Top of the agenda
- Auto–enrolment – first staging date has arrived and more changes proposed to the auto-enrolment regime
The Department for Work and Pensions has recently issued a consultation paper on changes to the earnings thresholds that apply for automatic enrolment purposes.
Under the auto-enrolment requirements, broadly, a jobholder is eligible for auto-enrolment in a qualifying workplace pension scheme if, among other things, his earnings in a pay reference period exceed the "earnings trigger". Employees who do qualify are entitled to minimum pension contributions by reference to what is known as the qualifying earnings threshold.
For 2012/13, the earnings trigger is £8,105. The DWP proposes that for the 2013/14 tax year this should rise to £9,205, to align with the tax threshold for PAYE.
For 2012/13, the lower qualifying earnings threshold used for calculating minimum contributions is £5,564. The DWP is proposing that for the 2013/14 tax year this should rise to £5,720, to be in line with the lower earnings limit for paying National Insurance contributions.
For 2012/13, the upper qualifying earnings threshold used for calculating minimum contributions is £42,475. The DWP's stated preference is that for the 2013/14 tax year, this threshold should reduce to £41,450, in order to reflect the reduction in the upper earnings limit for paying National Insurance contributions. However, the DWP acknowledges that maintaining the current threshold (or increasing it in line with earnings) is another possible option.
The period for commenting on these proposals ends on 17 October 2012.
The first staging date for auto-enrolment compliance was 1 October 2012 (although Royal Bank of Scotland has brought forward its staging date and commenced its auto-enrolment from July 2012). There is, however, anecdotal evidence that many employers have not yet planned how they will satisfy the statutory requirements, even those with early staging dates.
The Payroll industry is also reported to be in talks with the government about technical problems in relation to auto-enrolment. The issues are likely to be around complicated workforces consisting of part-time, temporary and overseas workers, and ensuring that payroll systems are able to deal with the employer's policy on auto-enrolment in relation to such a workforce.
We are currently advising clients on their auto-enrolment policy and introducing auto-enrolment compliant sections into industry wide schemes. If you would like to discuss your employer's auto-enrolment obligations, please contact a member of the pensions team.
The Pensions Regulator
- Regulator warns it may intervene on transparency of costs and charges
Bill Galvin, chief executive of the Pensions Regulator is reported to have warned that the Regulator "might have to just come up with something" if new industry body proposals for clearer information on pension charges and transaction costs in defined contribution schemes (DC) are unsuccessful.
The Association for British Insurers (ABI) wrote to the Regulator and the FSA on August 22 outlining a four-point plan which could sit alongside the National Association of Pension Funds (NAPF) code of practice that is due to be finalised this year. The ABI's key proposals are as follows:
- A consistent and simple disclosure of charges to employees across contract and trust-based DC schemes.
- Transaction costs, such as broking fees, to be made available to employees.
- All employees to receive regular, clear and meaningful information on charges and transaction costs as their funds build up.
- Existing workplace pension schemes to ensure that employees are provided with clear and comprehensive information on their charges.
The NAPF's code of practice is being developed by an industry-wide working group including ABI. Under existing regulation, contract-based DC schemes must offer members information about charges, but these regulations do not apply at the point employers select pension schemes for their employees. One of the aims of the Code is to ensure all charges are clearly and accurately stated in writing before an employer picks a pension scheme.
Whilst welcoming the introduction of a voluntary code of conduct, Bill Galvin did not rule out Regulator intervention. He pointed to the Regulator's powers to appoint, remove or prohibit people from being trustees of pension schemes and also to issue them with "improvement notices" that force them to change their practices.
- Pension schemes should take urgent action to meet scheme record improvement deadline
In 2010, the Pensions Regulator set targets for schemes to improve member data. For data created before June 2010, 95% of "common" data records (i.e. name, address, date of birth and national insurance number), had to be in place. For new data created after June 2010, the Regulator set a target of 100% of common data to be in place. The Pensions Regulator has issued a trustee progress checklist and FAQs on measuring data.
