Top of the agenda

  1. Auto-enrolment: know your "workers"

The auto-enrolment requirements under the Pensions Act 2008 apply to "workers".  A worker is defined in the Act as any individual who works under a contract of employment, or has a contract to perform work or services personally (i.e. they cannot send a substitute or sub-contract the work) and is not undertaking the work as part of their own business.  There are, however, exemptions under the Act to the "worker" definition.   The following categories, for instance, are exempt from 'worker' status: one person companies and office holders (people who do not have a contract or service agreement, such as non-executive directors).  Special rules also apply to categories of workers such as agency and overseas workers. 

The Pensions Regulator has given detailed guidance on the meaning of worker in its "Employer duties and defining the workforce" guidance to help employers identify the people within their workforce in relation to whom the employer may have a duty under the regime.

There have been two cases interpreting the meaning of "worker" recently.

In the case of Clyde & Co LLP v Bates van Winkelhof [2012] EWCA Civ 1207, the Court of Appeal recently overturned the decision made by the Employment Appeal Tribunal and found that a former equity partner (Ms BvW) was not a 'worker'.  The Employment Appeal Tribunal ('EAT') had held that the Ms BvW satisfied the necessary conditions for 'worker' status: fact that she had devoted her full time attention to the business and that she was in a subordinate position.  However, the Court of Appeal held that a member of an LLP who, if it had not been registered as an LLP would have been a partner in an 1890 Act partnership, can be neither an employee nor a 'worker' within the meaning of the Employment Rights Act 1996. The court considered whether Ms BvW would have been a partner if the LLP was a general partnership and concluded that she would, reasoning that the nature of a partnership is inconsistent with the status of an employee. A general partnership is not a separate legal entity, the partners are in a relationship with each other, and therefore each partner would have to be employed by themselves. Further on a sociological level there is not the hierarchical relationship which is normally found between an employer and worker.

In another case before the Court of Appeal, The Hospital Medical Group Ltd v Westwood [2012] EWCA Civ 1005, the Court of Appeal upheld the decision of the Employment Appeal Tribunal that a Doctor who, in addition to working as a G.P, was performing hair restoration surgery for a private clinic, as a self-employed independent contractor, was a 'worker'. The reasoning of the court was that Dr Westwood had not offered his service as a Hair Restoration Surgeon to the world in general and he was recruited by HMG to work for it as an integral part of its operations.


Although these cases look at the meaning of "worker" within the Employment Rights Act 1996, the definition in the 1986 Act is almost identical to the basic definition of worker for auto-enrolment purposes; these decisions are therefore likely to be influential in determining the meaning of worker for auto-enrolment purposes.

We are advising clients on compliance with the auto-enrolment requirements.  For further information, speak to a member of the pensions team.


  1. High Court orders rectification of IBM Pension Plan rules in relation to early retirement rights of active members

The case of IBM United Kingdom Pensions Trust Limited v IBM United Kingdom Holdings Limited and others [2012] EWHC 2766 (Ch) concerns a claim for rectification of the rules of the IBM Pension Plan (“the Plan”). The claimant was the present trustee of the Plan. The defendants were the principal employer and the largest participating employer of the Plan (together “IBM”), and Mr Metcalfe, a member of the Plan.


Earlier this year, the High Court had made an interim decision in relation to the present case, awarding Mr Metcalfe costs protection even though he had not been formally appointed as a representative beneficiary in the proceedings. Click here for our briefing on the interim decision.

The trustee in this case claimed that a mistake had been made in the drafting of the 1983 trust deed and rules, which created part of the DB section of the Plan known as “the C Plan”. This error had been repeated in subsequent rules. The original trust deed and rules of 1983 and the current trust deed and rules of 1997 needed to be amended, the trustee argued, to reflect what had originally been intended.

According to the trustee, the original intention in 1983 had been for C Plan active members to retire on an unreduced pension from ages 60 to 63 without consent and for its deferred members to take their deferred benefits from 60 with no actuarial reduction.

However, the 1997 trust deed and rules provided that, for active members, retirement between ages 60 and 63 is subject to consent and any pension payable from 60 is unreduced. For deferred members, retirement between ages 60 and 63 is subject to consent for deferred members still in service (but not other deferred members) and any pension payable is subject to actuarial reduction.

