Welcome to the February 2018 edition of our Trustee Knowledge Update which summarises recent changes in law and regulation. It is aimed at helping trustees (including trustee directors) comply with the legal requirement to have knowledge and understanding of the law relating to pensions and trusts. This edition focuses on the key legal developments over the last three months.

Government and legislation 

Finance (No.2) Act 2017

Section 3 inserts new Section 308C ITEPA 2003, providing income tax relief on employer-arranged pensions advice of up to £500 per tax year effective from 6 April 2017. Section 7 reduces the money purchase annual allowance to £4,000 from the tax year 2017/18. 

Action points: Trustees should note the reduced money purchase annual allowance and ensure that member communications are updated where necessary and relevant members are informed when they exceed their annual allowance. The change could result in an increased use of the “scheme pays” facility. 

Finance (No.2) Bill 2017-19 

This Bill introduces matters covered in the Autumn Budget (and previously published in the draft Winter Finance Bill). Clause 13 and schedule 3 change the requirements for registration and de-registration of schemes where the employer is dormant or (from October 2018) where the scheme ceases to be a master trust.

Action points: For information only at this stage. It is hoped that the Government or HMRC will provide further clarity for schemes with supportive sponsoring employers who may technically fall within the “dormant” definition. 

Draft Master Trust Regulations

The DWP is consulting on draft regulations dealing with the authorisation regime for master trusts, due to come into force from October 2018. The regulations will be supported by a TPR Code of Practice.

The definition of master trust is very broad and some industry-wide and not-for-profit schemes which provide DC benefits but would probably not describe themselves as “master trusts” will be in scope. However, there are specific disapplications of the regime for: DB schemes that only offer money purchase benefits by way of AVCs; DB schemes that only offer money purchase benefits to active DB members receiving transfers-in; certain closed schemes set up following privatisation; and some SSASs and singlemember schemes. 

In addition, for multi-employer hybrid schemes under which the only “scheme funders” are all participating employers, there will be exemptions from some of the more onerous provisions that apply to scheme funders generally.

Action points: Trustees of multi-employer schemes which hold DC benefits (other than just AVCs) should consider whether their scheme may fall within the master trust definition as a result of having any “unconnected” employers. 

Transfers - appropriate independent advice

Since April 2015, trustees have been required to check that members with non-DC benefits over £30,000 have taken appropriate independent advice before paying a transfer value to a DC arrangement. The calculation basis for measuring the £30,000 trigger is being amended from 6 April 2018 and will now be calculated as the cash equivalent transfer value (CETV), disregarding certain reductions, variations or enhancements made under the Transfer Value Regulations. 

This raises an issue for schemes which routinely provide enhanced CETVs. Trustees will, from 6 April, have to do a basic CETV calculation in order to ascertain whether appropriate advice is required, as well as a calculation of the actual (higher) transfer value payable. In addition, transitional provisions provide that where trustees have, on or after 1 October 2017 but before 6 April 2018, provided a member with conformation that appropriate independent advice would be required and, as a result of changes in the calculation basis, that advice is no longer needed, they must write to the member (by 26 April 2018) to inform him or her that there is now no requirement to take advice. This will not apply if, on or after 1 October 2017, the trustees informed the member of the change in the calculation method and invited him or her to contact the trustees for further information. 

Action points: Trustees should ensure calculations are made on the correct basis and that any members affected by the transitional provisions are contacted.

Bulk transfer of contracted-out rights without member consent

The DWP is consulting on draft regulations to enable bulk transfers of contracted-out rights (in relation to active, deferred and pensioner members) to take place in certain circumstances without member consent, to schemes that have never been contracted-out. It is proposed that a condition of transfer will be that the rights of the member are not adversely affected and the same protections (for example revaluation and indexation) must be provided by the new scheme. The proposed provisions (as for transfers of contracted-out rights currently) apply only to “connected employer transfers”. Consent will still be required for unconnected transfers. It is anticipated that the final regulations will come into force from 6 April 2018. 

Action points: This is a welcome move by the DWP and will assist trustees and employers wishing to restructure or merge schemes which hold contracted-out rights. 

