2.2019 was a busy year for pension litigators, with key judgments being handed down in a number of significant cases, including Safeway v Newton (validity of retrospective equalisation of normal pension age), Granada UK Rental & Retail Ltd v The Pensions Regulator (validity of financial support direction) and BIC v Burgess (validity of amendment of pension increase rule).
Rest assured though, 2020 is set to deliver much of the same.
1. GMP equalisation
A second hearing in the Lloyds Bank GMP equalisation case is expected in April 2020 in which the parties are seeking guidance relating to the extent of the trustee’s obligation to revisit past transfers out of the pension schemes. This follows the decision of the High Court back in October 2018 which held that benefits built up in the schemes between 17 May 1990 and 6 April 1997 have to be equalised to take account of the effect of unequal Guaranteed Minimum Pensions set out in legislation. If trustees are required to equalise past transfers out, there could well be administrative and tax implications for trustees of all formerly contracted-out defined benefit (DB) schemes.
In the meantime, the industry continues to digest the implications of the High Court’s first judgment as it unpicks the practical, legal and actuarial challenges associated with equalising members’ benefits. Unsurprisingly, however, most schemes are waiting for HMRC’s guidance to be published in 2020 concerning the tax consequences of equalising benefits before undertaking such an exercise.
2. Litigation continues regarding RPI/CPI
Several cases dealing with pension increase and revaluation provisions under various schemes’ rules (including Britvic plc v Britvic Pensions Limited, Mitchells & Butlers Pensions Limited and Atos UK IT Limited v Atos Pension Schemes Limited) are due to be heard in 2020.
The Britvic and Atos cases concern (amongst other things) the question of whether, under the schemes’ rules, there are other measures of inflation that the trustees can use instead of RPI. The outcome of Mitchells & Butlers, in which the trustee is seeking the rectification of the provisions in three deeds purporting to give the company the power to change the rate by which benefits under the scheme are increased and by which deferred pensions are revalued, will also be watched with interest.
On the topic of RPI, the Treasury is expected to begin a public consultation in January 2020 on whether the UK Statistic Authority’s proposal to align the calculation of RPI with the methodology used to calculate CPIH should be implemented before 2030 and, if so, when between February 2025 and 2030. CPIH is generally around 0.7% to 1% below the value of RPI, which means that aligning RPI with CPIH could have a material impact on the calculation of DB scheme benefits, liabilities and on future returns from RPI-linked investments.
3. Is the Safeway v Newton saga nearly over?
In October 2019, following a reference by the Court of Appeal to the Court of Justice of the European Union (CJEU), the CJEU held that, in the absence of an objective justification, EU law prevents a pension scheme from equalising normal pension ages with retrospective effect, even where this is permitted under national law and under the Trust Deed governing the relevant pension scheme.
Although in the CJEU’s view (based upon the evidence before it) there appeared to be no objective justification for the retrospective levelling down of NPA in the Safeway case, the CJEU recognised that this is ultimately a matter for the referring court to determine. It is therefore now up to the Court of Appeal to rule on this question in 2020.
Although the facts of the Safeway case are unusual, trustees of other pension schemes that equalised the normal pension age for men and women retrospectively should seek legal advice in relation to the validity of that change in light of the CJEU’s decision.
4. Potential game changer for cyber and data breach cases
The appeal in WM Morrisons Supermarkets Plc v Various Claimants was heard in the Supreme Court in November 2019 and the judgment, which is likely to be handed down this Spring, could have significant implications for all employers. The Court has two issues to consider in the appeal:
- Should Morrisons be held to be vicariously liable for the acts of its employee? The case concerns a rogue employee who uploaded payroll data with which he was entrusted onto a file sharing website. The company was a victim; the employee motivated by a grudge against it. If the answer to this question is yes, what are the consequences in practice for how organisations should monitor and carry out surveillance of employees? Should employers never let employees handle special types of personal data alone? Should employers monitor employees’ laptops routinely, or only if they suspect misuse of personal data?
- Does data protection law provide an exclusive remedy or can claimants rely on other causes of action in data breach cases? And does the Data Protection Act 1998 prevent the application of vicarious liability to a breach of the Act?
If the claim against Morrisons is successful, there will be a further hearing to consider the quantum of damages, and the all-important question of what damages should be awarded for the distress associated with a data breach where there is no other tangible loss. If the Court of Appeal’s decision stands, it will likely pave the way for future data breach related class actions – even if the individual quantum is modest, the numbers of individuals affected by data breaches is often significant enough to make such claims viable.
