Welcome to the November 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)

Terrorist Asset Freezing Act 2012

Queries have recently arisen as to whether occupational pension scheme trustees may have duties under this Act. The Association of Pension Lawyers is in the process of writing to the Government in an attempt to clarify the position and until the Government has responded, we do not suggest that schemes make any change in their administration processes.

The Act makes it a criminal offence to make funds available to someone who you know or have reasonable cause to suspect is on HM Treasury’s list of persons who may have direct or indirect involvement with terrorist activities. There are exemptions where a payment is made pursuant to an existing contractual obligation. It is also possible for the Government to grant licences to permit certain payments.

Government

Consultation on changes to Retail Prices Index

The National Statistician is consulting on a range of options for the way the Retail Prices Index is calculated. The consultation considers the differences between RPI and CPI which are caused when different formulae are used to calculate average prices in the absence of precise information about expenditure (known as the “formula effect”). The options under consideration range from no change at all to changing the RPI to remove the formula effect entirely. The consultation closes on 30 November 2012, with any recommendations to be published in January 2013 but it is possible that RPI may move closer to CPI.

State pension reform to go ahead

DWP has confirmed that reforms to introduce a universal flat-rate state pension are still intended to go ahead. A White Paper will be published later this year which will outline the key features of a single-tier pension system.

Trustees of contracted-out schemes will need to keep an eye on these reforms as a move to a single tier state pension will mean the end of contracting-out.

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

Updates to the Registered Pension Schemes Manual

These are the latest updates to the Registered Pension Schemes Manual which provides guidance for schemes registered under the Finance Act 2004. The key changes are as follows:

Wind-ups and partial wind-ups: There is additional guidance on winding-up and partial wind-ups. In particular, the guidance looks at when a partial wind-up can be treated as a wind-up for Finance Act purposes (such as the payment of a winding-up lump sum).

Auto-enrolment: HMRC has said in relation to autoenrolment schemes that if a member with fixed protection opts out within a 1 month permitted window, they will be treated as never having been a member and will not lose their protection. If they are contractually enrolled in a scheme outside the statutory auto-enrolment framework, fixed protection may still be retained if “the scheme has a legally binding rule that treats an individual who opts out of scheme membership as never having been a member of the scheme”.

Permitted transfers: If an individual has enhanced or fixed protection and transfers benefits to another scheme, they will retain the relevant protection if the transfer is a “permitted transfer”. Permitted transfers must meet certain conditions. The guidance analyses when HMRC will consider these conditions as being satisfied.

Part refund payments relating to short service – draft guidance

HMRC has issued draft guidance on Regulations made to deal with the issue of short service refunds in schemes formerly contracted-out on a protected rights basis (which permit partial refunds in certain circumstances as the rules may prohibit a refund of rights derived from former protected rights).

The draft guidance confirms that schemes “are expected to amend their rules in due course to remove any provision(s) holding back protected lump sum rights. For the avoidance of doubt, once this has been done there will be nothing to prevent the scheme from making a payment which extinguishes the member’s rights, so the scheme will not be able to make” partial payments. Therefore schemes with such provisions will need to review their rules to determine if amendments are required.

Updated guidance on calculating maximum drawdown for female pensioners

HMRC has updated its guidance about drawdown pensions. The guidance tells providers to use the same rates for women as for men to determine their maximum drawdown pension from 21 December 2012. This is to reflect the European Court decision in Test-Achats which said that using gender as a risk factor in ways which resulted in individual differences in premiums and benefits for men and women should not be permitted for certain insurance transactions.

The calculation of the maximum drawdown pension is based on the annuity that could have been bought with the drawdown pension fund. Until it becomes clearer how annuity providers will apply the judgement, the maximum drawdown pension for both men and women aged 23 and over should be calculated using the higher male rates in the relevant GAD table from 21 December 2012.

This is really an issue for scheme administrators rather than trustees. However, where schemes permit drawdown, trustees should ask their administrators to confirm that they are complying with the new guidance.

Regulator (www.pensionsregulator.gov.uk)

Record-keeping: trustees urged to take action to meet data deadline

In 2010 the Regulator set targets for schemes to improve their 'common' data records: e.g. name, address, date of birth and National Insurance number. For new data created after June 2010, the target to be met is 100% of common data to be in place by 31 December 2012; for data created before June 2010, the target is 95% by the same date.