Occupational Pensions Revaluation Order 2017

This Order sets the higher and lower percentage rates for statutory revaluation. The respective rates for the revaluation period 1 January 2017 to 31 December 2017 are 3.0% and 2.5% (so the 2.5% LPI cap has been applied on the lower revaluation percentage).

Action points: Trustees should ensure that scheme administrators are applying the correct revaluation percentages.

GMP increases from 6 April 2018

A draft order has been published which provides that statutory GMP increases will be 3% from 6 April 2018.

Action points: Trustees should ensure that scheme administrators are applying the correct GMP increases.

Regulator (www.pensionsregulator.gov.uk)

Guide to the Chair’s Statement 

TPR has issued a new guide, to be read alongside the DC Code of Practice. The guide include lists of good and poor practice “inspired by real-life chair’s statements”. It also includes a checklist and notes to assist completion. 

Action points: TPR is taking a hard line on Chair’s Statements and trustees should take great care to ensure they comply with legislation and guidance.

PPF (www.pensionprotectionfund.org.uk)

PPF levy determination

The PPF has published its final levy rules and guidance for the Levy Year 2018/19. Some of the key points to note are that the PPF will: 

  • proceed with changes to standard form contingent assets (see below);
  • require trustees certifying type A guarantees, whose levy saving would be £100k or more, to submit a guarantor report prepared by a covenant advisor; and
  • for type A guarantees, change how trustees may certify Realisable Recovery. 

The key deadline for the submission of scheme data (including hard copy contingent asset documentation) will be 5.00 p.m. on Thursday, 29 March 2018 (with online filing by midnight on 31 March).

The PPF has made changes to the standard form documents for contingent assets. The new forms were published on 18 January 2018 and any contingent asset agreement entered into on or after that date must be in the new form if it is to be accepted by the PPF for the 2018/19 levy year. Existing agreements, or those executed before 18 January, can still be submitted in the old form. We understand that the PPF intends requiring Type A and Type B contingent assets containing a fixed cap to be reexecuted in the new form for the 2019/20 levy year. 

Action points: Trustees with PPF compliant contingent assets should be taking steps to start the certification process. 

PPF Compensation Amendment Regulations – bridging pensions 

Currently, some members with bridging pensions can receive windfall compensation from the PPF. These regulations are intended to ensure that the amount of compensation a member receives from the PPF is not more than they would have received under their scheme. The regulations come into force on 24 February 2018 and apply to schemes entering assessment periods on or after that date. They provide that where a member, immediately before the assessment date, is entitled to a pension which would decrease at some point then that individual’s PPF compensation will be adjusted to reflect the decrease that would have occurred under the scheme rules. Trustees will be required to notify the PPF of details of any bridging pensions as at the assessment date. 

Action points: For information only at this stage. 

Tax (www.hmrc.gov.uk/pensionschemes/index.htm)

Autumn Budget

The Budget had few surprises for pension schemes. Pensions related announcements include:

  • Lifetime allowance to rise to £1,030,000 (CPI) for the tax year 2018/19 (as previously announced).
  • Increase to State pension of 3% from 6 April 2018 (under the triple lock).
  • Long term investment by pensions funds is to be supported. The Pensions Regulator will clarify guidance on how trustees can include investment in assets with long-term investment horizons and HM Treasury will establish a working group.
  • A reminder about the new HMRC registration and dormant employer provisions (now in the Finance No2 Bill). 

Action points: For information only at this stage.


British Telecom v BT Pension Scheme Trustees (High Court)

On 19 January, Zacaroli J handed down the judgment of the High Court in British Telecommunications Plc v BT Pension Scheme Trustees Ltd & Anor. In broad terms, the case considered the interpretation of two different scheme rules relating to pension increases: the “2016 Rule” and the “1993 Rule”. 

The 2016 Rule provides:

“On each 1 April … each pension in payment… will be increased by the increase in the cost of living during the 12 months up to and including the previous January … The cost of living will be measured by the Government's published General (All Items) Index of Retail Prices or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides.” 

