This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- The Pensions Regulator sets its strategic aims for the next three years
- BIC (UK) Ltd v Burgess and others – Limits on retrospectivity and the meaning of a written resolution
- The DWP concludes that TPR is an effective body
- Ombudsman orders trustees to pay £2.4 million to scheme for breaches of investment and trust law duties
The Pensions Regulator sets its strategic aims for the next three years
The Pensions Regulator (TPR) has issued its latest corporate plan for 2019 to 2021. The plan sets out what TPR considers to be the core regulatory risks in the pensions landscape and the six priority areas that it will focus on to address those risks.
As well as highlighting longstanding risks such as fraud and defined benefit (DB) scheme underfunding, TPR also focusses on some evolving risk areas, including:
- the growing significance of risk in the defined contribution (DC) market and the increasing importance of governance, administration, engagement and communication in the DC sphere;
- the risk posed by small DC arrangements that may struggle to meet TPR’s expectations;
- the low priority given to scheme administration by many schemes and the need to drive up standards of administration generally;
- poor governance and decision making by trustees; and
- the need for an effective regulatory regime for DB superfunds to ensure any consolidation is in the best interest of savers.
The table below sets out TPR’s six priorities for tackling the risks it has identified, along with some takeaways we have identified from TPR’s explanation of each priority.
BIC (UK) Ltd v Burgess and others – Limits on retrospectivity and the meaning of a written resolution
This is a judgment of the Court of Appeal handed down on 10 May 2019. The case related to whether pension in payment increases referable to pre-1997 pensionable service (the Pre97 Increases) had been validly granted.
The decision to grant the increases had been confirmed at a resolution passed at a meeting of the Trustees in 1991 and the original High Court decision had found that employer consent had been given in relation to the grant of the Pre97 Increases. However, the rules of the Bic UK Pension Scheme which were in place in 1991 did not contain a power (such as a power of amendment) which would have allowed the Pre97 Increases to be granted. In 1993 a trust deed and rules (the 1993 TDR) was executed which contained, amongst other things, a more flexible power of amendment which would have allowed for the grant of Pre97 Increases. The 1993 TDR was stated as having effect from 1990. The argument that had succeeded in the High Court was, therefore, that the 1993 TDR gave valid effect to the decision taken in 1991 to grant the Pre97 Increases.
The Court of Appeal overturned the High Court decision and decided that the powers in the 1993 TDR could not be utilised to give effect to a decision taken in 1991 simply because the 1993 TDR purported to be effective from 1990.
Separately and although not formally decided upon (the appeal succeeded on the issue of retrospectivity), the Court of Appeal gave a provisional view on the meaning of a written resolution where the power of amendment prescribed that a written resolution could be used to amend a scheme. It was held that the 1991 trustee meeting minutes which set out an intention to grant the Pre97 Increases merely recorded a resolution on future policy. In order to be a written resolution, the trustees needed to set out the text of the amendments, and ensure it was signed by all of the trustees and referenced the employer's consent. This should, therefore, be borne in mind when effecting amendments by way of written resolution.
The DWP concludes that TPR is an effective body
The DWP has published its Tailored Review of TPR. Tailored reviews are periodic reviews that look into the continuing need, efficiency and good governance of public bodies. TPR is subject to a Tailored Review at least once in the lifetime of a Parliament.
The DWP notes that TPR is a “well-run organisation that effectively carries out its statutory objectives”. In light of recent developments such as the collapse of BHS, it recognises that there is a continuing need for TPR and its functions and the DWP supports the increase in TPR’s use in recent years of its existing powers.
