Top of the agenda
5. Ancillary judgments in IBM v Dalgleish ahead of the permission to appeal hearing
Round-up of pensions developments: May 2015
1. Trustees should be cautious of transferring to overseas schemes that do not meet the new QROPS Pension Age Test
The conditions that an overseas scheme must satisfy to be a QROPS have been amended by regulations recently. From 6 April 2015, a QROPS would need to satisfy the Pension Age Test which requires that benefits paid from a member’s UK tax-relieved savings to the QROPS must only be paid from “normal minimum pension age” (age 55), or earlier if the member satisfies the “ill-health condition” (under the Finance Act 2004).
Schemes that do not satisfy this test as at 6 April 2015 could lose their QROPS status.
A transfer to an overseas scheme which does not meet the test will be an unauthorised payment, meaning the transferring member will be liable for a charge of up to 55% and the transferring (UK) scheme may be subject to what is known as a Scheme Sanction charge.
Some overseas schemes may not be compliant with the new test. Australian legislation, for example, permits pension benefits to be paid out earlier than they would under the UK regime, for instance on grounds of severe financial hardship or on specified compassionate grounds. Such schemes will not be compliant with the Pension Age Test and could therefore lose their QROPS status.
HMRC has been writing to QROPS asking them to notify HMRC if they fail to meet the conditions for being a QROPS.
UK transferring schemes should check when making a transfer to an overseas scheme as to whether it complies with the Pension Age Test. If the scheme does not comply, they should reconsider whether to process the transfer, as if they do, it could be an unauthorised payment.
Overseas schemes that have received letters from HMRC should respond by the deadline specified in the letter. If the overseas scheme does not comply with the new test, it should consider measures to comply with the Pensions Age Test, such as amending its rules to the effect that pension benefits in respect of transferred UK tax relieved funds will not be paid out earlier than permitted under UK law. Other measures may also be available for such schemes to get themselves within the Pension Age Test. For further information, speak to a member of the pensions team.
2. Pensions Regulator’s Annual Funding Statement 2015
The Pensions Regulator has recently published its 2015 Annual Funding Statement (the "Statement"). The Statement is primarily aimed at employers and trustees undertaking valuations with effective dates in the period 22 September 2014 to 21 September 2015 but will be relevant to trustees and employers of all defined benefit schemes.
On the whole, the Statement reinforces the main themes of the Regulator’s Code of Practice on DB funding (which was updated in July 2014) of:
- an integrated approach to managing risk, covenant assessment and setting an investment strategy; and
- considering the affordability of contributions to employers in light of their sustainable growth plans. The focus on the employer’s plans for sustainable growth in the updated DB Code of Practice was introduced as a result of the Regulator’s new objective to “minimise any adverse impact on the sustainable growth of an employer” which came into force in July 2014.
Larger funding deficits expected
A key message of the Statement is that many schemes are likely to experience larger deficits than at the last triennial valuation due to yields on long dated gilts having fallen significantly in the last 12 months. Long term gilt yields are now significantly negative and much lower than they were three years ago. The other reason for larger deficits is lower interest rates which can drive up current measures of pension scheme liabilities and schemes not being fully hedged against the risk.
A scheme’s ability to deal with these changes will depend on their risk capacity. The 2015 Statement distinguishes between those schemes that have capacity to take additional risk (i.e. because they adopted a more prudent approach or the employer covenant has improved) and those that do not have capacity to take risks. Whilst (as under the Code of Practice), it is open to schemes to consider adjustments to assumptions, length of recovery plan, level of deficit contributions and additional security, those with capacity to take risks may be able to make a “modest” extension to their recovery plans and a “modest” increase in deficit repair contributions. Schemes that have less capacity to take risk should try to obtain higher contributions from the employer whilst maintaining the same recovery plan end date (but bearing in mind whether an employer can afford this without its plans for sustainable growth being adversely affected).
Schemes that have assumed gilt yields will return to previous levels
Trustees who have assumed that gilts yields will return to their previous levels should consider whether they should move to assuming that gilt reversion will take place over a longer period and to a lower level than assumed in the last valuation.
Impact of Budget 2014 flexibilities
The Statement also pays a nod to the impact of the Budget 2014 flexibilities, recognising that these may increase DB to DC transfers. The Statement suggests that trustees should seek advice on the implications of changes of the incidence of members taking transfers on the funding assumptions and the scheme’s long-term membership trends.