The first issue was whether “becomes inappropriate” was something which the employer (or employer and trustee) had the power to decide, or whether it was a question of objective fact. Zacaroli J held that it was a question of objective fact for the court to decide. 

The concept of inappropriateness relates to the purpose for which the rule exists, namely calculating pension increases so as to reflect increases in the cost of living of pensioners under the Scheme. It should not be considered in a vacuum. “Even if RPI was universally regarded as inappropriate for all other uses, if it nevertheless remained appropriate for the purposes of measuring increases in private pensions, then the gateway in the rule would not have been passed”.

The judgment contains a long and interesting history of RPI and consideration of the various reviews of it and the alternatives. Zacaroli J concluded that: 

Having regard to the totality of the matters relied on by BT and the second Defendant as demonstrating, respectively, the disadvantages and merits of RPI, notwithstanding the powerful statements from the UKSA, ONS and others to the effect that RPI is flawed and that it ought not to be used as a measure of inflation, I have reached the conclusion for the above reasons that RPI has not at this time "become inappropriate" for the purposes of uprating pensions, within the meaning of that phrase in the 2016 Rule so as to meet the gateway threshold.” 

A key factor for this conclusion was that the underlying flaw caused by the method of aggregation used for RPI (the Carli formula) had always been present and was present and known about when wording like the 2016 Rule was first introduced into the Scheme.

The 1993 Rule provides:

“The annual amount of pension ... shall be increased by the lesser of 5% and the percentage ratio … by which the index figure of the General Index … exceeds the index figure for the same month in the immediately preceding year.

If the General Index ceases to be published, or is so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases, the Principal Company shall substitute such other index or appropriate basis of comparison as it shall in consultation with the Trustees decide. 

The "General Index" means the General Index of Retail Prices for all Items in the Digest of Statistics published by the Central Statistical Office.”

In relation to the 1993 Rule, Zacaroli J held that:

  • The word “continuous” emphasises the essential function of the index as to provide a comparison from year to year. If there was a change in formulation of RPI so that the figures could not be compared from year to year then that could open the gateway and allow BT to substitute. However, if the switch was not made that year then it could not be made the following year, because the comparison would then be between two similar indices again.
  • BT is the relevant decision maker and the court’s role is limited to assessing whether the decision was made rationally and in good faith. 
  • No rational decision maker, given the routine nature of the change to RPI relied upon by BT (a change in how clothing prices were taken into account) could determine that it was an amendment which invalidated the continuity of RPI.

BT has been granted permission to appeal.

Action points: As with other reported RPI/CPI cases, this is specific to the wording of the scheme’s rules. The judgment does however contain some points of general interest on the relevant factors to be considered and on the decision-making process itself. 

Age discrimination judgments – McCloud and Sargeant (EAT) 

The first case, McCloud, concerned provisions in the Judicial Pensions Regulations 2015, designed to mitigate the effect of compulsory pension reforms for older judges. Younger judges claimed that the regulations, by allowing older judges to remain in the more generous existing judicial scheme until retirement (or until the end of a period of tapered protection) amounted to direct discrimination on grounds of age. The Government argued that the provisions were objectively justified. 

The Employment Tribunal (ET) had found that the Government’s aims for including transitional provisions did not stand scrutiny: protecting those closest to retirement from the financial effects of pension reform defied rational explanation, as the closer a judge was to retirement, the less they would be affected by the reforms. The ET also rejected the government’s argument that consistency across public sector pensions was a legitimate aim. 

The EAT found that the ET had erred in law in holding that no legitimate aim had been identified however it had been entitled, when going on to consider proportionality, to find that the government had failed to justify the discriminatory effect of the transitional provisions. The EAT acknowledged the that the claimants were particularly adversely affected because of the combination of the effect of the pension scheme changes and the changes to tax treatment; and that the claimants had relied, when becoming judges and accepting lower salary, on “the Government’s then stated firm and settled view” that they should not suffer any detriment. The ET could not be faulted in its conclusion that “the extremely severe impact of the transitional provisions on the Claimants far outweighed the public benefit of applying the policy consistently across the whole public service pension sector”.

