Top of the agenda
- Employer's duty of good faith in the spotlight : could you be in breach?
The employer's duty of good faith has come under the spotlight recently in a number of pensions cases. The duty was first reviewed in a pensions context in the case of Imperial Group Pension Trusts Ltd v Imperial Tobacco Limited  2 ALL ER 597. In that case, Sir Nicolas Browne-Wilkinson V-C held that employers should not conduct themselves in a manner that would "destroy or seriously damage" the relationship of confidence and trust between the employer and the members.
The duty was applied more recently in Prudential Staff Pensions Ltd v The Prudential Assurance Company Ltd and others  EWHC 960. In this case, the test for whether an employer is in breach of its duty of good faith was put as follows:
- has the employer acted irrationally or perversely (in a manner in which no reasonable employer would have acted)?; and
- was the irrational or perverse conduct so "serious" such as to have destroyed or seriously damaged the relationship between the employer and members?
In this case, Prudential Assurance Company Limited was found not to have breached its duty of good faith when changing its policy on discretionary pension increases by introducing a cap.
In Bradbury v British Broadcasting Corporation  EWHC 1369 (Ch), which concerns contractual changes to pension schemes, the BBC, in its final salary scheme, placed a cap on future increases of pay so that only 1% of future increases would count as pensionable pay. The members could alternatively move to a career average scheme where there would be no cap. The issue of good faith arose in the context of whether the collateral purpose of 'driving' individuals out of their current scheme and the offer made by the BBC regarding pensionable pay were breaches of that duty. The decision has been remitted back to the Pensions Ombudsman on the good faith issue as the Ombudsman did not previously address this aspect.
There was also some discussion by Warren J as to whether IBM could be in breach of its duty of good faith in IBM United Kingdom Pensions Trust Limited v IBM United Kingdom Holdings Limited and others  EWHC 2766 (Ch). However Warren J declined to say “more than was absolutely necessary on the issue” as there had not been any full submissions either on the facts or on the law about the duty. The good faith duty is a key issue in a sister case in the IBM litigation relating to changes proposed by IBM to close the defined benefit section of the IBM Plan to future accrual - this case is scheduled to be heard in February 2013.
There have also been a number of determinations before the Pensions Ombudsman that have addressed the duty of good faith. Of these, the latest offering is Taylor (82402/1).
Here, the scheme rules allowed overseas members, at the employer's discretion, to take their pension in foreign currency at a conversion rate fixed at retirement. Some members were offered the option at retirement without having asked for it; Mr Taylor was not. Mr Taylor complained that this failure had resulted in him not being considered for the option and a financial loss to him.
Applying the test in Prudential, the Ombudsman held that that the fact that an option was available to some pensioners and not to others, without any particular reason for distinguishing between them, was sufficient to (at the least) seriously damage the relationship between the employer (Reuters) and the members of the scheme. As such there was a breach of duty of good faith by Reuters:
"This is a matter of arbitrary treatment, even if only through administrative inefficiency or inconsistency. In Mr Taylor’s case the result is that no discretion was exercised, against a background in which it might have been exercised as he wished had it been considered, and indeed had been for others."
On the issue of whether there had been any maladministration, the Ombudsman recognised that there was no statutory definition of maladministration. However, the Ombudsman did refer to the 'Crossman Catalogue', a list of examples given by Richard Crossman in debates leading to the establishment of the Parliamentary Commissioner for Administration, in which "Bias, neglect, delay, incompetence, ineptitude, perversity, turpitude, arbitrariness" were all considered to be maladministration.
In this case, the arbitrary approach taken by the employer in informing some members about the conversion option and not others was held to be maladministration.
The Ombudsman directed that the employer should give full consideration to Mr Taylor's request to permanently convert his pension to euros as if it was made when the pension was first put into payment. The decision should be made by the employer as if it was made when the pension first put into payment; no new matters should be taken into account when exercising the discretion unless Reuters were confident they would have been taken into account at that time.
The trustees were directed to recalculate Mr Taylor's pension in the event that the employer exercised its discretion in Mr Taylor's favour. Further, Mr Taylor was awarded £250 compensation for inconvenience.
- Pension funds lose investment case against fund managers
In Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson PFI Secondary Fund II LP & Ors  EWHC 3259 (Comm), the High Court has ruled against trustees and administrators of 22 pension funds in a claim against their fund managers for breach of investment mandate.
The first defendant in the case was a limited partnership ("the Partnership") established to invest in private finance initiative and public private partnership concession companies. The other two defendants were the General Partner of the Partnership and the Manager (Henderson Equity Partners), appointed by the General Partner on behalf of the Partnership to manage the investment portfolio of the partnership under the supervision and authority of the General Partner.