The checklists sets out the key tasks that trustees will need to carry out to meet their targets, which include:
- discussing plans with the scheme administrator;
- having scheme data checked and receiving their data score;
- identifying any systematic issues and taking steps to address them;
- agreeing processes with administrators for on-going data monitoring, reporting and dealing with errors.
According to the 2010 guidance, the Pensions Regulator expects schemes to have taken significant steps to meet these targets. However, a survey earlier this year showed that less than 47% of responses to the survey had over 90% of required common data in place.
The Pension Protection Fund
- PPF issues Consultation Document on 2013/14 PP Levy
The PPF has confirmed its Levy estimate for 2013/14 and also started a consultation in relation to the basis on which the 2013/14 Levy will be calculated.
The Levy estimate for 2013/14 is £630 million, increased from £550 million in 2012/13. The increase is stated to be attributable, among other things, to the increased risk over the last year to the PPF. The PPF has also indicated that Levy payers can expect to see further increases in the Levy in 2014/15 and thereafter. Despite this year introducing its "New Levy Framework" to fix Levy rules for three years, the PPF has said that the levy scaling factor and the scheme-based levy multiplier will both be reduced.
The PPF notes in its consultation document that since its introduction of the new certification requirements for Type A Contingent Assets (parent company guarantees)(i.e. for trustees to certify that they had no reason to believe that the guarantor could not meet its liabilities), they have seen a notable decline in the use of such assets. As a result, the PPF will be updating its guidance in respect of the new certification requirements for Type A Contingent Assets. Changes will also be made to relax the requirements for guarantors and custodians for Type B Contingent Assets (security over real estate) and Type C Contingent Assets (letters of credit) to recognise the downgrading of bank credit ratings of many financial institutions.
There are no material changes to the key Levy dates, except that the deadline for submitting deficit reduction contribution certificates has been relaxed from five working days into the Levy year to the last working day of April.
The consultation closes on 2 November 2012.
- High Court interprets special promise made to female members following equalisation
The case of In the matter of (1) Sea Containers Services Limited (In Liquidation) (2) Sea Containers Limited (In Liquidation) (3) 0438490 Travel Ltd (in liquidation) (4) 1882420 Ltd (In Liquidation) (5) SC Maritime Ltd (In Liquidation) (2012) concerns the interpretation of a special promise made to certain female members of The Sea Containers 1983 Pension Scheme following equalisation of benefits by the Scheme.
In 1994, the Scheme had equalised the benefits of male and female members by raising the NRD from 60 to 65. However, a "special promise" was made by letter by Sea Containers Services Ltd (SCSL), the principal employer, to certain female employees of group companies which were also participating employers in the pension scheme. In effect, the promise was that SCSL would provide a pension at age 60 equivalent to that which would have been available prior to the equalisation changes in 1994. The promise read as follows:
"The Company should like to confirm that should [employee name] still elect to retire at her previous retirement age of 60, the Company shall provide a pension at age 60 equivalent to that which would have been available prior to the Pension Scheme changes which were introduced on 1 August 1994."
SCSL and the other participating employers, including Sea Containers Limited (SCL), the ultimate parent company and direct holding company of SCSL, later went into liquidation. The provisional liquidators of SCL and liquidators of the group companies (including SCSL) sought clarification from the court as to how claims of female members who had received the promise should be satisfied. Among the questions the court considered were:
- whether, in order to benefit from the promise, a special member had to "elect to retire" actually at the age of 60, or before or after 60;
- what "elect to retire" meant;
- who the promise could be enforced against – whether SCSL and/or SCL and/or the female members' actual employers; and
- the extent to which the liquidators should take other benefits into account in determining what the promise was worth.
The High Court, taking a narrow approach to construction of the special promise, held the following:
- In order to benefit under the promise, the member had to elect to retire at the age of 60, and not before or after that age. The words of the promise were clear and did not admit a different interpretation on their face.
