Top of the agenda

  1. Identifying statutory employers – more on information required on the Scheme Return
  2. Finance Act 2011 – more additions to the Registered Pension Schemes Manual

Pensions Bill

  1. Government delays increase in State Pension Age by six months and limits increases in state pension age for women to 18 months
  2. Government amends definition of "Money Purchase Benefits"

Cases

  1. The Nortel case – Court of Appeal upholds pension expense ruling
  2. Incorrect benefit quotation was not decisive in member's decision to take voluntary redundancy but did amount to maladministration by the scheme administrator

The Pension protection Fund

  1. PPF consultation on 2012/13 levy framework – more on company guarantees

Round up

  1. Review of IORP Directive – should Solvency II-type requirements apply to pension schemes?
  2. Government to crackdown on "derisking" exercises
  3. Government challenged on the switch to Consumer Prices Index in public sector pension schemes
  4. Calls on the Government to push back auto-enrolment

Top of the agenda

Identifying statutory employers – more on information required on the Scheme Return

In our previous e-bulletins, we reported on the requirement for trustees to identify the statutory employers in the Scheme Return from November 2011. Precisely what information would be required on the Scheme Return has not yet been revealed. However, the Pensions Regulator has revealed the following:

  • Confirmation for each listed principal and participating employer will be required on the Scheme Return, as usual.
  • For each participating employer, there will now be a yes/no "radio button" asking if that employer also meets the statutory definition. There are differences in what constitutes an employer for PPF entry, scheme funding and section 75 purposes; for instance, an entity may be an employer for PPF purposes but may not be one for section 75 purposes. The help text that will accompany the additions to the Scheme Return will clarify that "yes" should be selected only where the employer meets the definition for "all" purposes.
  • There will also be an opportunity in the Scheme Return for any other entities that the trustees discover who meet the statutory definition to be listed as participating employers.
  • Where there is no employer identified which meets the definition for all purposes, trustees will be asked to contact the Pensions Regulator.

Comment

In our previous e-bulletin (click here to view it), we highlighted some of the practical difficulties that trustees may encounter in identifying statutory employers. We are currently involved in making suggestions to the Pensions Regulator as to the steps trustees could take to identify their statutory employers.

Finance Act 2011 – more additions to the Registered Pension Schemes Manual

The Registered Pension Schemes Manual has been updated to give examples on how benefits are to be tested against the annual allowance in the following two circumstances:

  • Where a member has a defined benefits arrangement with "split normal pension ages". The example is particularly relevant for schemes with different normal pension ages, which equalised benefits for men and women following the decision in Barber and, as a result, members have tranches of benefits calculated by reference to different normal pension ages.
  • Late retirement i.e. where a member does not draw benefits on reaching normal pension age and stays in service after normal pension age.

On 18 August 2011, HMRC published draft guidance on the disguised remuneration rules.  Following comments received, HMRC has now updated that guidance and published it as technical guidance in the Employment and Income Manual (EIM).  HMRC has also produced a table listing the key changes that have been made to the draft guidance. The guidance supersedes the disguised remuneration FAQs. 

Comment

The examples will be welcomed by the pensions industry in aiding understanding of HMRC's thinking on these issues. For more information on the treatment of split normal pension ages and late retirement under your scheme as a result of the Finance Act 2011 provisions and the implications of the disguised remuneration rules on your scheme, speak to your usual contact in the pensions team.

Pensions Bill

Government delays increase in State Pension Age by six months and limits increases in state pension age for women to 18 months

The Pensions Bill has been amended in response to concerns about women most affected by the accelerated rise in state pension age.  The timetable for increasing the state pension age to 66 has been delayed by six months; state pension age will now increase to 66 in October 2020, rather than, as provided for previously in the Pensions Bill, in April 2020. These changes mean that no women will see their state pension age increase by more than 18 months.

