Trustee quarterly update - 1 December 2016

If you would prefer not to receive this service from Addleshaw Goddard, please email: [email protected] TRUSTEE QUARTERLY UPDATE Pensions 1 December 2016 Court holds Bankrupt cannot be forced to draw scheme benefits to pay creditors In its judgment in Horton v Henry the Court of Appeal has held that where a bankrupt member has a right to draw benefits, but has not yet chosen to do so (a) his rights to future benefits under the scheme are not "income" over which the court can make an income payments order under section 310 of the Insolvency Act 1986; and (b) the trustee in bankruptcy cannot compel the member to take his benefits. For more information, click here. Court of Appeal ruling on switching from RPI to CPI In its judgment in the case of Barnardo's v Buckinghamshire, the Court of Appeal had to consider whether a scheme's rules allowed the Trustees to select an index as an alternative to RPI for pension increases and revaluation. The salient rules provided for increases to be in line with the "Retail Prices Index" where "Retail Prices Index" was defined as "the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval. Where an amount is to be increased 'in line with the Retail Prices Index' over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to dates when the period began and ended, with an appropriate restatement of the latter figure if the Retail Prices Index has been replaced or re-based during that period". The key question was whether this allowed the Trustees to adopt:  any replacement index chosen by the Trustees; or  only an index published by the publishing authority as a replacement for RPI. By majority the Court held that "replacement" meant replacement by the publishing authority. Key factors were (a) the wording suggested that the replacement happened before the adoption by the trustees (b) the wording referred to the possibility of the index being "replaced or re-based" and "rebasing" could only be done by the authority publishing the index, not the trustees; and (c) the possibility of replacing the index was also covered in the Revenue limits appendix in the rules, where the wording made clear that it was referring to replacement by the publishing authority; the judges considered that it would normally be expected that the same concept would be used consistently in the same document. The Court also considered whether, if the rules had given the Trustees the power to replace RPI with CPI, exercising such a power would have been a "detrimental modification" for the purposes of section 67 of the Pensions Act 1995. Consistent with previous decisions, the judges unanimously considered it would not. If the rules gave the Trustees a choice, until that choice had been exercised it was not correct to say that a member had a right to an increase based on one index rather than another. Comment This clarifies that there is no power to select an alternative index for schemes with similar wording. For schemes which do allow an alternative index, it is helpful that the Court of Appeal confirmed earlier High Court decisions that section 67 would not prevent such a change being made. Trustees may wish to consider whether their scheme's rules permit the use of an alternative index. We understand it is possible this case may go to the Supreme Court. High Court rules on limitation period for reclaiming overpaid pension In the case of Webber v Department for Education, the High Court had to consider the cut-off date for limitation purposes where a claim to recover overpaid pension was not brought through court proceedings; instead, the scheme had demanded payment and the member brought a complaint to the Pensions Ombudsman about the scheme's attempts to recover the overpayment. The court held the cut-off date was the date the Pensions Ombudsman received the scheme's response to the complaint. This judgment is the latest in a series of Ombudsman determinations and court cases arising out of substantial overpayments of pension made by the Teachers Pension Scheme to Mr Webber. Mr Webber was overpaid pension in every tax year from 2002/2003 to 2008/2009. In 2009, the scheme discovered the mistake and in November 2009 wrote to Mr Webber requiring repayment. The Limitation Act provides that a claim for recovery of overpayment must be made within 6 years of the overpayment or, if later, the date from which the person making the overpayment ought reasonably to have realised that it was an overpayment. In this case the court held that the scheme ought to have known from the outset that pension was being overpaid, so the standard 6 year time limit applied to each instalment of overpaid pension. If the scheme had brought court proceedings to recover the overpayments, the "cut-off date" would have been the date the claim form was issued. In other words, the scheme would have been able to recover overpayments back 6 years from that date. In the Webber case, the scheme had not brought court proceedings; the matter had been the subject of a Pensions Ombudsman determination, as Mr Webber had made a complaint about the scheme's attempts to recover overpayments. The court therefore had to decide what date was the cut-off date in such circumstances. The Pensions Ombudsman had held that the cut-off date should be November 2009 when the scheme demanded repayment. That would have allowed the scheme to recover overpayments back to November 2003, which would have been a significant portion of the overpayments. However, the High Court found that the cut-off date was the (significantly later) date that the Ombudsman received the scheme's response to Mr Webber's complaint about the scheme's attempts to recover the overpayment. Comment Where a past overpayment of pension is discovered, trustees should be mindful (a) that there is a six year limitation