Applying the law on rectification

Warren J, in his consideration of the law of rectification, referred to the conditions for rectification of mutual mistake laid out by Etherton LJ in Daventry DC v Daventry District Housing Ltd [2012] 1 WLR 1333. He stated that the requirements for rectification of formal mistake can be re-phrased as: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) which existed at the time of execution of the instrument sought to be rectified; (3) such common continuing intention to be established objectively, that is to say by reference to what an objective observer would have thought the intentions of the parties to be; and (4) by mistake, the instrument did not reflect that common intention.

Warren J applied this test in answering two key questions:

  • What did the trustee intend each of the versions of the trust deed and rules should provide?
  • What did the principal employer intend to consent to when executing those deeds and rules?

On the facts, Warren J found that the boards of both the trustee and the principal employer intended that the C Plan’s active members should have a right to retire between the ages of 60 and 63 without employer consent. Current and past trust deeds and rules should therefore be amended accordingly. However, the parties had intended deferred members to receive deferred benefits only at age 63, “at least if they were to be paid without actuarial reduction”. Therefore, the deeds should not be rectified on this issue.

Implications of the preservation regulations

Chief among IBM’s arguments was that the parties’ intentions regarding active members conflicted with that for deferred members; there was flexible retirement age for active members (60-63), but only one age for deferred members (63). This, according to IBM was in contravention of the Preservation Requirements under the Pension Schemes Act 1993.

In 1982/83, the Preservation Requirements had the effect that, if active members had an unqualified right to an unreduced pension at 60, the trustee was under a statutory duty to ensure that members enjoyed the same rights in deferment. Even though the Preservation Requirements were (and are) not overriding, there was in 1982-83 an enforcement mechanism available which would have enabled the trustee to secure the extension of such rights to deferred members. IBM argued therefore that the actual intentions could not legally be implemented in the 1983 trust deed and rules. In turn, the trust deed and rules could not be rectified.

Warren J rejected IBM’s argument, saying there was “no inequity” in rectifying the 1983 trust deed and rules to reflect the intended terms. “The fact that…. the Preservation Requirements would … give rise to consequences in relation to deferred members is irrelevant; that is simply a consequence of the terms that were intended ...”

Employees’ contracts

IBM also made a contractual counterclaim, arguing that new joiners to the C Plan entered contracts which included terms (i) that a member would be entitled to retire before age 63 only with the consent of the employer and (ii) that deferred pensions would come into payment as of right at age 63. This was on the basis that new joiners’ employment contracts incorporated employee handbooks and pensions booklets which included these provisions. Warren J held that IBM had failed to establish any such contract. Also, he pointed out that

                “the Employee Handbooks and the Pension Booklets made it clear that the Trust Deed and Rules were the formal governing documents and, in case of inconsistency with the Handbook or Booklets, were to prevail”.

Employer’s duty of good faith

There was also some discussion by Warren J of whether IBM could be in breach of its duty of good faith under the Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589 (Ch d). However, he declined to say “more than was absolutely necessary on the issue” as there had not been any full submissions either on the facts or on the law about the issue. The nature and extent of IBM’s Imperial duties of trust and confidence is a key issue in another case relating to changes proposed by IBM to close the defined benefit section of the Plan to future accrual. That case is to be heard in February 2013.

  1. Leave to appeal in the Procter & Gamble case granted

Lord Justice Hildyard has granted leave to appeal in the Procter and Gamble case. Justice Hildyard acknowledged that the issues in the case were “undoubtedly complex” and that it would be unrealistic to assume that an appeal would have no real prospect of success.  

Pensions Ombudsman

  1. Another CPI/RPI complaint bites the dust

In Stradwick (85899/1), the Pensions Ombudsman has dismissed a claim from a member who argued that he was led to believe from scheme booklets that his pension would be increased by reference to the Retail Prices Index (RPI) rather than the Consumer Prices Index (CPI).

Mr Stradwick, a member of the BT Pension Scheme, received an explanatory booklet in 1993 which stated:

Pensions in payment in excess of the Guaranteed Minimum Pension are at present increased by the Scheme at a rate equal to the increase over the 12 months to September the previous year in the cost of living – as measured by the General Index of Retail Prices.”