Auto-enrolment: caps on deferred member charges

The Pensions Bill has been amended in relation to the cap on administrative charges incurred under a qualifying pension scheme under the auto-enrolment requirements.  Click here for our auto-enrolment briefing to learn more about qualifying pension schemes.   The amendment ensures that the cap on administrative charges will apply to charges made to deferred members as well as to active members of a qualifying pension scheme.  The amendment also clarifies what constitutes an administrative charge for these purposes.

Government amends definition of "Money Purchase Benefits"

The Government has made amendments to the Pensions Bill to change the definition of "Money Purchase Benefits" following the Supreme Court's Judgment in Bridge Trustees Ltd v Yates and others (Secretary of State for Work and Pensions intervening) 1 W.L.R. 191. Under the amended definition, benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise in relation to them. For our earlier e-alert on this, click here.

Cases

The Nortel case – Court of Appeal upholds pension expense ruling

On 14 October 2011, the Court of Appeal dismissed the appeal in Bloom v The Pensions Regulator [2011] EWCA CIB 1124 agreeing with the High Court decision that a liability arising from a financial support direction or a contribution notice issued to a company in administration or liquidation will, except in very limited circumstances, amount to an expense of that administration or liquidation. To view our earlier e-alert on this, click here.

Incorrect benefit quotation was not decisive in member's decision to take voluntary redundancy but did amount to maladministration by the scheme administrator

In Lee (81043/1), the Pensions Ombudsman awarded £900 to a scheme member following the provision of an incorrect benefit quotation by the scheme administrator. The member, Mr Lee, had entered into a binding agreement with his employer to take voluntary redundancy. Mr Lee claimed that he would not have opted to take redundancy had he known the true value of his yearly pension.

The Ombudsman did not consider that the incorrect quotation had been decisive in the member's decision to take voluntary redundancy; the difference between the incorrect and actual pension entitlements was not critical and, in the circumstances, it was not certain that Mr Lee would have acted differently had he been given the correct information at the outset. The Ombudsman did, however, find that the scheme administrator's error constituted maladministration, causing the member significant distress and disappointment, for which the member was entitled to be compensated.

The Pension Protection Fund

PPF consultation on 2012/13 levy framework – more on company guarantees

In our previous e-bulletin (click here to see it), we reported on the PPF's consultation on the 2012/13 Pension Protection Levy framework. One of the proposals raised in the consultation is that for all new and existing Type A contingent assets (such as a PPF Guarantee), scheme trustees will need to certify on Exchange that the guarantor "could be expected to meet their full commitment under the guarantee if called upon to do so as at the date of the certificate". The proposal raises a number of issues:

  • Precisely what steps trustees and employers would need to take to give the certificate. For instance, would the trustees need to commission a full covenant review? – this may be over the top where the employer is already known to the trustees to be in a strong financial position – or can they rely on publicly available information?
  • What steps will the PPF take if trustees give the certificate in good faith only to find that the guarantor's financial strength has already deteriorated? Would the PPF have regard to the circumstances that applied at the time of certification or would the contingent asset be rejected in full or in part?

Comment

We understand that the new contingent asset guidance to be issued this December is expected to give further guidance on the proposed certification requirements. We are involved in making representations to the PPF that the guidance be sufficiently detailed so trustees know what information they need to obtain to give the appropriate certification and the actions PPF is likely to take (if any) if the guarantor's circumstances change.

Round up

Review of IORP Directive – should Solvency II-type requirements apply to pension schemes?

The European Commission, as part of its review of Directive 2003/41/EC (IORP Directive) issued a 'Call for Advice' in April 2011, asking for input from the European Insurance and Occupational Pensions Authority (EIOPA).  The main area on which the Commission is seeking advice is the extent to which the requirements of the type set out in the Solvency II Directive (Directive 2009/138/EC) should apply to pension arrangements under the IORP Directive. The IORP Directive applies to occupational pension schemes. It contains a number of requirements for those schemes (with scope left for member states to choose the exact details), for example:

  • that scheme liabilities are calculated every three years;
  • that schemes have sufficient and appropriate assets to cover their liabilities; and
  • recovery plans. 