period on reclaiming overpayments; and (b) that if they could "with reasonable diligence" have discovered the overpayment from an earlier date, the six year limitation period may already have started to run from that earlier date, potentially limiting how far back they can reclaim overpayments. Commencing court proceedings for recovery of overpayments will allow back payments for 6 years from the date the claim form is issued. Where there are no court proceedings but the matter comes before the Pensions Ombudsman, it seems that the cut-off date will be the date the trustee response is received by the Ombudsman which could reduce recovery. Where the member has brought an Ombudsman complaint, trustees could issue a claim and then apply for proceedings to be stayed in order to bring the date forward and achieve greater clarity. Tax Tribunal case raises risk of transfers being unauthorised payments The ruling by the First-tier Tribunal of the tax courts in the case of Clark v Revenue & Customs has raised the risk that a transfer made to a scheme which has been registered by HMRC may subsequently be held to be an unauthorised payment on the grounds that the scheme is not a "pension scheme" at all due to the trusts of the scheme being void for uncertainty. For more detail, click here. Court of Justice of European Union (CJEU) finds no discrimination in same sex partners case The CJEU has found that there was no unlawful discrimination in the case of Dr David L Parris v Trinity College Dublin. The case concerned an Irish pension scheme, the rules of which provided that a survivor's pension would only be payable to a member's spouse or civil partner on the member's death if the marriage or civil partnership was entered into before the member reached age 60 or retired, whichever was the earlier. The member had lived with his same sex partner for over 30 years and had entered into a civil partnership when over the age of 60. Irish law did not give recognition to same sex civil partnerships until after the member had reached age 60, so under the scheme rules it would have been impossible for him to meet the criteria for a civil partner's pension. The CJEU held that there was no unlawful discrimination on ground of sexual orientation. EU law did not require member states to provide for the legal recognition of same sex partnerships, and if they did so, it was up to the member state to decide the date from which the recognition would apply. The CJEU further held that there was no unlawful age discrimination, as the scheme rule in question fell within the scope of the EU Directive which permitted, ‘the fixing … of ages for admission or entitlement to retirement … benefits’. Finally, the court held, "where a national rule creates neither discrimination on the ground of sexual orientation nor discrimination on the ground of age, that rule cannot produce discrimination on the basis of the combination of those two factors." Comment The Supreme Court, in the case of Walker v Innospec is due to rule on the validity of a provision in the Equality Act 2010 which allows survivor benefits accrued before 5 December 2005 (the date of the introduction of civil partnerships) to be restricted to widows/widowers in a male/female marriage, i.e. not provided for the survivor of a civil partnership or same sex marriage. In the light of the CJEU's decision in Parris, it seems likely that the Supreme Court will uphold the Equality Act provision as valid. Pensions Ombudsman holds member should have realised lump sum on statement incorrect In the case of Mrs N (PO-12613) the Deputy Pensions Ombudsman has rejected a complaint from a member where the benefit statement provided to the member shortly before her retirement greatly overstated the lump sum to which the member would be entitled, giving the figure as £47,222.50. When the figures were revisited shortly after the member's retirement, it emerged that the correct figure for the lump sum was £25,666.23. The trustees produced copies of benefit statements from the four previous years, all of which had shown a much lower lump sum than that contained in the erroneous statement. The figures quoted were in respect of deferred benefits, so there was no reason for the member to attribute the increase to additional benefits earned. The Deputy Ombudsman held that the discrepancy was such that it should have put the member on notice that the figure might not be correct. Comment The legal starting point in cases where benefits have been misquoted is that the trustees are required to pay the correct level of benefit under the scheme rules. A member may be able to hold the trustees to an incorrect benefit quotation if the member has irrevocably changed his position to his/her detriment in reliance on the accuracy of the statement. However, a member cannot succeed with such a detrimental reliance argument unless it was reasonable for the member to rely on the statement. This case illustrates that if an incorrect benefit statement shows a sudden leap in the figures provided compared to previous years, and there is no obvious reason for such an increase, the Ombudsman may take the view that it was not reasonable for the member to rely on the statement. Pensions Ombudsman holds no obligation to provide 3 month guarantee on cash equivalent for active member In the case of Mrs E (PO-12359) the Pensions Ombudsman has rejected a complaint from an active member who alleged that she had been treated unfairly compared to a deferred member because when she requested a transfer value as an active member, the transfer value which she was quoted was not guaranteed. The member had requested a transfer value on 4 June 2015. She received a transfer value quotation of £686,687 on 16 June 2015. Both the transfer value statement and the accompanying letter expressly stated that the transfer value