The DWP does, however, set out 16 recommendations where there is room for improvement. Of particular note are the recommendations:
- to consider providing TPR with additional powers to allow it to create rules in specific circumstances in order to respond to emerging risks. Currently, changes to how TPR conducts its regulatory functions require legislative changes which limits the proactive steps TPR can take; and
- for TPR to consider whether the codes of practice it measures schemes against are the correct minimum standards of compliance. TPR has codes of practice for both DB and DC schemes and, whilst not mandatory, they are a guidelines for how regulatory requirements can be met. Surveys commissioned by TPR in 2017/2018 showed that only 19% of DB schemes met expectations under all of the DB code principles and 5% of DC schemes meet all of the key governance requirements. The DWP suggests that the requirements in the codes may not, therefore, be the appropriate ones to determine whether or not a scheme is well run.
TPR has accepted the recommendations and its progress against them will be considered at the next Tailored Review in five years’ time. It will be interesting to see if, by then, TPR has been afforded additional powers and if the DB and DC codes of practice have materially changed.
Ombudsman orders trustees to pay £2.4 million to scheme for breaches of investment and trust law duties
The Ombudsman has determined that the trustees of The Henry Davison Limited Pension Scheme (the Scheme) breached their investment and trust law duties when investing the Scheme assets and has ordered them to pay £2.4 million to the Scheme in relation to associated investment losses.
Following a complaint made by 14 Scheme members, the Ombudsman found that the trustees were personally liable, jointly and severally, for a number of breaches, including:
- In 2012 the trustees entered into an asset management agreement (AMA) with a Swiss investment manager, Tivan Fiduciaries S.A. (Tivan). They placed approximately £1.3 million of member funds with Tivan despite the fact that annual management charge and performance fees due to Tivan had not been confirmed. By 2015, the investment was worth approximately £106,000. The £1.2 million loss included £260,000 in finance costs, £100,000 in broker fees, and £740,000 in commission payments to Tivan. In 2016, Tivan went into liquidation. The Ombudsman concluded that the trustees:
- had failed to obtain proper advice and to consider the need for diversification of Scheme investments before entering into the AMA;
- had breached their duties of care and skill under trust law by failing to act in members’ best financial interests;
- had not properly delegated their power of investment to Tivan and had failed to monitor Tivan’s performance on an ongoing basis. As such, they could not rely on the statutory exemption from liability or on the Scheme’s exoneration clause; and
- had adopted an approach to due diligence in relation to the AMA which was so “shockingly inadequate” that they could not be excused from liability on the grounds of reasonableness under section 61 of the Trustee Act 1925 (TA25).
- The trustees had agreed loans from the Scheme which totalled just under £800,000. All of the loans had defaulted and none of them had been repaid. The Ombudsman determined that the trustees had not taken proper advice before granting the loans and had failed to take steps to protect the Scheme in the event of the loans defaulting. The trustees had therefore not satisfied the requirement under section 36 of PA95 to take care and exercise skill in the performance of their investment functions. Again, the trustees could not rely on the Scheme’s exoneration clause and were not protected under section 61 of TA25. The Ombudsman ordered the trustees to repay the loans to the Scheme.
- The trustees invested approximately £170,000 of member funds in preference shares in Kirkpatrick Fiscal Limited (Kirkpatrick). This investment was used to set up a special purpose vehicle (SPV). However, Mr Davison of Henry Davison Limited was the sole director of Kirkpatrick and the SPV was created on the recommendation of a lawyer not qualified to provide pensions law advice. Again, the Ombudsman concluded that the trustees had fallen well short of the standards of care and skill required under section 36 of PA95 and could not rely on the Scheme exoneration clause or section 61 of TA25. He ordered them to repay to the Scheme a sum equal to the monies invested with Kirkpatrick.
The Ombudsman observed that the Scheme was administered “almost entirely without established process or procedure” and that this had caused the Scheme members to suffer an “exceptional level of distress and inconvenience” over a prolonged period of time. It is not therefore surprising that he also ordered the trustees to pay £5,000 to each of the 14 complainants (one of the highest non-financial loss awards made by the Ombudsman to date) and stated his intention to refer the Scheme to TPR so that it can decide whether to appoint an independent trustee.