Welcome to the Summer 2012 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.

Legislation (http://www.legislation.gov.uk)

Finance Act 2012

Contains various changes to existing legislation in relation to Employer Asset Backed Contributions. See the Tax section below for further details.

The Occupational Pension Schemes (Disclosure of Information) (Amendment) Regulations 2012

From 1 October 2012, the time allowed to issue basic scheme information to jobholders (subject to automatic enrolment) will change from two months to one (to coincide with the period a jobholder can opt-out of auto-enrolment requirements). The requirement for the basic scheme information to describe how members are admitted to an occupational scheme will be extended to cover all the the scenarios which might arise through auto-enrolment.

The Registered Pension Schemes (Authorised Payments) (Amendment) (No.2) Regulations 2012

These Regulations deal with a problem which had arisen as a result of the abolition of protected rights. They allow a refund of member contributions to be made and former protected rights benefits to be retained in the scheme (meaning the usual requirement of benefits being extinguished is not satisfied) where:

  • scheme rules prohibit members’ entitlements from being extinguished by the payment of a lump sum;
  • when those provisions took effect, there was an enactment in force that effectively prohibited entitlements from being extinguished by the payment of a lump sum; and 
  • the relevant enactment has been repealed or revoked or has otherwise ceased to apply.

These provisions will not apply in relation to any payments made between 6 April 2012 and 8 August 2012. The Government believes schemes “will want to make rule amendments as soon as is reasonably practicable, and once this has been done, they will then be able to make a final refund of any remaining pension rights”.

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

Draft guidance on employer asset backed contributions

Since 29 November 2011, employers are not able to claim relief at the time of payment if they make contributions using certain asset-backed contribution arrangements. The guidance explains how to identify such arrangements and how to determine whether upfront relief is available. There are different rules for asset-backed contributions paid between 29 November 2011 and 21 February 2012 and those paid on or after 22 February 2012.

Pension Schemes Newsletter 54

HMRC has finished processing applications for Fixed Protection. If individuals had not received a notification from HMRC by 19 June, they need to contact HMRC. There is also a reminder that anyone with enhanced or fixed protection who is automatically enrolled will lose their protection status unless they opt out.

Updated salary sacrifice Q&As

It had been previously understood that salary sacrifice arrangements generally had to be for at least a year to be accepted by HMRC. These Q&As confirm a change in the Revenue’s approach and provide that "employer made contributions under a registered pension scheme... are exempt from income tax altogether. It is not necessary to stipulate a period for which the arrangement must be entered into or to set out 'lifestyle changes”.

Regulator (www.pensionsregulator.gov.uk)

Financial Support Direction statement to insolvency sector

This is a Statement on the Regulator’s power to issue financial support directions against companies after an insolvency event has occurred. It follows proceedings in relation to Lehman Brothers and Nortel where it was held that monies payable pursuant to an FSD issued after the commencement of administration should be treated as an “expense” in the administration. This could mean that such an FSD would have “super priority”, ranking above both floating charge holders and unsecured creditors and ahead of the administrators’ own remuneration. The statement sets out the considerations the Regulator will take into account when seeking an FSD in such circumstances and what it would consider to be reasonable.

Incentive exercises – industry update

The Regulator will have regard to the new voluntary code on incentive exercises (IEs) in any regulatory proceedings (see under Miscellaneous below). In addition, it sets out its own position and expectations of trustees. In particular, trustees should:

  • “start from the presumption that IEs are not in most members’ interests”
  • “ensure they fully understand the IE and its structure as well as how it achieves the level of good practice recommended in the Industry code”.
  • “be careful not to advise members where they are not authorised to do so”.
  • “actively engage with the proposal from the start”.
  • be aware of and meet their data protection duties
  • consider the funding impact on the scheme.

The Regulator also sets out 5 principles which they consider reflect a minimum standard: 

  • an offer should be made in a clear, fair and not misleading way
  • the offer should be open and transparent, so all parties involved are aware of the reasons for the exercise and the interests of the other parties
  • conflicts of interest should be identified and appropriately managed in a transparent manner. - Trustees should be consulted and engaged from the start of the process 
  • independent, impartial financial advice “should be made accessible to all members and promoted in the strongest possible terms. In almost all circumstances, the structure of the offer should require that members take financial advice”.

Revised guidance on multi-employer schemes and employer departures

This replaces the previous guidance and has been updated to reflect changes to the Employer Debt regulations and the alternative methods of dealing with section 75 debts, in particular flexible apportionment arrangements and the restructuring test. It goes through the requirements for each of the alternative mechanisms for dealing with s75 debts, sets out the criteria for each and how the regulator envisages the funding test working where relevant. It also sets out what the regulator sees as the key considerations for trustees in relation to each alternative.