- An election to retire at 60 would be effective if made at any time between the 60th birthday of the relevant member and her next birthday. The promise constituted a commitment only to provide a pension at age 60 upon retirement at the same age. A member who left an employer's service (at age 60) and took an immediate pension plainly elected to retire within the meaning of the special promise.
- A member did not "elect to retire" so as to benefit from the special promise, however, in the following circumstances: (a) where she left an employer's service but did not take an immediate pension;(b) where she left an employer's service and called for the payment of a pension some time thereafter; (c) where she called for the payment of a pension without leaving service with the relevant employer at the same time; (d) where she was entitled to a deferred pension and left service with her current employer, whether or not she called for payment of that pension at that stage; (e) where she was a former member who took a transfer of her benefits from the scheme, and left service with her current employer, whether or not she took an immediate pension.
- The special promise could not be enforced directly against any company other than SCSL.
- Assuming that the promise was effective, when determining what was due to the member, pension benefits accrued under the scheme after the day of her 60th birthday should be taken into account, but not any other retirement benefit scheme or personal pension policy, whether before, on or after the day of her 60th birthday.
The case is fact specific. However, the court did make some interesting points when interpreting the special promise, which may be helpful when interpreting an agreement or promise that is extraneous to scheme rules. Particularly worthy of note is Mr Justice Hildyard's rejection of the submissions of the representative respondent for the female employees that the special promise should be invested with broader meaning for commercial reasons:
"There is no warrant for such an extension, and for the Court to conjure such a meaning from the words would be not only to involve itself in an uncertain commercial evaluation, but also then to foist upon the parties and third parties affected a contractual engagement beyond what was actually agreed."
- Wheels VAT case heard by ECJ
The Wheels VAT case was heard in the early part of September by the European Court of Justice. The case had been launched by the NAPF and Wheels Common Investment Fund, a multi-employer scheme, in 2008 after a ruling in the ECJ that investment trusts were special investment funds and should be exempt from paying VAT on investment management services. Wheels and NAPF had argued that defined benefit (DB) schemes should be exempt from paying VAT on investment management services. DC schemes are already exempt. A VAT tribunal referred the case to the ECJ.
At the ECJ hearing, the European Commission agreed with HMRC and argued against granting an exemption to DB schemes. Employers and trustees of DB schemes had been hopeful that if the ECJ rules in favour of the NAPF and Wheels, DB schemes will no longer have to pay VAT on investment management services and may even be entitled to a rebate for VAT already paid. However the European Commission's view may now sway the odds in favour of HMRC. The ruling is expected within the next six months.
Pension Protection Fund Ombudsman
- Ombudsman orders PPF to review its levy decision due to unclear PPF guidance on contingent assets
In Mr C Suchett-Kaye (PPF000099), the Pension Protection Fund Ombudsman (PPFO) has instructed the Pension Protection Fund to reconsider its decision to disregard a contingent asset, in this case a conference centre, in its calculation of a pension scheme's risk-based levy.
In March 2009, the trustees of the NASUWT Managed Pension Plan submitted certification of a Type B (ii) (real estate) contingent asset which included a valuation of a property, a conference centre, and a legal opinion in order to reduce its risk-based levy payment to the PPF.
In October 2009, the PPF informed the scheme trustees that the property had not satisfied the requirements of a Type B (ii) contingent asset. It argued that, as the land was occupied by the party granting the charge, its valuation should have been calculated on a vacant possession basis rather than on a market value basis. The PPF also found that the legal opinion contained qualifications which did not tally with the opinion given. In particular, the opinion was unable to confirm that the security agreement, submitted by the scheme trustees as part of the contingent asset arrangement, gave rise to a "first priority legal mortgage or fixed charge in favour of the trustees". This was included as a condition under PPF guidance on contingent assets issued for the 2009/2010 levy year.
The NASUWT scheme levies for the period 1 April 2009 to 31 March 2010 were set out in an invoice dated 30 October 2009. In November, the trustees requested a review of the invoice. The PPF Board upheld the calculation of the levy in May 2010, stating that the information given did not satisfy the requirements of a Type B (ii) contingent asset. The Reconsideration Committee reached the same conclusion in August 2010. The trustees then referred the decision to the Ombudsman.