In 2006, the Partnership acquired John Laing plc, a large public company with some non-PFI assets. By 2009, the fund had dropped 60% in value.
The claimants' fundamental allegation was that the Manager and the General Partner did not invest in a portfolio consisting exclusively or principally of PFI concession companies, as they were required to do. The claims based on this fundamental allegation contained two key groups.
- Claims against the Manager for breaching its obligations under a Management Deed by investing in Laing plc.
- Claims against the General Partner for breaching its obligations under the Partnership Agreement by investing in Laing plc.
The claimants planned to advance both sets of claims as derivative claims on behalf of the Partnership – but only if they were permitted to do so by the Court, and only if they obtained declaratory relief excluding or limiting their liability in respect of the Partnership's debts. Twenty of the claimants also planned to bring the claims against the General Partner individually.
The classic example of a derivative claim is where a minority shareholder brings a claim on behalf of a company against wrongdoers who are in control of the company. There is no example in English law of a claimant limited partner seeking to pursue a derivative claim on behalf of a limited partnership. However, the claimants argued that there was no reason why a derivative claim could not be brought in a partnership context.
Cooke J held that the claimants were not entitled to pursue a derivative claim against the General Partner. They were able to pursue a derivative action against the Manager, but to do so they would forfeit their limited liability and render themselves liable to the creditors of the Partnership generally, as if they were the General Partner. Cooke J arrived at his decision by reviewing the role of limited and general partners under the Limited Partnerships Act 1907. Cooke J also dismissed all of the allegations of breach of mandate.
This case highlights the difficulties of bringing derivative claims against fund managers where the investment vehicle is a partnership. It also serves as a reminder of the importance of tight drafting of the investment mandate and of monitoring the activities of the investment managers and fund performance carefully. This is the first case of its kind involving pension scheme trustees. The previous case in the High Court (which settled before getting to trial) was a decade ago involving the trustees of the Unilever Superannuation Fund and Mercury Asset Management plc (MAM). Broadly, the trustees had claimed that MAM had failed to exercise the highest standards of care in managing the scheme's assets, achieving target returns and not breaching tolerance levels on fund performance. The case is reported to have settled for £70m.
- Auto-enrolment: another case on the meaning of "worker"
There has been another case recently looking at the meaning of "worker" under the Employment Rights Act 1996. Although this case (like the other similar cases we covered in our October bulletin) look at the Employment Rights Act 1996 definition of worker, that definition is very similar to the basic definition of worker under the Pensions Act 2008 for auto-enrolment purposes. Where the definition for auto-enrolment purposes and the Pensions Regulator's guidance on the meaning of worker are not sufficient, these cases could be influential in determining whether a person is a worker for auto-enrolment purposes and therefore whether an employer has duties in relation to that person under the auto-enrolment regime.
In Suhail v Herts Urgent Care  UKEAT/041, the claimant was a registered GP who worked as an out of hours GP. The respondent was an out of hours GP service responsible for providing cover in Hertfordshire, with approximately 250 GPs on its books whom the respondent regards as self-employed. The claimant worked for the respondent as well as for an out of hours service in east London and was also registered with Rotherham Primary Care Trust. The service level agreement between the parties stated that there was no guarantee or obligation of work; no employer/employee relationship; and that the GP was self-employed.
Problems arose between the claimant and the respondent in July 2010. The claimant was subsequently informed that he would not be allowed to work further shifts. In September 2010, the claimant alleged that the respondent's action in bringing his shifts to an end amounted to Public Interest Disclosure victimisation - (i.e. because he had "blown the whistle" on potential health and safety breaches within the organisation, his shifts had been brought to an end).
The Employment Appeal Tribunal held that the claimant was not an "employee" or a "worker" for the purposes of the Employment Rights Act 1996 so he was not entitled to bring this claim.
In determining whether or not the claimant was a worker, it was concluded that there was no mutuality of obligation as between the claimant and the respondent. There was a substitution clause which was intended to have effect and the claimant was clearly marketing his services to providers of medical services. The claimant was able to take work as a locum at any time he chose. Further factors which were taken into account were that the employing doctors would not and were not expected to be supervised and had complete clinical independence. However, these factors were restricted to the facts of this case and were not regarded as decisive.
This case contrasts with Hospital Medical Group v Westwood  EWCA Civ 1005 (see our October bulletin) where the Court of Appeal held that a GP performing hair restoration surgery for a private clinic, HMG, was a "worker". The decisions may be distinguished on the following grounds:
- The GP in the Court of Appeal case performed hair restoration services for HMG and was integral to HMG's operations, whereas in this instance the GP was one of 250 GPs on the books of the out of hours service.
