made an unauthorised payment of his benefits under the plan to him, with onerous tax consequences for the member.
The Virgin Stakeholder Pension rules required a member to take his or her benefits before the age of 75 by using their fund in the Plan to buy an annuity with an insurance company and taking any tax free cash that the member was allowed. If the member did not do this, their pension would become an Alternatively Secured Pension (ASP). Broadly an ASP is a form of a pension drawdown, whereby a person can continue to invest their pension savings and draw an income from their fund (within certain limits). However, as Virgin did not provide an ASP, Virgin had the discretion to transfer the member's fund to a provider that did offer an ASP.
Some months before his 75 birthday, Virgin wrote to Mr Finn about his rights, including the right to transfer his funds to an annuity provider; if he did not, Virgin informed him that it could transfer his funds to an ASP. If he did not take his benefits in either form by age 75, this could have serious tax consequences (he'd be taxed at least 55% of his fund value and would lose his right to a tax free cash of up to 25%). Mr Finn and his IFA responded by indicating that Mr Finn would be transferring his benefits to Canada Life to buy an annuity with the insurer. Due to various delays, by the time the transfer paper work was completed, the member had already reached age 75 and Canada Life refused to accept the transfer. Virgin then sent Mr Finn a cheque £14,759.83, which was calculated by deducting the 55% unauthorised payment charge and a 40% scheme sanction charge from his fund value of approximately £50k.
The Ombudsman dismissed Mr Finn's complaint. The Ombudsman accepted that neither Virgin nor Canada Life explained to Mr Finn exactly how long the transfer process would take. However, Mr Finn and the adviser could have taken steps to take the benefits earlier, and it should have been obvious that the process required time.
The Ombudsman found that Virgin had a discretion to make the unauthorised payment. Given that Virgin informed Mr Finn of the consequences of failing to transfer on time, Virgin had acted reasonably in making the unauthorised payment.
Although there is no longer a requirement to purchase an annuity at age 75 - the requirement was removed under the Finance Act 2011 - the case does highlight the potentially disastrous consequences for members if transfers are not processed promptly.
5. Trustees to be given a right to publish their views on the effects of a takeover offer on their scheme under changes to the Takeover Code
The UK Takeover Panel has published its response to its consultation on the rights of the target's pension scheme trustees under the Takeover Code. Under the changes, trustees of a target's defined benefit pension scheme will be given similar rights to those currently available to employee representatives, including the right to publish their opinion on the effects of a takeover offer on the scheme. The changes will take effect from 20 May 2013. For our briefing on the changes, click here.
6. DWP to go ahead with proposals for automatic transfer of "small pots"
The DWP has confirmed that it will go ahead with its proposals for the automatic transfer of "small pots". The DWP had consulted on the matter in 2011 and published its response to its consultation in July 2012 (see our previous update here). The final rules are different in some respects to what had been proposed and there are still some refinements to be made to the rules. Provisions for the regime are to be included in the Pensions Bill 2013.
Currently, the onus is on individuals to transfer pension pots if they move jobs and to consolidate their pension savings. There are also rules that allow some DC occupational pensions schemes to pay a refund of pension contributions for individuals with less than two years pensionable service in the scheme. The introduction of the automatic transfer system is motivated by the DWP's concern that individuals may lose track of these dormant small pots and that it can be inefficient for the pension industry to administer these pots; members may also be getting poor returns on them. The problem is likely to be exacerbated by the advent of auto-enrolment because more individuals will now be contributing to pension pots.
The small pot rules
- Short service refunds from occupational DC schemes will be abolished from 2014.
- In its place, the DWP has proposed that automatic transfers of small pots will take place initially only between money purchase schemes. The scope may be widened later to include defined benefit schemes.
- The regime would apply to "workers" (and include employees automatically enrolled, those who elect to join the scheme under the auto-enrolment regime and those who are contractually enrolled).
- "Small pots" are pots no larger than £10,000. The Secretary of State may review this limit every 5 years and change it.
- A pot will be eligible for automatic transfer when all contributions have stopped and the individual has left employment, or when all contributions have stopped for a prescribed period. The DWP has not finalised this aspect of the rules.
- Members will have the option of opting out of the automatic transfer system and to leave the pots in their previous employer's scheme.
Certain aspects of the proposals will be fleshed out by the DWP in due course. It has stated that it will set standards for automatic transfer schemes in regulations, and that these standards would be subject to formal consultation. The Pensions Regulator will be responsible for ensuring compliance with the small pots regime.