Schemes selected for proactive engagement
The Regulator is also going to continue its approach of selecting a number of schemes for proactive engagement. It has already contacted all schemes in Tranche 10 (i.e. those with valuation dates between September 2014 and September 2015 at whom the Statement is aimed) selected for proactive engagement.
A suite of other documents have also been published alongside the Statement:
- A scheme funding analysis. This is a look forward at schemes in Tranche 10
- Scheme funding analysis which reviews the valuations and recovery plans of schemes with valuation effective dates in the period September 2012 to September 2013.
The Statement must be read in conjunction with the Code of Practice.
Trustees and employers of schemes with defined benefits that have valuations with effective dates in the period 22 September 2014 to 21 September 2015 (i.e. Tranche 10 schemes) should have regard to the Statement in their approach to their valuations.
The Regulator will also be publishing additional practical guidance on an integrated approach to managing risk, covenant assessment and setting an investment strategy to complete its Code of Practice on DB funding.
3. High Court upholds Ombudsman's determination that BBC did not breach its duty of good faith in imposing a cap on pensionable pay
In May 2012, the High Court had held that the BBC's introduction of a cap ("the Cap") on increases to pensionable pay through contractual agreement with employees was effective. For our briefing on that decision, click here.
However, the High Court referred the issue of whether the BBC had breached its duty of good faith to employees, to the Pensions Ombudsman to decide, as whilst Mr Bradbury had raised the issue, albeit in layman’s terms before the Ombudsman, as the issue had not been a "live" one, the BBC had not had an opportunity to submit its defence to it.
In December 2013, the Pensions Ombudsman determined that the BBC had not breached its duty of good faith to Mr Bradbury, in relation to the changes to his pension arrangements. For our update on the decision, click here.
Mr Bradbury then appealed to the High Court.
Mr Bradbury advanced six arguments in support of his appeal, all of which were rejected by Warren J.
The BBC's changes to its pension scheme breached his reasonable expectations
Warren J held that Mr Bradbury had not raised this argument in time and in any event, the BBC's conduct had not given rise to any reasonable expectations.
The BBC had improperly coerced members into agreeing to the changes
Warren J held that absent any reasonable expectations, presenting Mr Bradbury with hard choices did not of itself amount to improper coercion.
In making the pension changes, the BBC had a collateral purpose of creating a more agile workforce by making its pension scheme less attractive to long-serving and under-performing staff
Warren J rejected this allegation. The BBC's changes were primarily a response to its pension scheme's sizeable deficit.
The BBC's changes discriminated against younger members of the scheme
Warren J held that as Mr Bradbury was not a "younger" member of the scheme, any discrimination did not give rise to a breach of the implied duties owed to him.
The consultation was a sham
Warren J held that the BBC's consultation did not breach the implied duties. Furthermore, the BBC was motivated by the legitimate desire to make urgent changes to avoid a scheme valuation which would have resulted in significantly larger deficit contributions.
The Ombudsman had erred by assessing the individual elements of any breach of the BBC's implied duties rather than adopting a holistic assessment
Warren J rejected this argument. He held that the individual breaches alleged were disparate and that Mr Bradbury had failed to advance a strong enough case that the disparate allegations together amounted to a breach of the implied duties, when none of the allegations by themselves gave rise to such a breach.
Warren J's conclusions are not surprising. In the earlier judgment, when remitting the good faith issue to the Ombudsman, Warren J had noted:
“The BBC has adopted a middle way in order to keep the Scheme open and continue to provide defined benefits, albeit that they may be less generous than the benefits previously offered. It is, he accepts, regrettable …..but it was not irrational or perverse. Many employers have simply closed their schemes to any future accrual on a defined benefit basis. Mr Bradbury has no right to a salary increase and in view of the financial position of the Scheme it was not irrational or perverse to offer him one only on terms. Those would be [counsel for BBC’s] submissions if he had to make them. I cannot say on the material before me that he would be bound to succeed; but it would be entirely unsurprising to find that the evidence gave considerable support to such submissions.”
The decision will give comfort to employers who enter into contractual arrangements with employees, to limit their future liabilities to the pension scheme, particularly against the background of increasing scheme deficits and deficit repair contributions.
Bradbury v British Broadcasting Corporation  EWHC 1368 (Ch)
4. High court sets aside a trust settlement on grounds of mistake
The case concerned a Part 8 claim that a trust settlement be set aside on the grounds of mistake. The settlement had been made by a Melanie Freedman who had been loaned money by her father to buy her first property. Her father later agreed to forgo the loan. Melanie subsequently rented out the house and moved into another property that was closer to her son’s school. Her father loaned her the money to buy the second house too - this loan was to be repaid at least in part with the proceeds of sale of the first property.
