- 1 - Trustee Knowledge Update – Issue 27, May 2014
Trustee Knowledge Update
Welcome to the May 2014 edition of our Trustee Knowledge Update. It aims to inform trustees about changes in the law to help
them to comply with the legal requirement for each trustee (or trustee director) 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 that trustees may
need to be aware of.
The Budget 2014
Trustees need to be aware of the far reaching changes
announced in the 2014 Budget as many will have
implications for the ways in which schemes are operated.
The key changes to be aware of which came into force in
March 2014 are:
• An increase in the trivial commutation threshold
from £18,000 to £30,000;
• An increase in the amount that can be taken as a
small pot from £2,000 to £10,000; and
• Changes to drawdown limits, so the guaranteed
income required in flexible drawdown has fallen
from £20,000 a year to £12,000 and the maximum
amount that can be taken in capped drawdown
has increased from 120% of an equivalent annuity
In addition, although not yet confirmed by legislation, it
seems that it may be possible to take a pension
commencement lump sum now and delay taking the
corresponding pension until after April next year.
The biggest changes are due to come into effect from April
2015 and will allow members with money purchase pots to
take the whole pot as a cash lump sum. 25% of such a
lump sum can be tax free (as currently) and the balance will
be subject to income tax at whichever rate applies to the
member. Members will need to be given a new form of face
to face advice before exercising this option and details of
what such advice will entail have yet to be given.
Revised draft money purchase regulations
The Pensions Act 2011 contains provisions which, when
brought into force, will amend the definition of money
purchase benefits to exclude any benefit which is capable
of being underfunded. This change will be retrospective to
January 1997. To ensure that this does not adversely affect
actions that schemes have carried out between 1997 and
the date the revised definition comes into force in July this
year, the Government issued draft regulations to protect
historic transactions. It has now issued a revised draft of
Money purchase benefits with a final salary underpin will
continue to be treated as money purchase until the
underpin bites. The regulations should also mean that
historic wind-ups and section 75 debts will not need to be
unravelled because benefits should have been treated as
money purchase benefits.
If trustees think that there are any benefits in their scheme
which may be affected by the revised definition, they should
seek advice and ensure that the transitional regulations do
protect any activities they may have undertaken in the past.
Consultation on standards in DC schemes
The Government is consulting on standards in DC
schemes. Its main proposal is that there will be a cap on
charges in auto-enrolment default funds of 0.75%
(excluding transaction costs). Consultancy charges where
members must pay for advice given to their employer will
be prohibited from April 2015 along with payments for sales
commission deducted from members’ pensions, and
increased charges when members leave employment from
April 2016. From April 2015, trustees will have new duties
to consider and report on costs and charges.
All schemes will need to have a chair of trustees with
responsibility for saying how the scheme has complied with
these governance requirements, and trustees will need to
provide an independently audited statement of compliance.
There will also be a requirement for providers of contractbased
schemes to operate independent governance
committees to assess value for money, and report on how
quality standards are met.
Guidance on reporting material payment failures in DC
Where there has been a material late payment of DC
contributions by an employer, reports should be made to
the Regulator via Exchange. There are alternative methods
for reporting failures by one employer and failures by
several. The guidance also sets out the information that
trustees will need to make a report to the Regulator.
Where trustees are looking to report a late payment, they
should ensure that they have read this guidance and make
the report in the correct way.
Where trustees are not sure whether a payment failure is
material, there is existing Regulator guidance on the factors
to take into account.
VAT – decision in ATP PensionService
The saga of which elements of VAT an employer can
recover in relation to occupational pension scheme
expenses continues to rumble on. The question before the
European Court in the ATP case was whether a Danish
defined contribution scheme could be regarded as a special
investment fund and so exempt from VAT. The Court held
that, unlike a DB pension fund, a DC scheme could be a
special investment fund. A DC pension arrangement should
be regarded as a special investment fund “if the funds are
invested using a risk-spreading principle, and if the pension
customers bear the investment risk.” The fact that
contributions are made by the employer does not change
this, nor does the fact that the accumulated funds could be
paid out, either as a lump sum or in instalments, after
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The decision will not have a direct impact on DC schemes
that invest through insurance wrappers as these are
already exempt under a different VAT exemption.
However, it will be relevant for DC schemes with
segregated investments managed through asset managers.
Employers with such schemes may wish to consider
whether VAT reclaims should be sought (bearing in mind
possible knock-on consequences for managers who may
have to repay input tax previously recovered).