- Further, the Court of Appeal found that separately from his general practice and his work at another clinic, the GP had contracted specifically and exclusively to carry out hair restoration on behalf of HMG. However, in this case the GP was marketing his services to whichever provider of medical services might wish to provide him with work.
- High Court grants rectification by way of summary judgment
The High Court has granted rectification by way of summary judgment in Misys Ltd & Anor V Misys Retirement Benefits Trustees Ltd & Anor (2012) after holding that a trustee and a representative pension scheme member had no real prospect of successfully defending a claim for rectification of a pension scheme deed. The deed had altered members' entitlement to benefits, but the evidence showed that the intention was for the deed to consolidate the rules applying to the scheme and not to affect members' entitlements.
The deed had been executed after a merger of three pension schemes. The applicants brought a claim for rectification, asserting that the intention was to consolidate the rules relating to the merged schemes, and that the solicitors responsible for preparing the deed had made changes to the rules relating to members' entitlement to benefits without instruction and without drawing those changes to their attention. As well as witness evidence, documents including minutes of trustee meetings, drafts of the deed, and a report by the solicitors' firm confirmed that it had not been intended that the deed would change members' entitlements.
The court held that the facts and evidence demonstrated that there was no real prospect of a successful defence to the rectification claim. Accordingly, it granted the application for summary judgment.
Summary judgment is being used increasingly in rectification applications. Cases can be heard in court or by telephone – there has been one successful application heard by telephone so far. There may be scope for applications to be dealt with on paper but that approach has not been adopted as yet. In fact, in the current case, the judge refused to deal with the application on paper. Even so, the summary judgment route can significantly save time and costs compared to a full trial.
- Government plans for "reinvigorating" pensions
On 22 November, the DWP published its report, "Reinvigorating workplace pensions" in which it outlined its plans to revitalise workplace pensions by encouraging greater risk-sharing between members and employers, as well as monitoring closely the use of charging structures and taking steps to simplify current legislation governing the disclosure of information.
Central to the DWP's plans for the future is the new "defined ambition" system which it is hoped will create greater certainty in respect of members' benefits, whilst limiting the cost volatility to which employers are exposed. The "defined ambition" options currently under consideration are based on traditional defined benefit (DB) and defined contribution (DC) models, with additional features intended to distribute risk more evenly. For example, some of the DB options put forward consider the introduction of optional or conditional indexation (where future indexation is not guaranteed but is conditional on the scheme's funding position), on the removal of spouses' benefits and fluctuating benefit payments depending on the funding level of the scheme, amongst others. Proposals based on a DC structure focus on the introduction of capital guarantee mechanisms, whether in relation to members' investment returns or the provision of retirement income in later years. For instance, one of the ideas of guaranteed fixed-period returns that also incorporates some risk sharing involves providing for a guaranteed minimum level of growth, with potential to receive more than that minimum. The provider of the guarantee would take on the downside; however, both the provider and the members would share the upside so if the fund performed over the minimum guarantee the provider and member would both take a share. The proposals for "defined ambition" pensions are still at a preliminary stage and it is expected that the DWP will issue a further publication outlining the framework for "defined ambition" pensions in due course.
- Draft changes to the annual allowance regime
Under a draft order, the draft Annual Allowance Charge (Amendment) Order 2012, issued for consultation, various changes are being proposed to the annual allowance charge. Here are some of the changes being proposed:
- The circumstances in which the deferred member "carve-out", which effectively allows deferred members to be exempt from the annual allowance charge (if certain conditions apply), are exended for cash balance and defined benefit schemes. For instance, a deferred member whose benefits are transferred to another scheme will be exempt if no further benefits accrue to him under the receiving scheme for the rest of the pension input period.
- Benefits must not increase by more than the "relevant percentage" as defined in the Finance Act 2011 during the year for these new extensions to apply. However, any increase that arises due to an "enactment" will not be taken into account for these purposes.
- There is a further circumstance in respect of DB arrangements only where no annual allowance charge will arise. This is where all the member's benefits are secured under a deferred annuity contract and the benefits increase in accordance with that contract but not by more than CPI or RPI (whichever is greater).
- There are changes to the adjustment to be made to the valuation of cash balance arrangement benefits in the year benefits are taken. The full impact remains to be seen, but these changes could result in more benefits being caught by the annual allowance charge.
- In respect of cash balance or defined benefit arrangements, changes are proposed to the adjustment to be made to the valuation of benefits where the scheme pays facility applies. Essentially the member must give notice, and the annual allowance charge must have been applied, before his benefits come into payment for the amount of the charge to be taken into account when valuing the closing value of his benefits in that Pension Input Period.