The Ombudsman remitted the matter back to the PPF Board for reconsideration. In reaching her decision, the Ombudsman gave a reminder of the scope of the Ombudsman's role. Her duty was not to decide on what basis the valuation was carried out or whether the legal opinion was drafted in the correct form but to consider whether or not the Reconsideration Committee's decision was reached correctly. When considering the exercise of a discretion, the Ombudsman should only interfere where the decision maker had failed to follow one or more of the following principles:
- Asking itself the correct questions;
- Directing itself correctly in the law;
- Taking into account all relevant matters and not taking into account any irrelevant matters.
On the facts, the Ombudsman was of the opinion that the first and third principle had not been satisfied. Both the Board's initial communications with the trustees and the Reconsideration Committee's decision had been "unclear". The reasoning behind refusing the valuation was "inadequate". The only requirement clearly stated in the Board's contingent asset guidance was that "vacant possession" and "market value" should have the meanings given to them in the RICS Red Book. The Board, moreover, had introduced "wholly new" arguments during the course of the investigation about the scope of the valuation and raised additional concerns over the legal opinion. These were matters that should have been brought to the attention of the trustees at the outset. The qualifications to the legal opinion, meanwhile, were inconsistent, and it was not clear whether the legal opinion alone would have resulted in the contingent asset not being recognised even if the valuation had been acceptable.
This case is one of very few in which the PPF has been asked to reconsider its decision. It would be helpful if the PPF were to amend its contingent asset guidance so as to clarify the principles to be applied when valuing security over property.
- Pensions Ombudsman orders member to return overpayment of benefits
In Fitzgerald (86179/1), the Deputy Pensions Ombudsman has held that a member must repay over £70,000 of overpayments he received as a result of his failure to submit annual certificates of re-employment to the scheme administrator.
Mr Fitzgerald started receiving an early retirement pension on redundancy from the Teachers' Pension Scheme in 1997. The pension application form he had completed stated that "subsequent teaching employment may result in the reduction or suspension of your pension". It also contained a declaration that he would return certificates of re-employment every year. He also got a leaflet explaining that his combined pension and the salary he later received from teaching could not exceed his teacher's salary had he not retired and that if he did not notify Teachers' Pensions (TP), the scheme administrator, of future employment, he would have to repay any overpaid pension.
Mr Fitzgerald took up employment as a teacher for five separate periods from 1998 to 2010. He contacted TP's pension services section in relation to his re-employment many times but submitted a certificate of re-employment on only one occasion, in 1999. He stopped receiving blank re-employment certificates from TP after 2001.
In 2008, TP, having changed their administration process, realised Mr Fitzgerald's benefits should have been significantly abated.
Mr Fitzgerald asserted that he should not have to return the overpayments as he had informed TP of his re-employment.
The Ombudsman held that TP's administration of service records after retirement had been "lax" up until they changed their system in 2008. However, this was not the main reason why Mr Fitzgerald's benefits were not abated. Rather it was Mr Fitzgerald's failure to return certificates of re-employment annually. The fact he returned a certificate in 1999 showed he was aware of his obligation to do so. Although TP did not send certificates for completion after 2001, this did not mean Mr Fitzgerald could not have actively chased TP.
The Ombudsman directed TP to agree a repayment arrangement with Mr Fitzgerald that would not cause him "undue hardship" – a 10-year period was agreed – and pay him £200 for the distress and inconvenience he had endured.
The decision upholds the legal position that members cannot retain overpayment of pension by a scheme unless they can show a change of position. However, the determination demonstrates that if the matter goes to the Ombudsman, the Ombudsman may direct repayment terms for the member that are generous.
- Pensions Ombudsman holds that erroneous information in scheme booklet was binding
In Paffey (84254/1) the Pensions Ombudsman has upheld a complaint by a member who failed to meet the two-year minimum service requirement for an ill-health pension due to incorrect information contained in a scheme booklet.