Rules around how the transfers will be made are still being developed. The two proposals being considered by the DWP are a "pot matching" IT solution, where there is a central database of information on small pots supplied by schemes which the employee's new scheme can check; if there is small pot for the employee, the new scheme can then initiate the transfer process. Alternatively, there may be an employee information system, where relevant details are passed on by employees to their employers. The DWP has expressed a preference for the former, but will consult on the matter before issuing regulations.
Also up for debate is the issue of how frequently these transfer should be made. Two proposals being floated are: a "member-specific" approach (here the process is started every time the employee starts work with a new employer) or a periodic approach (where transfers occur in bulk at certain intervals specified in regulations). The DWP is leaning towards the latter proposal.
7. Kodak Pension Plan Trustees to buy the business of US parent Company
In an unusual deal, the trustees of the Kodak Pension Plan are to buy the personalised imagery and document imaging business ("the Business") of the US parent company, Eastman Kodak for a reported $650 million. Payment is to be made in cash and non-cash consideration.
The Kodak Pension Plan has as its participating employer, a UK company, Kodak Limited which is a subsidiary of Eastman Kodak.
The Plan had a significant deficit. In 2010, the Plan trustees agreed a company guarantee and schedule of contributions with the US parent to eliminate the deficit by December 2022. The Plan was also closed later to future accrual.
In January 2012, the US parent filed for bankruptcy in the US. Kodak Limited, it would appear, is not part of those proceedings and is continuing to trade in the normal fashion.
Following the US bankruptcy proceedings, the trustees of the Plan lodged a $2.8 billion claim against Eastman Kodak as an "unsecured creditor", it would seem, for the US parent's obligations under the schedule of contributions and the guarantee. There doesn’t seem to be any suggestions that the claim was an employer debt claim.
By way of settlement of that claim, the trustees are to buy the Business for $650 million. The US parent had been trying to sell the Business for some time. Selling the Business to the trustees, the US parent is reported to have stated, will enable the business to continue and the Company to come out of bankruptcy. The sale to the trustees will be beneficial to the Business in that the trustees recognise the value of the Business and are committed to its growth. For the pension plan, the Business is expected to deliver long-term cash flows that will support the Plan.
It is common for parts of a business in insolvency proceedings to be sold off to creditors or financiers. It is, however, unusual for a pension scheme to buy the business of the employer. From that viewpoint and also the value paid for the business, the deal is unusual.
From pension scheme trustees' point of view, the preference would usually be for the business to be sold and for the trustees to claim for the cash. However, we understand that in this case, the trustees are buying the Business at a discount - this may have been the appeal. The transaction is, though, subject to approval of the US Bankruptcy Court. We understand that the Pensions Regulator was also involved in the discussions and has indicated its support for the deal.
If approval is given, it remains to be seen whether the deal will give the results expected.
There was another example recently of pension scheme trustees taking a stake in the employer business, in the restructuring involving British Coal. Here, the pension scheme trustees took a 75.1% stake in the property side of the business and made a £30m investment in the holding company of the property business in consideration for the equity stake. For further details about that deal, click here. There are now, however, reports that because of a fire, the largest colliery is to be closed. As a result, we understand that a proposal is being made to restructure the business that may result in members of British Coal's pension schemes being tipped into the Pension Protection Fund.
8. Ministerial statement on Government's red-tape challenge to simplify pensions regulations
On 25 April 2013, the Pensions Minister, Steve Webb, announced the outcome of the Government's pensions red-tape challenge to ease the administrative and regulatory burden on employers. The key changes to be made as a result of the red-tape challenge work are:
- Simplification of the rules around disclosure of information. The Government has already consulted on this, addressing issues such as the use of electronic communication and proposing new provisions relating to lifestyling under defined contribution schemes. For our summary of the consultation, click here.
- A new statutory objective for the Pensions Regulator better balancing the need to protect members’ benefits with the need for sponsoring employers to be able to grow sustainably (as announced in the Budget 2013).
- More work on how the current processes relating to employer debt that cause difficulties for charities and employers participating in multi-employer schemes could be improved.
- Consideration of whether to make indexation for future accruals discretionary as part of on-going work to encourage risk-sharing through new "defined ambition" pensions.
It remains to be seen whether some of the proposals will in fact lead to an improvement for employers. The details around the new employer objective for the Pensions Regulator have yet to be revealed. Even after they are issued, there is likely to be some period of uncertainty as employers and trustees wait to see what changes the new objectives has on the Regulator's behaviour especially around funding for defined benefit schemes.