It is proposed that the changes will be made from 6 April 2013 (they will not be retrospective).
Pension Protection Fund
- PPF Technical news
Issue 2 of the Pension Protection Fund's technical news ("TN") has been published. Key matters covered in the TN are:
Pensions Act 2011: Regulations relating to PPF requirements that were introduced under the Pensions Act 2011 but have not yet commenced will be brought forward. There is also a reminder that uncertainty surrounds the treatment of "Bridge"-type benefits for PPF purposes following the proposed changes to definition of money purchase benefits under the Pensions Act 2011. ("Bridge" benefits being those that were the subject of interpretation by the Supreme court in Houldsworth and another v Bridge Trustees Limited and another and Secretary of State for Work and Pensions  UKSC 42, i.e. where schemes offer guaranteed notional investment returns, rather than an actual investment return, or internal annuities (as opposed to the purchase of annuities from an insurance company)). The PPF will include an update on the treatment of Bridge benefits for PPF purposes in a future TN.
GMP equalisation: as a result of undertaking a pilot with some schemes in the PPF assessment period, the PPF is now satisfied that its proposed methodology for equalising in respect of GMPs is "fit for purpose" and can be implemented for schemes in a PPF assessment period. The PPF will be writing to schemes in an assessment period detailing how it expects the GMP equalisation method to be taken into account in the future.
Funding determinations: the concept of funding determinations was introduced recently under regulations. It gives the PPF the option of making a decision about a scheme's funding level based on an estimate of its assets and protected liabilities (as opposed to the scheme having to carry out a full formal section 143 valuation). The PPF has in the TN summarised its policy on how it will exercise this option (following earlier consultation): broadly, it will only use funding determinations for schemes that are very underfunded or very overfunded. One of the key advantages of the funding determination method is that there will be no need to obtain a formal section 143 valuation nor will there be a requirement to obtain audited accounts.
Reconsideration applications: following earlier consultation, the PPF has confirmed its approach to dealing with new provisions that will allow schemes to make an application for reconsideration to the PPF even if the scheme has not been able to obtain a protected benefits quotation (PBQ). The previous rules on reconsideration required trustees to obtain a PBQ in order to apply for reconsideration. Broadly speaking, a PBQ is an annuity quotation which would provide in respect of each member PPF-level of benefits or full scheme benefits (whichever can be secured by the trustees at the lower cost for that member). The PPF's approach is that providing trustees can demonstrate that they have taken reasonable steps to obtain a PBQ but could not do so, a "non-protected benefits quotation application" for reconsideration may now be made to the PPF.
Financial Assistance Scheme: The TN also has tips on how schemes should deal with underpin benefits (i.e. a money-purchase scheme with a defined benefit underpin or a defined benefit scheme with a money purchase underpin) for FAS compensation purposes and a reminder of impending regulations which would consolidate all existing FAS regulations.
- Consultation on the "Fair Deal" policy: Government response
"Fair Deal" is a non-statutory policy protecting the pension terms of employees who are compulsorily transferred out of the public sector to the private sector.
On 19 November 2012, HM Treasury published its response document to set out the Government's current position on Fair Deal following a consultation exercise held in 2011. Six additional questions are asked and draft guidance is also provided. Key features are summarised below:
- The Government proposes to reform the Fair Deal policy by offering continued membership of public service pension schemes to employees who are to be compulsorily transferred out of the public sector in future. This will replace the current requirement for the new employer to offer a "broadly comparable" pension arrangement including a bulk transfer from the public sector scheme in respect of past service rights.
- It is also proposed that employees who were previously transferred from the public sector to the private sector under the old "Fair Deal" policy will be allowed to join a current public service pension scheme for future service, with a bulk transfer payment for past service, when the contracts are re-tendered, in the event that the new contractor does not wish to offer a "broadly comparable" scheme of his own. The new public sector scheme may differ from the public sector scheme that the employee had left.
- There would be transitional protection for public service workers who at 1 April 2012 had less than 10 years to reach their Normal Pension Age, and some tapering protection for slightly younger employees.
Responses to this latest consultation are requested by 11 February 2013.
- Court of Appeal to hear Lehman Brothers companies' appeal against Upper Tribunal decision
We understand that the Lehman Brothers companies are appealing against an Upper Tribunal decision of June this year. The Upper Tribunal had ruled that the trustees of the Lehman Brothers' Pension Scheme could appeal against an earlier decision by the Determinations Panel of the Pensions Regulator not to issue FSDs against the 38 Lehman Brothers companies.
The appeal is to be heard on 29/30 April 2013.