Her father later raised the idea of putting the two properties into a trust. Evidence from the witnesses suggested that the terms of the trust were that Melanie should not have both properties and that when the first property was sold, she would repay the loan on the second property from the sale proceeds of the first property.
The legal adviser advising them on the settlement failed to appreciate the effect of the settlement which was to give rise to a tax charge of £156,000 and, as a consequence, Melanie could not repay the loan to her father. Melanie’s claim was opposed by HMRC.
Both parties relied on the Supreme Courts’ decision in Pitt v Holt, Futter v Futter  which was applied more recently in Kennedy and Kennedy (2014). The court, citing the principles set out in these cases, held that for a remedy in mistake to be granted there must have been:
- a distinct and serious mistake; and
- it must be unconscionable not to set the settlement aside.
It also said that it is likely that the relief would not be given if the transaction was part of a tax avoidance scheme.
The court allowed the settlement to be set aside on the grounds of mistake as the above criteria was satisfied in the case of Melanie's trust. In particular, the Court disagreed with HMRC’s argument that Melanie’s mistake was one of ignorance or disappointed expectation, in relation to which the relief could not be granted.
Lord Walker had said in Pitt v Holt that for the test to be satisfied, the mistake must not be one of “mere ignorance” but that the Court “should not shrink from drawing the inference of conscience belief or tacit assumption where there is evidence to support such an inference”.
The High Court held that there was evidence that Melanie had proceeded on the basis of legal advice coupled with her belief that her father would not advise her to do something dangerous and so there was a tacit assumption on her part that entering into the settlement did not involve any impediment to compliance with her agreement to repay the loan.
On the issue of whether the mistake was sufficiently serious, the Court said that if the consequences were only about inheritance tax payable, it would have sympathy with HMRC‘s arguments that the mistake was not sufficiently serious. However, the effect of the settlement was that Melanie could not repay the loan to her father and this was sufficiently serious.
The principles in this case, as indeed in the case of Pitt v Holt and Kennedy v Kennedy, although they apply to private settlements, will be relevant to actions of trustees of an occupational pension scheme and mistakes made in a deed relating to an occupational pension scheme.
Melanie Dawn Freedman and HMRC & Others  EWHC 1457 (Ch)
5. Ancillary judgments in IBM v Dalgleish ahead of the permission to appeal hearing
In 2014, the High Court ruled that IBM UK Holdings Limited ("Holdings"), the principal employer of two IBM defined benefit pension plans, breached its duty of good faith to members of those plans. For our update on that decision, click here. The remedies judgment followed in February this year (for our briefing, click here).
There have subsequently been three ancillary judgments, prior to the hearing on IBM’s application for permission to appeal.
5 May 2015 judgment
In the first judgment, dated 5 May, Warren J held that the representative beneficiaries (“Rep Bens”) should have conduct of the entire appeal and any cross-appeal in the case. This was, however, subject to the trustee of the IBM pension plans being entitled to “proper representation” on the appeal; the trustee’s role should not, as IBM had submitted, be restricted to a junior note-taker attending the appeal.
The debate as to who should have conduct of the appeal had arisen as counsel for the Rep Bens had argued all the issues at the breach hearing, while the trustee’s counsel had argued all the remedies issues on behalf of the Rep Bens at the remedies hearing.
18 May 2015 judgment
Incorrect references to Holdings breaching the contractual duty of good faith
Warren J held that he had jurisdiction to amend his earlier judgments to correct references he had mistakenly made to Holdings being in breach of its contractual duty of good faith to scheme members, when in fact pension scheme members were employed by IBM United Kingdom Limited ("UKL").
He held that references in his earlier judgments to breaches of contractual duty by Holdings should be attributed to breaches of contractual duty by UKL. He also considered that it was not established that the breaches by Holdings of its Imperial duty did not give rise to any breach of contractual duty by UKL in relation to:
- the exclusion notices (through which IBM had sought to close the DB sections of the IBM plan to future accrual); and
- changes to IBM’s early retirement policy.
The consultation requirement
Regarding his findings in the breach judgement that there had been a breach of the employer consultation requirements, Warren J held that no real distinction had been drawn between Holdings and UKL in the breach hearing. The consultation which actually took place related to the various elements of Project Waltz, some of which were to be implemented by Holdings and some by UKL. It was not just a consultation by UKL but also by Holdings. “Having decided to consult at all”, he added “it can be argued strongly that Holdings as much as UKL should have consulted properly and that the members should have some sort of remedy for its failure to do so”.