There is also a progress check for trustees, which contains an action list to assist trustees in meeting the December deadline. Accompanying FAQs refer to the following:

  • going forward, data scores should be re-checked at least annually;
  • making all reasonable endeavours to meet the targets includes taking “proportionate steps to trace missing data” (examples are given of what this might amount to);
  • where paper or microfiche records are used to store common data, the Regulator expects “trustees, administrators and providers to take account of the risks in storing data in this way”;
  • records should be retained for as long as is relevant for the purposes for which they are made, in this case ensuring that pension benefits can be paid accurately when members retire. “Trustees and administrators of schemes are therefore likely to need to hold data for very lengthy periods of time”.

Updated winding-up guidance

The Regulator expects that the key activities in relation to winding-up (which vary depending on the type of scheme) should be completed within two years. This guidance outlines suggestions of good practice to enable such activities to be completed as soon as reasonably practical and certainly within two years. It concentrates on common, complex areas that can delay the winding-up, rather than looking at each activity involved in the process.

The Regulator says that the guidance is also “aimed at parties involved in the management and administration of an ongoing scheme. For example, for live schemes consideration should be given to activities such as regular member tracing and data cleansing exercises, to ensure that records are as accurate as possible. This means that if the scheme faces wind-up in the future, unnecessary delays are avoided”.

Alongside the guidance, the Regulator has issued a statement on streamlining the GMP reconciliation process in winding-ups. It acknowledges that one of the most costly and time consuming jobs on a winding-up can be reconciling the GMP records that trustees hold with HMRC’s records. The guidance suggests that trustees and administrators should use £2 per week ‘tolerance’ levels when determining the right level of GMP. For example, if, according to trustees’ records, a GMP should be set at £25 per week, but HMRC’s data indicates that it should be £26.50, the guidance encourages trustees to adopt the HMRC figure as it is within the £2 tolerance.

PPF (www.ppf.gov.uk)

Pension Protection Levy Set at £630 Million

The PPF have confirmed a levy estimate of £630 million for the 2013/14 levy year. This will match what is now expected to be collected in 2012/13, but is coupled with the bad news that this is a one-off concession because the PPF faces “significantly heightened levels of risk” and that unless these fall, future levy increases are “inevitable”.

PPF draft Levy Determination and supporting documents for 2013/14

The consultation document says that in relation to contingent assets, the intention is to operate the regime in much the same way as for 2012/13, but with some updates to the related guidance, and “somewhat less “benefit of the doubt””.

In particular, the trustees’ form of certification will be unchanged from 2012/13. They will still need to confirm in relation to contingent assets that: “The Certifier has no reason to believe that each certified guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset as certified”. In relation to this requirement, the PPF notes a substantial drop in both recertifications and new certifications: with some 157 guarantees not having been re-certified, the PPF says that it underestimated the number of guarantees previously given that were in fact of limited value.

The complete suite of draft PPF documents for the 2013/14 PPF levy year can be found on the PPF’s website.

PPF Annual Report and Accounts for 2011/12

The PPF’s annual report shows a return on invested assets of 25% as at 31 March 2012. It credits this to its sophisticated liability matching strategies.

At the end of March 2012, the PPF had a £1.07 billion surplus, 128,000 members, and £11.1 billion of assets under management. However, the probability of achieving its long-term goal of being self-sufficient by 2030 fell from 87% to 84%.

Other selected facts and figures from the Report include:

  • during 2011/12, 53,463 people transferred into the PPF;
  • since 2005, the PPF has paid out a total of £463m in compensation (over £200m of that in 2011/12);
  • at the end of 2012, there were 293 schemes in assessment with assets of £5.3bn and liabilities of over £7 billion;
  • the PPF took on assets totalling almost £2.5bn from the 147 schemes which completed assessment and transferred to the PPF during the year; and
  • the number of people receiving FAS assistance increased from 16,900 to 22,800, with FAS paying out £74 million.

Auto enrolment and NEST

Consultation on auto-enrolment thresholds for 2013/14

Looks at the levels of the earnings trigger and the qualifying earnings band for auto-enrolment in the 2013/14 tax year. The provisional proposals are for the earnings trigger to rise from £8,105 to £9,205 in line with the increase in PAYE threshold; the lower end of the qualifying earnings band to rise from £5,564 to £5,720 reflecting the increase in lower earnings limit; and the upper end of the qualifying earnings band to fall from £42,475 to £41,450, reflecting a planned reduction in the upper earnings limit (although maintaining this year’s value, or uprating by earnings to £42,971, are also options). The aim is that a response to consultation will be issued with the Chancellor’s autumn statement in early December.

Cases

IBM UK Pensions Trust v IBM UK Ltd (High Court)

The 1983 deed and rules for IBM’s “C Plan” section, and later iterations of them, all contained provisions which required employer consent to retirement between the ages of 60 and 63, although if consent was given the pension would be unreduced. In this claim for rectification, the trustees argued that the intention had always been that the scheme would allow members to retire at any time between 60 and 63 without consent (and without actuarial reduction). This was described in the case as “flexible retirement”.