Whichever mechanism is used, trustees must ensure that the process relating to that mechanism is followed correctly and decide whether it is in the best interests of scheme members. They should also consider whether, overall, this is part of a series of events where the ultimate aim is to abandon the scheme or where the overall effect would be of material detriment to the scheme.

Funding update

Based on schemes with recovery plans with valuation dates falling on and between 22 September 2009 and 21 September 2010. The key features reported include:

  • 21% of schemes reported having some form of contingent asset, the majority of which are recognised by the PPF.
  • The average (unweighted) funded status on the technical provisions, s179, and buy-out bases is 78.8%, 92.9%, and 57.8% respectively.
  • The average (unweighted) length of the recovery plans was 8.1 years; just over one year shorter than in the previous tranche of plans.

Supporting providers and employers to deliver good DC pensions

In December 2011, the Regulator published six draft principles that should be present in DC schemes that are used for auto-enrolment. It has now published further information on the features that should underlie each of the following key principles:

  • schemes should be designed to be durable, fair and deliver good outcomes for members
  • comprehensive scheme governance framework established at set-up, with clear accountabilities and responsibilities agreed and made transparent
  • those who are accountable for scheme decisions understand their duties and are fit and proper to carry them out
  • schemes benefit from effective governance and monitoring through their full lifecycle
  • schemes are well administered
  • communication to members designed to encourage member engagement so that they are able to make informed decisions.

PPF (www.ppf.gov.uk)

PPF Alert D&B Failure Scores now available

Dun & Bradstreet has completed most of its checking work on the average failure scores from April 2011 to March 2012 (i.e. that will be used for calculating the 2012/13 risk based levy). The scores can be obtained by calling D&B on 0870 850 6209, e-mailing customerhelp@dnb.com with ‘PPF’ in the title of the email, or using the online contact form at: http://www.dnb.co.uk/customerservices/. The final score allocated to each employer will appear on this year’s PPF invoices.

Auto enrolment and NEST

Auto-enrolment: Regulator’s approach to compliance

The Regulator intends to provide information and support so that employers know what they need to do to fulfill their new auto-enrolment duties and to enable them to act at the right time. To this end it has issued an overview document setting out what all of the employers’ duties are under autoenrolment and the potential penalties for non-compliance. It has also issued a policy document setting out what its approach would be to different types of non-compliance, how it would approach investigation and enforcement and the factors it would take into account when determining what an appropriate sanction would be.

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012

The automatic enrolment earnings trigger for 2012/13 is £8,105 and the lower and upper limits of the qualifying earnings band are £5,564 and £42,475 respectively.

The Employers' Duties (Implementation) (Amendment) Regulations 2012

Make various provisions in relation to employers with fewer than 50 workers, amending the implementation timetable to extend staging periods to as late as February 2018. In addition, the first transitional period for defined contribution schemes will be extended to 30 September 2017. The second transitional period (with 2% employer contributions) will then run to 30 September 2018. The transitional period for defined benefit or hybrid schemes will also be extended.

The Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2012

Come into force on 1 July 2012. The Regulations will allow employers to certify that their scheme meets the autoenrolment quality requirements or alternative requirements (and various DC alternatives are set). A certificate will last 18 months and will need to comply with any Government guidance. They also provide for the minimum levels of revaluation in CARE schemes.


Procter & Gamble v Svenska Cellulosa Aktiebolaget

The case arose from the 2007 sale of P&G’s European tissue towel business to Svenska Cellulosa (SCA). As a result of the transfer of employees, 129 members of P&G’s defined benefit scheme became deferred members of that scheme. Had they remained active members, they would have been entitled to two “Enhancements”, namely the right to be considered for a bridging pension from age 55 (subject to employer consent) and, on completion of 15 years' continuous service, an entitlement to better early retirement reduction factors.

The parties had agreed a purchase price adjustment which would reflect the amount of liabilities SCA took on as a result of liabilities which transferred under TUPE (the Transfer of Undertakings regulations, which protect employment rights on a business transfer). However, a dispute arose as to what that adjustment should be in relation to pensions, which are subject to a (partial) carveout under the legislation.

The judge held that:

  • liability to provide the Enhancements transferred under TUPE, including the right to be considered for early retirement benefits; and
  • instalments of pension payable after normal retirement age are “old age benefits” (meaning that rights in respect of them do not transfer automatically under TUPE), even if the pension in question originally came into payment before normal retirement age.