The requirements of the IORP Directive are implemented into law in the UK through the Pensions Act 2004 and regulations under the Act.  The Solvency II regime does not apply to pension funds covered by the IORP Directive. Having issued an initial consultation on their draft response to the Commission in July 2011, EIOPA has issued a further response for consultation. Below, we pick up some of the points from the recent response.

Scope

EIOPA recommends that the Directive is not extended to cover non-occupational pension schemes i.e. pay-as-you-go, book reserve and personal pension schemes.

Valuation of assets, liabilities and technical provisions

EIOPA recommends that the IORP Directive should be varied so that assets of Institutions for Occupational Retirement Provisions are valued on "a market consistent basis". This means valuing the assets at the amount for which "they would be exchanged between knowledgeable willing parties in an arm's length transaction".

Minimum funding requirements and recovery plans

EIOPA recommends that either there is no implementation of Solvency II minimum funding requirements under the IORP Directive or that they are implemented but in a heavily amended form.

Investment rules

EIOPA recommends amending the more explicit aspects of the current investment rules under Article 18 of the IORP Directive. In particular, those aspects dealing with risk capital markets, cross-border activities and derivatives. Instead, there should be a greater reliance on a general "prudent person rule" to regulate investment.

Comment

The NAPF has announced its intention to explain to EIOPA and the European Commission the unsuitability of the Solvency II rules to pension schemes. The EIOPA consultation period has also been extended from the end of November to 2 January 2012 following lobbying by the Pensions Regulator that the initial four week period set was not long enough. 

We are involved in making representations to EIOPA in relation to the consultation.

Government to crackdown on "derisking" exercises

Pensions minster, Steve Webb, has announced that a working group is putting together a code of practice on "derisking exercises". The derisking exercises mentioned specifically were incentives offered to defined benefit scheme members to transfer their benefits out of the scheme and pension increases exchanges (for instance, where employees are offered a higher flat rate pension in exchange for forgoing any increases to their pension in payment). The code is expected to be out in summer next year. Steve Webb has also indicated that the Government may legislate on the matter if there is failure to comply with the code.

Comment

Employers considering these derisking exercises should exercise caution, especially as to the terms offered to members and how the offers are communicated to the members. Although any such exercise must be conducted with regards to current legislation, the scheme's provisions and general principles of trust law, employers currently considering such proposals may wish to conclude the process before a possibly more restrictive code or further legislation is introduced.

Government challenged on the switch to Consumer Prices Index in public sector pension schemes

The Civil Service Pensioners' Alliance and six trade unions led by the Public Commercial Services Union have challenged the Government in the High Court on its decision to switch to the Consumer Prices Index for uprating pensions in public sector pension schemes. We understand that the key basis of the challenge was that the Government has a duty to maintain the purchasing power of pensions and that a switch to CPI from RPI would fail to do this and result in significant annual cuts in benefits. The hearing was concluded on 27 October and judgment has been reserved.

Comment

One of the main reasons for the Government's decision to switch to CPI as a measure of inflation for indexing and revaluing pensions for private pension schemes under the Pensions Bill is to bring the inflationary measure for private schemes in line with that in the public sector. If the current challenge against the Government is successful, this would seriously undermine the Government's reasoning behind switching to CPI for private pension schemes.

Calls on the Government to push back auto-enrolment

A Government-commissioned report compiled by private equity executive, Adrian Beecroft, has recommended delaying the introduction of auto-enrolment and removing some of the auto-enrolment requirements for small businesses over concerns about the current state of the economy. The report was followed by a statement from pensions minister, Steve Webb to the effect that there are currently no proposals to change the auto-enrolment timetable. However, since then a confidential report commissioned by David Cameron has also suggested that the auto-enrolment requirements should be delayed for small companies.