A later booklet, from 1999, stated that deferred benefits would be “increased in line with the Scheme’s pension increase arrangements”. The scheme rules stated that increases were to be made in line with the Pension Increase Orders. In 2005, Mr Stradwick, who had been employed by BT and its predecessor for 37 years, accepted voluntary redundancy and paid 52% of the substantial redundancy payment he received into the Scheme.

In 2010, the Scheme announced to deferred pensioners that from April 2011, increases in deferred pension and lump sum before retirement would be linked to the CPI instead of the RPI in line with the Government’s change to the Pension Increase Orders.

Mr Stradwick complained to the Pensions Ombudsman arguing that he had been led to believe from scheme booklets that his pension benefits would be increased for life by reference to the RPI and that his decision whether to take redundancy were based on RPI increases and, as the CPI was expected to increase over the long term at a lower rate than the RPI, he was likely to suffer financially.


The Ombudsman dismissed the complaint, holding the following:

  • In the recent case of R. (Staff Side of the Police Negotiating Board) v. Secretary of State for Work and Pensions ; Piper v Secretary of State for Work and Pensions, the High Court held that the Government’s decision to alter the basis on which the official pensions were increased was lawful.
  • Since the scheme rules provided that increases are to be made in line with the Pension Increase Orders, Mr Stradwick’s benefits had been correctly calculated.
  • None of the scheme literature provided to Mr Stradwick made a commitment that all benefits had to be increased in line with the RPI, and always would be. The words “at present” in the explanatory booklet clearly indicated "at least the possibility of something different in future”.
  • It was “highly unlikely” that Mr Stradwick would have done anything differently if the scheme literature had clearly said there was no guarantee that RPI would be used in the future. Mr Stradwick was influenced more by the significant redundancy payment he was in line for.


It seems increasingly unlikely that members’ complaints of this nature will be successful. This case follows closely the reasoning in Clarke and Frost where the Ombudsman also dismissed claims that explanatory literature relating to RPI-based indexation entitled members to continued increases by reference to RPI. For our updates on those determinations, click here and here.  

  1. Prudential ordered to compensate member for processing his Open Market Option earlier than required under the rules

In Ayre (85297/2), Mr Ayre who had a policy under the Prudential Pension Plan made a complaint against Prudential for transferring his pension fund to Canada Life too early when he exercised the Open market Option (OMO).  The rules of the Plan, broadly, provided that the OMO should be calculated on the "Specified Date," which in this case was 1 April 2011.  However, in this instance, Prudential paid the OMO to Canada Life earlier than the Specified Date.  Had the amount been paid on the Specified Date, the amount payable would have been higher.  Prudential eventually accepted that the OMO transfer should not have taken place on any date other than the Specified Date but did point out that if they had made the transfer on that date, the transfer would not have reached Canada Life until three to five days later.   Canada Life confirmed, however, that the amount payable to Mr Ayre under his annuity would have been the same ( approximately £6,152 per annum) if the funds were received between 1 April to 8 April. 

The Pensions Ombudsman held that under the policy, the value of the OMO should be calculated at the Specified Date, no other date, and that Prudential should not have made the transfer before that date.  By doing so, it had not adhered to the terms of the policy and was therefore guilty of maladministration. The Ombudsman ordered Prudential to pay Canada Life the amount required to bring Mr Ayre's annuity up to the level of £6,152.04 per annum and to pay Mr Ayre the shortfall in payments he should have received under his annuity from 31 March 2011 plus simple interest.  Mr Ayre was also entitled to £200 compensation for the inconvenience he had endured.  

Holt (84553/1) 

  1. Incorrect information given to member on commutation rights entitled member to damages

In Holt (84553/1), the Pensions Ombudsman has upheld a complaint by a member who spent £7,000 after being wrongly informed by the scheme administrator that she could commute part of her pension for a lump sum.


Mrs Holt’s ex-husband retired from the Police Pension Scheme in 1998 and exercised his entitlement to a cash lump sum at the time.

When Mr and Mrs Holt divorced in March 2005, his pension was subject to a pension sharing order in favour of Mrs Holt. Under the relevant regulations, Mrs Holt was unable to commute her pension for a lump sum because her husband had “received a lump sum … before the date on which the pension sharing order takes effect.”