19 May 2015 judgment
The judgment of 19 May considered whether IBM had to give notice to members when implementing a new early retirement policy. The trustees argued that IBM must give 6 months’ notice of a new early retirement policy as a remedy for breach of duty in relation to Project Waltz changes. Warren J held, however, that no notice of the changes had to be given as IBM’s Imperial duty did not require it to give members reasonable notice of any future early retirement policy. Furthermore, there was no implied restriction on the exercise of discretion to determine an early retirement policy to the effect that it could only be exercised on giving reasonable notice. However, IBM did have to communicate the change to its early retirement policy to members.
Warren J’s comments that Holdings should have consulted properly are somewhat at odds with the statutory employer consultation requirements under the Employer Consultation Regulations, which technically apply to the employer (i.e. UKL) only. The applications for permission to appeal are expected to be dealt with on 8 June.
6. Regulator’s section 89 report in relation to the Carrington Wire defined benefit Scheme
The Pensions Regulator has published a section 89 report in relation to the Carrington Wire defined benefit scheme and a Contribution Notice ("CN") issued to a Mr Richard Williams.
Mr Williams was the owner of a shell company which bought a Yorkshire based company called Carrington Wire Ltd (“CWL”). CWL was the sole sponsoring employer of the Carrington Wire Scheme. Prior to the acquisition of CWL by the shell company, CWL had been purchased by PAO Severstal, the Russian parent company of the Severstal Group. As a condition of the purchase, PAO had agreed to guarantee CWL’s liabilities to the Carrington Pension Scheme; the guarantee however had a clause that if CWL ceased to be associated with Severstal, the Severstal guarantee would fall away.
PAO then proceeded to wind-down CWL and sold it to Mr William’s shell company for £1 with a working capital adjustment of £400, most of which was received by Mr Williams. The result was that PAO was no longer bound by the guarantee to the pension scheme and the scheme became solely reliant on CWL (which had already been wound-down and had little or no assets). The scheme entered a PPF assessment period.
In November 2012, the Regulator issued a warning notice seeking to impose CNs on PAO and its subsidiary and Mr Williams. The matter was settled with the Russian companies for a £8.5m payment into the Carrington Pension scheme. In January 2015, the Determinations Panel determined that a CN be issued to Mr Williams for approximately £382,000.
The settlement reached with the Russian companies and the CN imposed on Mr Williams (if paid in full), will not be sufficient to keep the scheme out of the PPF (the PPF level deficit in the scheme being around £16m). However, it will significantly reduce the PPF’s exposure in relation to the scheme. The imposition of the CN on Mr Williams highlights the Regulator’s continued willingness to exercise it moral hazard powers where it considers it reasonable to do so.
7. Settlement reached in Desmonds – Regulator no longer to pursue CNs
In April 2010, the Regulator issued a warning notice seeking to issue Contribution Notices (“CNs”) against two director shareholders, Mr Desmond and Mr Gordon, requiring them to pay £900,000 and £100,000 respectively into the Desmond & Sons Ltd Pensions & Life Assurance Scheme. The Regulator issued the CN warning notices on the ground that the director shareholders had structured a Member’s Voluntary Liquidation so as to enhance shareholder value to the detriment of the Scheme.
On reference to the upper Tribunal, the Tribunal decided, at an interim hearing, that it could not direct the Determinations Panel of The Pensions Regulator to add Mrs Desmond (another shareholder of the company) to the CNs as any claim against Mrs Desmond was time barred and the Upper Tribunal could not make an order beyond the authority of the Panel. The Upper Tribunal did however have jurisdiction to increase the sum requested by the CNs as part of its statutory role to determine whether the Panel had taken appropriate action. For our summary of this interim hearing click here.
Ahead of the full Upper Tribunal hearing, a Section 89 report from the Regulator has revealed that a settlement has been reached in the Desmonds case. The terms of the “no admissions as to liability” settlement have not been disclosed other than that Mr Gordon has agreed to pay an (undisclosed) sum of money to the Scheme, which will help the Financial Assistance Scheme in paying members’ benefits. As a consequence of the settlement, the Regulator will not be issuing CNs against Mr and Mrs Desmond or Mr Gordon.
The Regulator’s section 89 report can be found here.