This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- Supplemental Lloyds judgment fine tunes a GMP equalisation method
- Trustees should check whether their scheme is a "master trust"
- Auto-enrolment minimum contributions set to increase
- DWP publishes consultation on consolidation of defined benefit pension schemes
Supplemental Lloyds judgment fine tunes a GMP equalisation method
The High Court has issued a short supplemental judgment in relation to the Lloyds Bank case concerning GMP equalisation. The judgment clarifies a point held over from the first case concerning method D2; one of the methods available to address unequal GMPs.
Method D2 involves a one-time calculation of actuarial equivalence, using a statutory GMP conversion mechanism. The Representative Beneficiaries (representing certain affected members of three Lloyds Banking Group pension arrangements) argued that, to apply method D2, it was necessary to equalise benefits in accordance with method C2 first. This would involve providing for the better of male or female comparator pensions each year.
Dismissing this position, the Judge held that method D2 involved calculating the actuarial equivalent of the pre-conversion benefits first, in the same way as for method D1, and then equalising those benefits by taking the higher of the actuarial equivalents of the unequalised female and male pensions. The higher of these equivalents would then be adopted for the purposes of GMP conversion.
The Judge also clarified that it is for the actuary, not the court, to determine the actuarial equivalents of the unequalised pensions and that the actuary (without any influence from the court) will have to make certain actuarial assumptions to do so.
Trustees should check whether their scheme is a "master trust"
In December 2018 the Pensions Regulator (TPR) issued a warning that trustees should check whether their scheme falls within the statutory definition of a master trust. If it does, the deadline for applying for authorisation or to trigger exit is 31 March 2019. After this date if a master trust scheme operates without authorisation it will be forced to wind up. TPR has launched a step by step guide (which can be accessed here) for trustees to use to check to see if their scheme is a master trust.
A master trust is an occupational pension scheme that provides money purchase benefits and is used, or intended to be used, by two or more unconnected employers and is not a public service pension scheme. The number of master trusts has grown significantly since the start of the statutory auto-enrolment regime and there has been concern about its regulation and the level of protection afforded to members compared to those enrolled in other types of pension schemes. As a result of these concerns, the new authorisation regime for master trusts came into force on 1 October 2018. Under the new regime, authorisation from TPR is required for a master trust scheme to operate.
There are five criteria that TPR will use in order to assess whether authorisation will be given to a master trust scheme. In summary, TPR will look at whether those people involved in running the scheme are "fit and proper"; the scheme is financially sustainable; the scheme funder meets certain requirements; there are systems and processes in place to administer and govern the scheme properly; and there is an adequate continuity strategy in place. A code of practice and guidance is provided by TPR to assist trustees in checking whether their scheme meets the criteria.
Trustees should carefully assess whether their scheme falls within the definition of a master trust and if so, apply for authorisation from the TPR, or wind up, by 31 March 2019.
Auto-enrolment minimum contributions set to increase
A timely reminder for those employers and employees that pay into defined contribution (DC) auto-enrolment schemes - the statutory minimum contribution rates are due to increase in less than three months.
From 6 April 2019, the minimum employer contribution rate for most DC auto-enrolment schemes will increase from 2% to 3% of qualifying earnings. Alongside this, the total minimum employer and employee contribution rate (including tax relief) for these schemes will rise from 5% to 8% of qualifying earnings.
In addition, the DWP has announced that the qualifying earnings band will increase from £6,032 - £46,350 to £6,136 - £50,000 for the 2019/2020 tax year. The earnings trigger for auto-enrolment will, though, remain fixed at £10,000.
The new minimum contribution rates will almost certainly result in better retirement outcomes for members who choose to stay the auto-enrolment course. However, with Brexit and the prospect of an extended period of financial uncertainty looming large, it remains to be seen whether the requirement for higher member contributions will lead to a mass auto-enrolment exodus.
DWP publishes consultation on consolidation of defined benefit pension schemes
In December 2018 the DWP published its consultation in relation to measures to support the consolidation of defined benefit (DB) pension schemes. The consultation focusses on authorising and regulating DB ‘superfund’ consolidation vehicles. The DWP consultation highlights a number of potential advantages of the ‘superfund’ route; including that it would provide incentives for employers to inject significant sums into their schemes so they would be sufficiently well funded on a prudent basis allowing them to enter a superfund. Such an upfront investment would allow employers to discharge their legacy liabilities and concentrate on their core business, while being reassured that the members of the pension scheme are likely to be better protected in the long term.
The consultation notes that factors which should improve the probability of benefits paid in full include; the injection of additional funds from the employer or its parent group, the capital buffer provided by the superfund’s investors, the efficiencies of scale offered by a consolidation vehicle and the absence of potential future sponsoring employer insolvency.
In response to the consultation TPR has published guidance on how it intends to regulate such superfunds. TPR notes it will have a key role in assessing transfers in and transfers out of the superfund and will be ensuring that governance is proper and the correct people are operating the superfund. TPR will also have a key role to play in ensuring the financial sustainability of the superfund by closely scrutinising the capital buffer and the financial resources and reserves of the commercial entity of the superfund.
The DWP consultation runs until 1 February 2019 after which further concrete details of an authorisation regime should emerge. It remains to be seen what traction superfunds will eventually achieve despite this governmental push.