However, in 2006 Lancashire Pension Services, the scheme administrator, wrote to Mrs Holt, informing her that she would be able to commute the maximum 25% of her pension into a lump sum. In January 2010, she received a benefit statement which did not refer to any commutation rights. She telephoned Lancashire Pension Services and was told she was entitled to a cash sum of £26,000. In reliance on this information, Mrs Holt booked a holiday costing £4,843, cashing in premium bonds to help pay for it. She also spent over £2,000 on her holiday.

When she returned from holiday she received a letter from Lancashire Pension Services informing her that she was not entitled to a lump sum.

Mrs Holt complained to Lancashire Constabulary, the scheme managers. In December 2011 she accepted an offer of £500 for distress. She then put her complaint before the Ombudsman arguing that she would not have taken the holiday if she had received the right information. When she cashed in the premium bonds, she intended to use the lump sum to replace them when she reached 60. She also planned to retire at 60 and live on the lump sum until her State pension became due.


The Ombudsman held that incorrectly informing Mrs Holt that she was entitled to a lump sum amounted to maladministration and that the holiday and the associated costs, which amounted to around £7,000, were expenditure that she had “reasonably incurred based on the incorrect information”.

However, the Ombudsman did not award Mrs Holt £7,000 because the equivalent portion of her pension had not been and could not be commuted. If she was awarded the full amount she would in effect receive this sum twice.

An appropriate measure of compensation, the Ombudsman decided, would be “a sum that would allow Mrs Holt to put herself in the position she would have been in”. She would have had £7,000 invested in premium bonds, or other investments of her choice, had she not taken the holiday. Therefore she should be compensated for the cost of borrowing that sum and repaying it from her pension over her lifetime.

A precise assessment was impossible due to uncertainty over interest rates and Mrs Holt’s likely longevity. However the Ombudsman considered a sum of £2,500 to be adequate.  

  1. Pensions Ombudsman holds that member "ought to have reasonably known" she was receiving overpayments

In Cunningham (86236/2), the Pensions Ombudsman has dismissed a complaint by a member of the Royal Bank of Scotland Group Pension Scheme who had been asked to return over £4,000 of pension overpaid to her.

Miss Cunningham was a pension credit member of the Royal Bank of Scotland Group Pension Scheme.  In December 2010, Royal Bank of Scotland Group Pension Services ("RBS"), the scheme administrator, wrote to Miss Cunningham and enclosed a retirement benefit statement, setting out that she would receive £10,464.84 a year, which would be paid monthly starting from 18 December.  Miss Cunningham had also been informed of the value of her annual pension in several letters before her benefits were set up. A few months after her pension came into payment, RBS wrote to Miss Cunningham to inform her that her benefits had been "inadvertently doubled" and that she had so far received £4,162.73 more than she was entitled to. RBS apologised for the error and asked her to forward a cheque for the overpaid amount.

Miss Cunningham subsequently requested details of the Scheme's internal dispute resolution procedure. RBS responded by offering that she repay the overpayments over a 12 month period.  Miss Cunningham responded with further complaints. RBS, in response, suggested repayment over a period of 36 months. It also offered  Miss Cunningham £300 for any inconvenience and distress she had suffered. Miss Cunningham accepted this as an interim solution but told RBS not to make any deductions from her pension in respect of the overpayments while the Pensions Ombudsman considered the case.

Among Miss Cunningham's submissions to the Ombudsman, she claimed that she had not been advised of the level of her monthly pension before she began to receive it, that she had not received the letter of December 2010, and that she was "too upset at the time with multiple bereavements" to query the amounts she received.  She also argued that the repayment terms offered were unfair, that the trustees should not be able arbitrarily to deduct money from her pension, and that the compensation she had been offered was inadequate.  Furthermore, she claimed that she had relied on the money to her detriment, spending over £2,000 in "unusual expenditure" during the three month period in which the overpayments had been made.