was not guaranteed. Following the appointment of a new actuary, the transfer value basis was changed in July 2015. This led to the member being provided with a revised transfer value quotation of £644,226 on 11 August 2015. The member subsequently opted out of scheme membership and transferred her benefits out of the scheme. The Ombudsman rejected the member's complaint. The relevant legislation only required the trustees to guarantee cash equivalent transfer values for 3 months in respect of deferred members, and the trustees had dealt with the member in the same way as they would have dealt with any other active member, so the treatment was not unfair. The Ombudsman said that, in his view, the wording about the transfer value not being guaranteed could not have been clearer. One notable aspect of the determination was that the member, who had an actuarial background, had asked to see details of the transfer value calculations. The Ombudsman said he saw no reason for the trustees to refuse this request, and asked the trustees to do so. However, he did make clear that as the case had already been determined, the trustees were not required to enter into dialogue with the member regarding the transfer value calculations. VAT transitional period extended to 31 December 2017 On 5 September 2016 the Government announced that it was extending the transitional period for reclaiming VAT to 31 December 2017. This maintains the longstanding practice of allowing employers to treat VAT on certain pension costs as input tax for VAT purposes, meaning it can be offset against the employer's own VAT bill. For more information, see our e-bulletin. Pension Schemes Bill will require Master Trusts to be authorised by Regulator The Pension Schemes Bill published on 20 October 2016 will introduce a prohibition on operating a master trust scheme (MTS) unless the scheme is authorised by the Pensions Regulator. Existing MTSs will have six months from commencement of the Act to apply for authorisation. One controversial aspect of the Bill is that it appears to impose requirements for events occurring from 20 October 2016 onwards to be reported to the Regulator within 7 days, notwithstanding that the Bill has not yet become law and its final terms are not yet known. For more information, click here. Regulations on bridging pensions following end of contracting-out The Government has passed regulations designed to ensure that, following the end of contracting out, the law which allows a scheme pension to be reduced where a bridging pension is being paid still works as intended. Autumn Statement In his Autumn Statement on 23 November 2016 the Chancellor announced that the Government will shortly publish a consultation on tackling pensions scams, including giving firms greater powers to block suspicious transfers. For more information about pensions measures announced in the Autumn Statement, click here. DWP announces cap on early exit charges On 15 November 2016 the DWP announced that it would be introducing a cap on early exit charges in occupational pension schemes. (The FCA made a simultaneous parallel announcement in relation to personal pension schemes.) The objective is to remove a barrier to people accessing pension freedoms with their "flexible benefits" (i.e. with their DC pension pots). Broadly, an "early exit charge" is a charge imposed on a member who, having reached age 55, takes or transfers his benefits or converts them into different benefits where the charge would not apply if the member had reached "pension age". Market value adjustments (MVAs) and terminal bonuses are not caught by the cap. For existing scheme members as at the date the cap is brought into force, early exit charges will be capped at 1% of the value of the member's pension pot (or any lower rate specified under existing terms). For members joining the scheme after that date, early exit charges will be banned altogether. The Government intends to have the necessary regulations in force by October 2017 (later than the equivalent personal pension scheme measures which will take effect from 31 March 2017). The duty to comply will be placed on the service provider and/or trustees depending on who imposes the charge in practice. Government confirms EU General Data Protection Regulation will apply In our June Update we flagged that the General Data Protection Regulation (GDPR) will directly apply in all EU Member States from 25 May 2018. In that Update, published prior to the EU referendum, we flagged that the referendum had created uncertainty as to the extent to which the GDPR would apply in the EU long-term. On 24 October 2016, the Secretary of State for Culture Media and Sport stated in an appearance before a parliamentary select committee, “We will be members of the EU in 2018 and therefore it would be expected and quite normal for us to opt into the GDPR and then look later at how best we might be able to help British business with data protection while maintaining high levels of protection for members of the public.” Thus it is clear that the Government still expects parties processing personal data to take steps to comply with the GDPR. For more detail on the implications of the GDPR, see our June Update. Government to merge TPAS and Pension Wise into new pensions guidance body In an announcement on 9 October 2016 the Government confirmed its intention to merge TPAS and Pension Wise into a new pensions guidance body. The announcement stated that the next step would be to consult on how best to design a single body. Government cancels plans to create a market for secondary annuities On 18 October 2016 the Government announced that it has cancelled plans to allow existing annuity holders to sell the benefit of their annuities. Pensions Regulator publishes new scheme return guidance for defined benefit/hybrid schemes