Industrial Acoustics v Crowhurst

The employer and trustees had sought to equalise retirement ages in 1992 by a resolution, which amended the definition of Normal Retirement Date (NRD) for post-17 May 1990 female joiners from 60 to 65, and a 1995 resolution which amended the definition for pre-17 May 1990 female joiners from 60 to 65. In 1998, they implemented Rules which inadvertently restored NRD to that at the time of the 1992 resolution. A 1999 resolution then returned the NRD for pre-17 May 1990 female joiners to 60. The scheme continued to be administered on the basis of the 1995 resolution. The employer applied for summary judgment for rectification. The judge held that:

  • the employer and trustees had a continuing common intention after the passing of the 1995 resolution that it should continue to apply;
  • that continuing common intention existed at the time of execution of the documents sought to be rectified; 
  • the objective observer would have no doubt that the continuing common intention prevailed and it had been the intention of the employer and trustees that the 1995 resolution remained effective; and
  • the mistake in the 1998 rules did not reflect that continuing common intention.

As the continuing common intention had prevailed at all times, rectification was both warranted and justified.

Bradbury v BBC

The BBC offered members the choice of remaining active members of their current section of the scheme (but with future pay awards limited to 1% for pension purposes), or to opt out and join a new CARE scheme under which future pay awards would not be subject to any pensionable cap. On this basis, the member agreed to transfer to CARE. However, he subsequently complained about the BBC’s conduct in offering the choice.

The judge held that there was no breach of the scheme rules as the BBC could rely on the agreement it had reached with each member, notwithstanding what the rules said. However, he disagreed with the argument that the definition of “pensionable salary” in the rules (which crossreferred to “the amount determined by the BBC as being an Employee’s basic salary or wages”) allowed the BBC to redefine “pensionable salary” in a way that could impact on past service. That would require clear words which were not present.

The judge also held that there would have been no alienation of any right or entitlement within section 91 Pensions Act 1995 as a member never had a right to a future pension based on the full amount of the anticipated pay rise. He agreed with counsel for the BBC that: “members have no right to a salary increase. Accepting a salary increase on terms that part only is pensionable does not… involve a surrender of anything; the member becomes entitled to a greater future pension, albeit one that is smaller that if the whole increase were pensionable”.

HMRC v Forde & McHugh

The Court of Appeal held, by a majority, that payments by an employer to an employee’s FURBS were earnings for the purposes of s.3 of the Social Security Contributions and Benefits Act 1992, meaning the employer was liable to pay NI contributions on them. This confirms what was generally thought already.

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

87252/1 Swithenbank

The scheme’s pension increase rule said that pensions would be increased by 5% or if lower “the increase in the cost of living over a preceding relevant period chosen by the Trustees...” The member complained that while past practice in relation to the scheme was to award RPI pension increases, as reflected in scheme communications, the trustees had agreed to use CPI going forward. The trustees had also communicated the change less than a month before it came into effect in April 2011.

The Deputy Pensions Ombudsman held that it was not unreasonable for the trustees to continue to apply the policy that they had adopted in the past (which was apparently to use the government’s favoured index). The scheme booklet made it clear that it was a summary of benefits and subject to scheme rules. Even if the booklet had not referred to the rules as overriding, there was no clear case that the member’s expectation had been disappointed by a change in the measure of inflation-proofing.

In relation to the timing of the announcement, the trustees had acknowledged that it came late in the day. However it did not follow that there had been maladministration. The Deputy Pensions Ombudsman said that that “Whilst it might have been preferable if members had been given more warning about the impending change, the Trustees did clearly communicate their decision, and the reason for it, in time for the switch to CPI. At the time when the decision was made, there was no particular requirement for consultation to take place about a change to the rate at which pensions increase.” She also agreed with the trustees that section 67 Pensions Act 1995 did not apply because “the change to pension increases does not represent a modification” of an entitlement under the Plan.

Miscellaneous Incentive Exercises – A Code of Good Practice

This is a new Code of Practice on incentive exercises launched by an Industry Working Group. It is aimed primarily at employers, rather than trustees, and it will usually be the employer's responsibility to follow it. It applies to all offers made available on or after 8 June 2012.

There are seven broad principles:

  • No cash incentives should be offered that depend on the member’s decision to accept the offer.
  • For transfer exercises advice should be provided. For modification exercises (e.g. pension increase exchange), advice should be provided or guidance given and a value requirement satisfied (where the aggregate value of additional pension (if taken up by all members) is greater than increases given up).
  • Communications should be fair, clear, unbiased and straightforward. Trustees should play a role in ensuring this particular principle is met.
  • Records should be retained by the parties involved and the member advisers should, in particular, record and report on those who go against the adviser's recommendations.
  • Exercises should not be rushed and must allow sufficient time for members to make up their mind, with no undue pressure applied. There is guidance on time periods to be followed.
  • Exercises should only be offered to those over 80 on an “opt-in” basis, and advisers should adhere to a “vulnerable client” policy. 
  • All parties involved should ensure that they are aware of their roles and act in good faith.