The Sargeant case relates to transitional pension provisions for firefighters. The claimants, all of whom were under age 45 at the date of the change, argued they were penalised when they were transferred into a less generous scheme as part of the wider public sector pension reforms, whereas exemptions were made for firefighters closer to retirement. The ET had found that protecting those closest to pension age from the effects of pension reform could be a legitimate aim, and the way in which it had been done was proportionate and fair. 

The EAT found that the ET did not err in law in holding that the transitional arrangements pursued legitimate aims, despite the discriminatory impact on grounds of age. The ET had been entitled to find that the Government had demonstrated four legitimate aims: “to protect those closest to pension age from the effects of pension reform; to take account of the greater legitimate expectation that those closer to retirement would have that their pension entitlements would not change significantly when they were close to retirement; to have a tapering arrangement so as to prevent a cliff edge between fully protected and unprotected groups; and that there was consistency across the public sector.”

However, the ET did err when considering proportionality in failing to consider whether the application of the transitional provisions was a proportionate means for achieving the Government’s legitimate social policy aims. The question should be remitted to the ET. 

We understand that the EAT has granted permission to appeal in both cases.

Action points: These cases will be of interest to trustees of any scheme where transitional provisions were put in place to mitigate the effects of a benefit change (typically from DB to DC). Helpfully, Sargeant suggests that protecting those close to retirement can be a legitimate aim however the aim and means should be carefully scrutinised, in the context of the particular scheme.  

Wedgwood Pension Plan Trustee v Salt (High Court)

This was an application by the trustee of the Wedgwood Pension Plan for directions as to whether a notice served by the employers in June 2006 had the effect of closing the scheme to future accrual, and whether a salary link should have been maintained.

The first question was whether the rule which the employers had used to give notice to terminate accrual (rule 62) had been validly introduced. Its predecessor had imposed a limitation that a participating employer could only leave the scheme if it found it “impracticable or inexpedient” to continue to participate. Rule 62 contained no such restriction. 

The power of amendment allowed the principal employer to amend the rules provided that no amendment “shall prejudice or adversely affect any pension or annuity then payable or the rights of any Member.” The court rejected the argument that the reference to “the rights of any Member” could apply not only to accrued rights but to future rights acquired by future service. However, the parties accepted that this wording would have the effect of protecting the link to final salary. The court held the introducing rule 62 had breached the amendment power fetter. Extending employers’ power to withdraw to situations other than where it was impracticable or inexpedient to continue contributing, prejudiced or adversely affected the rights of members. This did not mean that new rule 62 was invalid in its entirety: instead, it should be read as subject to the same restriction that the employers needed to show that it had been impracticable or inexpedient for them to continue contributing in respect of active members.

The court then considered whether the participating employers could in fact establish that, at the time of issuing the termination notices, they found it impracticable or inexpedient to participate in the scheme. The judge noted that in 2006 the group was experiencing financial difficulties and that the planned closure was part of the employers’ turnaround plans and found that the employers could have legitimately concluded that their difficult financial position made it impracticable and inexpedient to continue participation. The effect of rule 62, read subject to the limitation, having been validly invoked, was that the members had thus left pensionable service in 2006, breaking the link to salary.

The scheme will now transfer into the PPF.

Action points: This case is a further reminder for employers and trustees of the importance of carefully considering any fetters in the power of amendment before making changes to the scheme. 


Money laundering update

In a further update from HMRC, trustees need now keep detailed records of beneficiaries only from the point the benefit comes into payment. Where the scheme is liable for certain taxes including Stamp Duty Reserve Tax or Stamp Duty Land Tax in the 2016/2017 tax year, no penalties will be issued as long as trustees must register online with HMRC’s Trust Registration Service (TRS) by 5 March 2018.

Action points: Trustees should review the data they hold on members and beneficiaries to ensure they comply with the new HMRC guidance and, particularly where they have direct holdings in shares or real property, check whether they need to register with TRS. 

Ombudsman (www.pensions-ombudsman.org.uk)

For the latest on The Pensions Ombudsman and his work, please ask your regular CMS contact for a copy of our quarterly Pensions Ombudsman Update.