Pensions Newsletter 60 – February 2014
In relation to pensions liberation, the Newsletter reiterates
that HMRC will respond to requests for confirmation of the
registration status of a receiving scheme without seeking its
HMRC will only provide confirmation where the receiving
scheme is both registered and the information held does
not indicate a significant risk that the scheme was set up, or
is being used, to facilitate pension liberation. Otherwise, a
response will be issued setting out the conditions in which
HMRC will confirm registration status and explain that one
or both of the conditions are not satisfied (but not which
condition is not satisfied).
Pensions liberation – HMRC guidance
Pensions liberation was also dealt with in the Budget and in
the Finance Bill. As a result, HMRC has issued guidance
summarising the new provisions: “From 20 March 2014
HMRC can.. ask for documents and other information from
the pension scheme administrator and other persons to
help HMRC decide whether or not to register a pension
scheme. There are new penalties and appeals in respect of
the application for registration and information notices.
These include a new penalty if false information is provided
in connection with an application for registration. There is
also a new requirement that the pension scheme must be
set up and maintained for the main purpose of providing
authorised pension benefits. Where HMRC believe this is
not the case, registration may be refused, or an existing
pension scheme may be de-registered”.
These changes do not affect the process for dealing with
applications from members for transfers to schemes which
trustees believe may be being used for liberation but they
may make it harder for such schemes to continue.
Countdown to end of contracting-out
HMRC has issued the first of its countdown bulletins to the
end of DB contracting-out intended to be in April 2016.
From April 2014, HMRC offers a Scheme Reconciliation
Service to assist pension scheme administrators and
trustees to reconcile their records for all non-active
members against HMRC records in advance of April 2016.
HMRC request that those intending to use this service
submit a request as soon as possible.
GMP Increase Order 2014
The GMP increase rate is 2.7% for 2014/15.
Revaluation of Earnings Factors Order 2014
Sets out how much earnings are to be revalued by for
various purposes, including the calculation of GMPs. The
percentage for the 2014/15 tax year is 0.9.
The Social Security (Contributions) (Limits and
Thresholds) (Amendment) Regulations 2014
The lower earnings limit for 2014/15 is £111 per week
(£5,772 pa). The upper earnings limit is £805 per week
(£41,865 pa). The primary threshold (from where National
Insurance contributions are paid) is £153 per week (£7,956
pa). This may be relevant for trustees where their scheme
is integrated with the state pension arrangements, for
example by operating a lower earnings limit off-set.
Information for schemes on the move to Experian
The PPF is moving from Dun & Bradstreet to Experian to
calculate employer insolvency risk. Experian will be using
a new methodology. This has so far taken longer than
anticipated to fine-tune and the PPF intends to publish a
consultation at the end of May 2014 which will set out their
plans for the levy years 2015/16, 2016/17 and 2017/18.
The PPF proposes that the new PPF Specific Scores for
the 2015/16 levy will only be calculated by reference to
month-ends from 31 October 2014 onwards, meaning that
for one year only a six-month average will be used in the
levy calculation. The levy bands and levy rates will also be
changing although the PPF says it will still be using a
system of “broad bands”.
Experian will capture financial information from a range of
sources, with overseas entities, wherever possible, having
scores based on the same model (rather than having a non-
UK insolvency score “translated”). Employers will have their
insolvency risk assessed using one of eight scorecards,
and the levy rule which determines which scorecard is used
will be based on:
• whether the entity is part of a group or is a standalone
• the data available on the employer in accounts, as
some companies do not publish full financial
• for group companies publishing full accounts, the
size of the entity.
Each scorecard has five to seven variables but, broadly
speaking, each uses measures that capture “financial
fundamentals” such as scale of operations, profitability,
gearing, liquidity and cashflow. The scorecards are heavily
based on financial data and the PPF’s analysis suggests
they are likely to show only limited volatility. New scores
should be available from the end of May.
Government response to consultation on employer
Draft legislation contains a power to allow certain
categories of employees to be exempted from the autoenrolment
requirements. The Government has been
consulting about which employees this should extend to. It
has concluded that there is a strong case to permit
employers not to enrol workers who:
• have tax protected status for existing pension
savings (eg fixed and enhanced protection);
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• are on the brink of leaving employment;
• have given notice of imminent retirement;
• recently cancelled membership after being
The Automatic Enrolment (Earnings Trigger and
Qualifying Earnings Band) Order 2014
From 6 April 2014 the revised thresholds for auto-enrolment
• £10,000 for the earnings trigger, a rise from
• £5,772 for the lower end of the qualifying earnings
band, a rise from £5,668;
• £41,865 for the upper end of the qualifying
earnings band, a rise from £41,450.