The Pensions Regulator has published additional resources to help those completing a scheme return for a defined benefit or hybrid scheme. PPF confirms changes to s143 and s179 assumptions The PPF has announced changes to the assumptions it uses for section 179 and section 143 valuations. The changes take effect from 1 December 2016. According to the PPF, the most significant changes are:  the use of separate discount rates for pensioners and non-pensioners post-retirement;  the use of yield indices that have durations that better match average liability durations, including the introduction of a new index-linked gilt yield; and  updated mortality assumptions. Consultations Consultations on the following issues have taken place or commenced over the past quarter: Government consults on various contracting-out issues including equalisation of GMPs The Government has published a consultation on various matters relating to contracting-out, including a proposed methodology for equalising GMPs. For more information, click here. HM Treasury consultation on pensions advice allowance HM Treasury has consulted on introducing a "Pensions Advice Allowance" which would allow members to take £500 tax free from their money purchase scheme to redeem against the cost of financial advice. The consultation closed on 25 October 2016. Draft PPF Levy Determination 2017/18 On 22 September 2016, the PPF published its consultation and draft determination for the 2017/18 levy. The PPF is not proposing major policy changes for the forthcoming levy year. One area of concern raised by the PPF is schemes that run on outside the PPF with a shell company or "special purpose vehicle" as sponsoring employer. Separately, one change which the PPF is making is to allow certain employers that are moving to the FRS 102 accounting standard for the first time (primarily likely to be unlisted entities) to make submissions to the PPF by 31 March 2017 to avoid their insolvency risk scores being adversely affected by certain elements of the new accounting standard. The consultation closed on 31 October 2016. DWP Consultation on increase to PPF compensation cap for members with long service The DWP has consulted on regulations relating to its plans to increase the PPF compensation cap applicable to members with long pensionable service. Broadly, the compensation cap will increase by 3% for each year of pensionable service a member has in excess of 20 years (subject to 2 times the cap). The consultation closed on 9 November 2016, and the Government intends to bring the measures into force in April 2017. DWP consults on "appropriate independent advice" requirement re GARs and re overseas transfers The DWP has consulted on draft regulations dealing with how to value benefits with a guaranteed annuity rate (GAR) for the purposes of ascertaining whether the value of the benefits is over £30,000 (the threshold which triggers a requirement for the member to take "appropriate independent advice" before transferring benefits to a money purchase arrangement). The consultation closed on 7 November 2016. The DWP has also published a call for evidence on how transfers overseas have been affected by the advice requirement and how the requirement could be made to work better in relation to overseas transfers. That consultation closes on 23 December 2016. DWP consults on General Levy rates The DWP is consulting on the rate of the General Levy, which is used for the core funding of the Pensions Regulator, TPAS and the Pensions Ombudsman (not to be confused with the PPF levy). It proposes a freeze in the levy rate for schemes with less than 500,000 members and a reduction in the levy rate for schemes with 500,000+ members. The consultation ends on 18 January 2017. FCA consults on measures to improve disclosure of transaction costs The FCA has published a consultation proposing rules and guidance to improve the disclosure by asset managers of transaction costs in workplace pensions. It sets out standards to enable trustees to obtain, for the first time, a standardised disclosure of the transaction costs that pension investments incur. The consultation closes on 4 January 2017. FCA consults on requirements for annuity providers to illustrate potential gains of shopping around The FCA is consulting on new measures to require annuity providers to provide annuity quotes in a personalised format which will illustrate to the individual member how much he or she could potentially gain by shopping around for an annuity. The consultation closes on 24 February 2017. HMRC consults on new provision of information requirements re lump sum death benefits HMRC is consulting on draft regulations which will impose new requirements on scheme administrators to provide information when paying taxable lump sum death benefits to a trust. The information will include the amount of the lump sum on which tax has been charged, the amount of the tax charge, and various details of the scheme and the deceased member. The trustees of the trust will then have to provide the recipient of a payment from the trust with the amount the recipient has to declare for income tax purposes and the amount of tax paid by the pension scheme administrator. The beneficiary can then use the information to claim a refund. The closing date for comments on the draft regulations is 5 December 2016. For further information please contact: Rachel Rawnsley Jade Murray Catherine McAllister Rachel Uttley Addleshaw Goddard Pensions Team Addleshaw Goddard's Pensions Group is acknowledged by independent commentators as one of the leading practices in the UK, renowned for its ability to deliver commercial and practical advice, designing and delivering training for trustees and pensions managers and providing timely and accurate advice services. 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