The trustees also sought to rectify the scheme provisions relating to deferred members, which provided that retirement from deferment between 60 and 63 was subject to consent, with any pension payable being subject to actuarial reduction. The trustees argued that deferred members should also have been given the right to such “flexible retirement” between 60 and 63, and that it was a requirement of the preservation legislation that the deferred members be entitled to the benefit to which active members were (or at least, should have been) given.

After considering the evidence, the judge agreed to grant rectification of the 1983 deed and rules (and their subsequent iterations), to include a provision allowing active members to retire at any time between ages 60 and 63 on unreduced pension. However, the claim to rectify the provisions of the trust deed relating to deferred pensions failed. The judge rejected the argument that the effect of preservation requirements, as they had then stood, meant that “the parties’ actual unvarnished intentions were legally incapable of fulfilment.”

The judge also explained that under the preservation legislation as it stood until 6 April 2005, a deferred pension did not have to be paid until age 60, even if “normal pension age” under the scheme was earlier. He then went on to consider the effect of changes made by the Pensions Act 2004, saying that their effect was to make clear it was not a breach of preservation requirements to have a normal pension age of 60, but only to pay short service benefit from age 65. He disagreed with the trustees’ argument that the changes made by the Act should apply only to service after 6 April 2005: “They apply to the entirety of the deferred pension of a member leaving service before normal retirement age.”

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

Squibbs – trustees’ duties to review terms of option granted to member

Before retiring in 1991 aged 55, the member elected for the scheme’s “variable pension option” (VPO). Under the scheme rules, where VPO applied, a member’s pension would be “increased before [state] pensionable age and reduced thereafter in accordance with arrangements approved by the Actuary with a view to providing him with a more stable aggregate pension from the Scheme and from the general social security scheme.”

Communications at that time stated that the member would receive an additional £1,200 of pension annually until age 65 but that after that date, there would instead be an annual deduction of £2,700 until his death. They also said that the VPO could not “be altered or cancelled under any circumstances.”

The member complained that the trustees had breached their fiduciary duties in their operation of the VPO, that the option had been wrongly presented to him at the time, and that the trustees had not subsequently ensured that the factors used were fair and reasonable.

The Ombudsman held that the information provided to the member had made clear that his pension would be permanently reduced after age 65, and had not stated (nor could reasonably have stated) that the effect of the VPO would be cost-neutral to him. It had been the member’s responsibility to decide whether or not to elect for the VPO and the trustees had provided sufficient information to enable him to select the option appropriate to his circumstances at the time. The VPO was just one of a number of actuarial options (such as commutation or transfer) which would not be re-examined in the light of subsequent experience.

Of the trustees’ wider duties in relation to the VPO, the Pensions Ombudsman said that “if they considered a number of options, and the costs, and reached a decision not to take the matter further that was at least as much as was necessary”. Minutes since 1991 showed that the scheme had regularly reviewed the VPO and the factors used, even though no changes were made. There was nothing to suggest that, in deciding not to change them, the trustees had behaved in a way which no reasonable trustee body would have done.

Llewellyn – member should reasonably have known that she was not entitled to pension received

The member left the NHS in 2002 to work for Kier, becoming a deferred member of the NHS scheme. However, in 2006 she completed a form to take a transfer value from the NHS to Kier scheme in relation to her past service. On the form was a declaration that: “I understand that once the transfer value has been paid the NHS Pension Scheme will have fully discharged its obligation to provide any more benefits for the period of membership which the transfer value relates to.”

On the member’s retirement in 2008 the NHS scheme mistakenly put a pension into payment for the member and did not notice until three years later, by which time the member had been overpaid in the region of £8,000.

The member denied that she had signed the declaration and said the administrator could not prove otherwise (it was unable to provide a copy of the relevant page of the form, as it had not been properly scanned when their paper files were converted into soft copies). She said that as the NHS scheme did not confirm to her that the transfer had taken place, she assumed that it had not proceeded.

The Pensions Ombudsman did not uphold the complaint. He said that that the onus was on the administrators of the Kier scheme to confirm that the transfer had taken place, and that they had informed the member in 2008 that the benefits to be paid to her included benefits transferred in from the NHS scheme (the member acknowledged this but said she did not understand the documents: “I know nothing of these matters as a layperson”).

An overpayment had occurred and the administrator had a right to recover it. The Pensions Ombudsman agreed with the administrator that the member should reasonably have known that she was not entitled to a pension from the NHS scheme by the time her Kier pension was put into payment, at the latest. The administrator could not be held responsible for the member not understanding what she was told in the letter from Kier.