IBM UK Pensions Trust Ltd v IBM UK Ltd (High Court)
The case concerned a series of restructurings of the IBM
pension arrangements and considered what the employer’s
duties to the scheme members were in relation to the
changes being made.
The judge concluded that the test of whether an employer
had breached the duty of trust and confidence it owed to its
employees was a severe one and relied on irrationality and
perversity. If no reasonable employer would have acted in
the same way, the duty could be said to be breached. The
question also turned on what the members’ “reasonable
expectations” were: meaning not what they might
reasonably have hoped or wished for but what expectations
had been engendered by the conduct of the employer.
Disappointing such expectations is a serious matter which
goes to the heart of the employment relationship.
Where restructuring of pension arrangements is currently
being contemplated this is a case that needs to be
considered both by employers in relation to the way in
which they present information to employees and trustees
in relation to what they can legitimately expect from
Briggs (and others) v Gleeds (High Court)
This case looks at the impact of deeds of amendment that
did not comply with the formalities for execution because
signatures had not been witnessed (as required by
The deeds were held to be invalid with the result that some
employees who thought they had joined the scheme were
treated as never having been members whilst others got
greater benefits than they had believed they were entitled
This case illustrates the need to ensure that documents are
properly executed, both in line with any statutory
requirements and any requirements in scheme rules. If
trustees or employers are executing any documents and
are in doubt of what is required, they should seek advice or
run the risk that documents might be held to be invalid in
Vaitkus v Dresser-Rand UK Ltd (High Court)
This is another in the long line of cases where schemes
thought they had equalised benefits in the early 1990s but
subsequently turn out not to have.
The scheme was established by interim deed in 1988 which
said that the trustees would give effect to “the Explanatory
Literature” (any literature setting out the provisions of the
Scheme, including any amendment of those provisions, and
issued to members and prospective members). NRD was
65 but a summary of scheme benefits provided that female
members with a past service credit could take their benefits
from age 60 without reduction. In April 1991 an
announcement was issued to female members saying that
the unreduced pension at age 60 would no longer be
available. The definitive deed, signed in December 1992,
provided for the unreduced pension at 60 and was
expressed to be effective from 1988. The provision was not
corrected until 1998. The amendment power said that the
principal employer could amend the scheme by deed, or
pending execution of a deed, by notice in writing in a form
agreed by the employer and trustees.
The court held that the April 1991 announcement was
“Explanatory Literature”, effective to amend the scheme. In
addition, the effect of that announcement was not reversed
by the execution of the definitive deed in 1992. As Clause 1
of the definitive deed provided that it took effect as if
executed on 6 April 1988, the new amendment power
should be treated as taking effect from that date and the
sending of the 1991 announcement was within the terms of
Honda v Powell (Court of Appeal)
This is another case about the validity of amendments. The
Court of Appeal held that a deed of adherence that
extended “the benefits of the scheme” to employees of the
adhering employer could not be interpreted as referring to a
reduced scale of benefits agreed between the parties but
not actually set out either in the deed of adherence or in a
deed of amendment (until much later).
Innospec Ltd v Walker (EAT)
The member worked for Innospec between 1980 and 2003
and entered into a civil partnership in 2006. The scheme
provided spouses’ pensions but limited civil partner
pensions to service after December 2005 (as permitted by
the Equality Act). As a result, the member’s civil partner
would receive a pension of about 1% of the pension that
would have been provided to a spouse.
In 2012 an Employment Tribunal held that the parties had
directly discriminated against the member and as direct
discrimination was clearly prohibited by the EU Equal
Treatment Directive, the Tribunal would seek to read the
Equality Act in a way compatible the Directive (effectively,
by ignoring the relevant provision relating to 2005). The
parties were therefore in breach of the requirements for
pension schemes not to discriminate against members.
The employer appealed to the Employment Appeal
Tribunal. In an unusual move, the Government was joined
to the appeal. The EAT concluded that:
• the relevant provision of the Equality Act was not
incompatible with EU law, as the EU Equal
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Treatment Directive did not have retrospective
effect in the field of sexual orientation; and
• even if it had been, it would not have been
possible to reinterpret the provision to make it
compatible: that would have been “diametrically
opposed” to the thrust of the legislation and the
apparent intention of Parliament.