In February 2009, Mr Paffey began working for the Pension Protection Fund and joined the Principal Civil Service Pension Scheme (PCSPS). The scheme booklet stated that "any period of service transferred from another pension scheme counts towards the two-year requirement". It also stated that "if you transfer a personal pension into the Scheme the two-year requirement is satisfied immediately".
Mr Paffey transferred his two personal pension plans into the PCSPS. He was also a deferred member of four occupational schemes, with over two years of active membership in each, but chose not to transfer these so as to avoid losing future discretionary increases in those schemes.
In September 2009, Mr Paffey suffered three strokes and was told he would never return to work. He was refused an incapacity pension from the PCSPS on the grounds that he had less than two years' service. The Cabinet Office explained that the scheme booklet was wrong in that only transfers from occupational pension schemes could count towards the two-year service requirement. It also told the member that the scheme rules, which stated that only transfers from occupational schemes counted towards the service requirement, took precedence over the booklet.
The Ombudsman ruled that the incorrectly worded scheme booklet constituted maladministration. The likely rational act, if Mr Paffey had known the true situation, is that he would have transferred benefits from one of the occupational pensions to the PCSPS. The Ombudsman instructed the PCSPS to pay Mr Paffey compensation to put him in the position he would have been in had the scheme booklet been correct.
The case is unusual in that the Ombudsman ruled that a statement in ancillary literature, a scheme booklet, was binding.
- Trustees had ensured that the terms on which a level pension was offered to the member were fair and reasonable
In Squibbs (78488/2), the Pensions Ombudsman has dismissed a complaint by a 76 year old member of the Airways Pension Scheme in relation to the level pension option he had chosen when he was compulsorily retired at age 55.
In the run up to retirement, the member had received a number of letters explaining the level pension option and that under this option, he would receive an extra £1,170.72 on his pension each year up to the age of 65, and thereafter a payment of £2,734.44 would be deducted from his pension for the rest of his life. The information he received also stated that although this option aimed to give a more even pension throughout retirement, once it had begun, it could not be altered or cancelled "under any circumstances".
By the time he reached age 76, Captain Squibbs had already had deductions to his pension from age 65 totalling £30,078.84 whereas the extra payments he had received from age 55 until State pension Age had totalled £11,707. Captain Squibbs complained against the trustees of the Scheme that they had not operated the level pension option in a fair and reasonable way; in particular, he argued that the option had not been clearly explained to him to enable him to make a fully informed decision based on his personal circumstances and that the trustees had failed to ensure that, within the parameter of cost-neutrality for the scheme, the factors used in calculating his pension were fair and reasonable.
The Pensions Ombudsman found, on the facts, that the trustees had ensured that the actuarial factors used were fair and reasonable. On the issue of cost neutrality, the trustees had argued that the obligation was to ensure cost neutrality across membership as a whole, i.e. using the mortality assumptions appropriate for all the Scheme members and the investment return for the Scheme. Mr Squibbs' arguments had implied that the level pension option should be cost neutral to his personal circumstances. The Ombudsman disagreed with Mr Squibbs' arguments stating that he doubted that this could "have been anyone's reasonable understanding" of the cost-neutrality requirement. One of the key issues at stake here was how long a member lived after retirement; if he died at a relatively young age, the level pension option would have been in his favour. Equally, if he died at an older age, than the level pension option may not be in his favour. The Ombudsman said that this was a risk that Mr Squibbs had to consider when deciding whether or not to choose the option.
The Ombudsman also held that the trustees did not need to revisit the level option terms for him for various reasons, including the absence of a specific discretion under the scheme rules for them to do so and the fact that the member had previously agreed to those terms.
- Public Service Pensions Bill 2013 announced in Parliament
The Public Service Pensions Bill 2013 was announced in Parliament on 13 September. The Bill proposes major reforms to public service pension schemes as follows:
- No benefits will be provided under existing public service schemes after a closing date of 1 April 2014 for local government schemes and 5 April 2015 for other schemes. However, transitional agreements have been agreed to allow those who are close to retirement to continue to accrue benefits under their existing schemes.