Trustees and sponsoring employers should therefore monitor the outcome of this case. If the claim is successful, they will need to consider any impact it may have on their scheme/organisation’s data protection policies, data protection insurance and on how employees and trustees use and access personal data.
5. ESG related litigation looms
Environmental, social and governance (ESG) issues will continue to be high up the agenda for trustee boards, pension providers and asset managers in 2020, with more new legal and regulatory requirements set to be introduced. Alongside legislative compliance, schemes should be aware of the growing risk of legal challenge in the context of ESG and climate change more generally.
The Pensions Ombudsman recently determined a complaint (PO-27469) by a member who alleged that he was not provided with sufficient information regarding how his pension scheme was taking account of climate change in respect of its investments, risk management and covenant monitoring. Although the complaint was dismissed, ClientEarth, who helped the member bring the complaint, has questioned the Ombudsman’s reasoning and called on it to carry out a review of its internal processes.
It is also important to note is that the legislative position has changed since this complaint was considered by the Ombudsman. Since 1 October 2019, trustees of schemes with more than 100 members are required to update their scheme’s Statement of Investment Principles to set out their policy on how they take account of financially material considerations, including ESG, when making investment decisions. By October 2020, trustees of money purchase schemes are also required to publish their first implementation statement confirming how they implemented this policy. Should any future complaints be made to the Ombudsman on this issue, it will be interesting to see whether these developments have any impact on the determination reached.
Meanwhile, in Australia, similar legal risks are emerging. A member is taking the Retail Employees Superannuation Trust to court for failing to disclose sufficient information on the potential impact of climate change on its investments and how it is addressing these risks. The outcome of this case may be known in 2020 and, although it will be a decision of the Australian courts, it may increase the pressure on pension scheme trustees here in the UK to be in a position to demonstrate that they are taking climate change related risks seriously.
6. How will the PPF respond to Bauer?
The CJEU’s decision in PSV v Bauer, which came out just before Christmas, will have come as a relief to many in the pensions industry because the CJEU rejected the argument put forward by the Advocate General that Article 8 of the Insolvency Directive requires Member States to guarantee employees’ occupational pension benefits in full on their employer’s insolvency. If the ruling had gone the other way, it is likely that this would have had significant funding implications for the PPF, the PPF levy and the funding regime for defined benefit schemes in the UK.
However, the CJEU went on to say that any reduction which “seriously compromises” a former employee’s ability to meet his or her needs must be regarded as manifestly disproportionate. According to the CJEU, this would be the case where, even though a former employee is receiving at least half of the amount of the pension benefits to which they were entitled, the individual is already living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned, as a result of the reduction in their benefits. (Note: We understand that the Eurostat at-risk-of-poverty threshold for a single adult in the UK was £11,044 in 2018). The PPF will need to consider, together with the Department for Work and Pensions, how it responds to this.
In addition, following the ECJ decision in Grenville Hampshire v The Board of the Pension Protection Fund  (Case C-17/17) which held that, under EU law, members are entitled to an “individual minimum guarantee” of 50% compensation upon employer insolvency, the PPF started to increase payments to pensioners whose compensation amounted to less than 50%. However, the PPF also confirmed that proceedings have been brought which challenge the way in which it intends to calculate the increases for pensioners affected by the Hampshire judgment. This was postponed pending the outcome of Bauer. Now that Bauer has been decided, we can expect this case to be rescheduled for a hearing in 2020.
7. More regulatory challenges
Following the Conservative Party’s victory in the recent General Election, the Pension Schemes Bill has been reintroduced in Parliament. The Bill will introduce:
- new criminal offences and civil penalties (including fines of up to £1 million) aimed at directors, investors and others who, broadly, take action which is deemed to be materially detrimental to a DB scheme, and
- new and extended powers for the Pensions Regulator.
These new powers, which may come into force later this year, are intended to support the Regulator’s tougher approach to pensions regulation. However, they are significantly wider than many in the industry expected. If they are introduced as currently drafted and subsequently used by the Regulator, they are likely to lead to many more legal battles similar to that seen in relation to Box Clever in the future.
Now that the Bill has been reintroduced this should pave the way for the Regulator to commence its long awaited two-stage consultation on its new Code of Practice on funding DB schemes which it had been delaying due to the previous political uncertainty.