This means that the December 2005 cut-off remains an
option for schemes in relation to both civil partners and
same sex spouses. However, the Government is currently
conducting a review on the provision of survivor benefits in
such cases (due to be concluded in the summer) and it may
be that the position will change then.
Irvine – member should have been aware of the “risk”
that her pension was being overpaid
The member applied for early retirement in 2008, which her
employer agreed to. She continued working part-time for
her employer but agreed that if she worked more than 16
hours a week within a month of retirement, her pension
might be suspended. When the pension was put into
payment her pension statement reminded her that she had
to tell the administrator as soon as possible if she went
back to NHS employment, as her pension might need to be
reduced or stopped.
In November 2009, the administrator asked the member for
details of any re-employment. She provided these, including
the fact she was still working in the NHS, 20 hours per
week. Her pension continued in payment until January
2012, when the administrator informed her that her pension
had been incorrectly calculated and should have been
abated, given the size of her earnings (at her pay level,
working more than 10 hours per week was enough for the
abatement to apply). She had been overpaid by £10,000.
The Ombudsman accepted that the administrator could
have solved the problem as far back as 2009 and that its
delays had resulted in the overpayment becoming “much
more substantial”. However, he said that although the
member would not have been in a position to calculate the
amount of any overpayment, she should have been aware
that there was a risk of overpayment: and in any case
“there was nothing that [she] could have done differently to
avoid the abatement of her pension even if she had known
about it earlier”. She had no defence to recovery as she
had received sufficient information on the possibility and
application of abatement, although the administrator should
pay her £350 for distress and inconvenience.
Disclosure: New Disclosure Regulations came into force
on 6 April 2014. They make some changes to the existing
regime particularly in relation to money purchase benefits.
Trustees need to ensure that they have checked their
existing disclosure practices against the new requirements
to ensure that they are fully compliant.
Draft European Pensions Directive: The Commission has
adopted its proposal for a new IORP (Institutions for
Occupational Retirement Provision) Directive, which among
other things provides for: schemes to have “an effective
system of governance which provides for sound and
prudent management of their activities”, with a “fit and
proper” test for those exercising key scheme functions; and
better information to members, including a standardised
two-page annual Pension Benefit Statement about pension
entitlements. It is intended that the new Directive will
replace the current version from the beginning of 2017.
Protected persons: When defined benefit contracting out
ends in 2016, draft legislation will allow employers a
unilateral right to amend the scheme to reduce benefits or
increase contributions to offset increased national
insurance contributions. However, the Government have
now confirmed in a response to consultation that this power
will not extend to “protected persons” who have transferred
from public sector schemes. The intention is that any
issues in relation to such employees “can and should be
resolved through negotiation between employers and their
Dates for diaries: Trustee training remains one of the most important ways of ensuring that trustees have the knowledge and
understanding required to perform their duties. Our 2014 trustee training courses are taking place on 10th June 2014 and 14th October
2014. If you have any enquiries about any of these courses or would like to reserve a place, please contact Karen Mumgaard – E:
General: For further information on our pension services, please contact Mark Grant – E: firstname.lastname@example.org, T: +44 (0)20
7367 2325 or your usual pension partner. Please also visit our website at www.cms-cmck.com.
Get to grips with the requirements of the Pensions Regulator with our Field Guide for trustees. You will need to be a subscriber to our
Law-Now website (which is free) to access this guide. Register at http://www.law-now.com/register. You can also get help here with
understanding the Pensions Act 2004 and all related regulatory publications by viewing our online Plain English guide to the Pensions
Act. If you are interested in the Pensions Ombudsman’s activities, visit our website www.law-now.com/po-info.
The Pensions team is part of the CMS Cameron McKenna Human Capital group and advises employers and trustees of schemes varying in size, from a few
million pounds to several billion pounds. Additionally, we act for some of the largest firms of administrators, actuaries, consultants, brokers and professional
trustees. We provide a full range of services in connection with occupational pension schemes, including all aspects of employment and EU law. The team
also works closely with our corporate lawyers, providing support on mergers and acquisitions, insolvency lawyers supporting us on employer covenant
issues, and the financial services team which specialises in regulatory and fund management matters.
The information in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. It is not an
exhaustive review of recent developments and must not be relied upon as giving definitive advice. The Update is intended to simplify and summarise the
issues which it covers. It represents the law as at 7 May 2014.
CMS Cameron McKenna LLP is a limited liability partnership registered in England and Wales with registration number OC310335.