- New public service pension schemes will be set up. These schemes will either be DC or DB, but in case of the latter, the defined benefit scheme must be a career average revalued earnings (CARE) scheme. In the case of a CARE scheme, revaluation of pensionable earnings will be required until the person retires by reference to a change in prices or earnings in a given period. The Treasury will make orders that specify what the percentage increase or decrease in prices or earnings is for each period of service. The aim is to ensure that the same measures of prices and earnings are used and applied on a consistent basis across public service schemes.
- Final salary scheme pension benefits accumulated under existing schemes will be calculated in accordance with the member’s final salary at the point they retire, not the point at which the final salary scheme is closed.
- The normal pension age (NPA) of civil servants will be tied in with the state pension age but fire-fighters, the police force and members of the armed forces will keep their NPA of 60. This measure will apply to benefits already accrued under public service pension schemes and to future benefits under those schemes and the new schemes that are to be set up.
- New schemes will have an employer cost cap to ensure that the public service pensions remain affordable.
According to the Office of Budget Responsibility, the measures are expected to cut the cost of providing public sector pensions by 40% over the next 50 years.
- Consultation on how RPI is calculated
The Office for National Statistics (ONS) is to issue a consultation on changes to the Retail Prices Index (RPI) on 8 October 2012. If the key measures to be proposed in the consultation go ahead, the result could be a narrowing of the gap between inflation measured by the RPI and the Consumer Prices Index (CPI). RPI has, in most years, produced a higher inflationary rate than CPI.
The differences between the indices arise principally for the following reasons:
- Difference in the basket of goods taken into account. RPI, for instance, covers owner-occupier housing costs, whereas CPI does not.
- CPI is representative of all private UK households whereas RPI excludes the highest earners and pensioner households that are dependent mainly on state benefits.
- There are also key differences between the formulae used for RPI and CPI. RPI predominantly uses what is called an "arithmetic mean" and CPI uses a "geometric mean". Use of the arithmetic mean for RPI is understood to put a higher value on inflation.
ONS is proposing a number of options including:
- Make no change to the RPI methodology.
- Stop using the arithmetic mean for all categories of goods for which it is used.
- Change the RPI so its formula aligns fully with that used for CPI.
The consultation will close on 30 November with recommendations published in January 2013 with a view to them taking effect in March.
If the "formula gap" between the two indices is reduced, the advantages for schemes in switching to CPI may not be as significant as is currently. Such a change could also result in lower incomes for investors in British index-linked gilts, whose returns are calculated using RPI.
- Scottish Council fined over data protection breaches
The Information Commissioner has fined a council £250,000 for a data breach that saw former employees' pensions records found in a paper recycling bank in a supermarket car park.
Scottish Borders Council, a Local Government Pension Scheme administering authority, employed a third party data processor, GS, to digitise the records of former pension scheme members.
However, it put no contract in place with GS, failed to seek sufficient guarantees on how the personal data would be kept secure and did not regularly monitor how the records were being handled. The Information Commissioner found that the Council had contravened the Data Protection Act 1988, which requires certain data to be kept secure and effectively provides that a party which outsources its data processing remains legally responsible for the security of the data.
Although the decision involves a Scottish Council, it is significant for other data controllers in the pensions market, in particular trustees of pension schemes and employers providing pension arrangements and serves as a warning to ensure secure arrangements are in place for data processing.
- Scheme funding: the asset-backed approach
At a time of growing pension deficits, companies are looking at how best to fund their pension schemes. Pensions Partner, Roderick Morton has co-authored an article in PLC magazine on the increasingly popular alternative to cash funding: the asset-backed funding partnership (ABFP).
The article considers a number of issues, including:
- Typical structure of an ABFP;
- Potential benefits for trustees and employers;
- The key commercial issues
- Use of Scottish Limited Partnerships;
- The investment duties of trustees;
- Tax treatment of an ABFP; and
- Statement from the Pensions Regulator on ABFPs.
The article may be viewed here.