The Ombudsman held that the trustees had a legal right to recover the overpayment.  There are some defences to an action for recovery, such as when the recipient’s position has changed so that it would be inequitable to require repayment. However, the fact alone that the money has been spent in whole, or in part, does not mean it could not be recovered – it may have been spent in the normal course of things, or on additional expenditure that would have been incurred anyway. Such a defence would not be open to Miss Cunningham if she knew, or ought to have known, that she was receiving more than her entitlement and, on the facts, the Ombudsman considered that Miss Cunningham ought to have reasonably known that she was receiving more than she was entitled to.  Miss Cunningham's complaint was dismissed.

  1. Regulator recommends a £2 tolerance level when reconciling GMPs

The Pensions Regulator has updated its winding-up guidance. The guidance provides suggestions of good practice for those involved in the winding-up process, particularly trustees. In the updated guidance, the Regulator has encouraged scheme trustees and administrators to use £2 per week “tolerance” levels when reconciling GMP data with that of HMRC. The tolerance level is to enable trustees to reconcile their data with HMRC more quickly as reconciling GMP data “to the penny” can be a disproportionately long and costly exercise. The Regulator has in the updated guidance given an example of how the tolerance level will work in practice: if according to trustees’ own records, a GMP should be set at £25 per week but HMRC’s data shows that it should be calculated at £26.50, the guidance encourages trustees to adopt the HMRC figure as it will be within the £2 tolerance.  


  1. DWP Consultation on CPI/RPI amendments and bridging pensions

The DWP has published for consultation draft regulations which:

  • make amendments to various sets of existing regulations as a result of the switch from CPI to RPI for indexation and revaluation; and
  • introduce a limited power for trustees to modify their rules to take account of the impact of changes to State Pension Age on bridging pensions. 

The CPI/RPI amendments

The amendments being proposed to take account of using CPI instead of RPI include ensuring that certain deferred members (broadly those who left service before 1986) do not gain a right to a statutory cash-equivalent transfer value (CETV) simply because the scheme now revalues deferred benefits on the basis of CPI. Members who became deferred members before 1 January 1986 were entitled to have their deferred benefits fully revalued on an uncapped basis (after this date the statutory minimum for revaluation was capped) and therefore are excluded from right to a CETV; the intention is that this should remain the case despite the switch to CPI.

The DWP is also proposing amendments to ensure that the statutory indexation requirements for pension credit benefits (i.e. benefits paid to ex-spouses on divorce) which remain in a DB scheme should be similar to those of other benefits.

Bridging pensions

The draft regulations propose to extend the power for trustees to amend their scheme to make changes to the age until which bridging pensions are paid. Briefly, where members retire before their State Pension Age (SPA), some schemes pay a higher, or an additional, pension until SPA and this is known as a bridging pension. The SPA of both men and women is currently being increased, which means that people may have to wait longer for their state pension, and under some schemes their bridging pensions may have to be paid for longer. The impact of the increase to SPA will depend on the individual scheme. The DWP is therefore proposing to introduce a statutory power which will enable trustees to modify their scheme by resolution (notwithstanding any restriction in the scheme rules) in certain respects in order to take account of the changes to SPA.

Round up

  1. Review of the IORPS Directive – where are we on that?

A debate was held last month in the House of Commons with representatives from CBI, ABI and other industry bodies attending, to discuss the proposals by the European Commission on the extent to which the requirements of the type set out in the Solvency II Directive (Directive 2009/138/EC) should apply to arrangements under the IORP Directive. They key points arising from the debate were as follows:

  • The implications of fully applying pillar 1 of the Solvency II framework to pension funds would be “catastrophic” (Pillar 1 defines the financial requirements for a company to be considered adequately capitalised). In particular, there was likely to be:
    • a substantial total increase in liabilities for companies sponsoring DB schemes (estimated at £300 billion by the NAPF), which may lead to a spike in claims on the Pension Protection Fund (PPF) and burden on PPF rising;
    • a significant move away from equities towards more risk-averse investing, namely government securities and the highest quality corporate bonds, which may have an impact on the real economy; and
    • further closure of schemes, reductions in benefits and increase in member contributions in response to the increased liabilities. 
  • With respect to the “holistic balance sheet” proposals put forward by EIOPA in its response to the Commission’s consultation, it is unclear what the holistic balance sheet will be in practice. (Broadly, the holistic balance sheet is a supervisory assessment tool which takes into account intangible elements whether or not they would be on or off balance sheet in an accounting sense. On the asset side, elements such as the value of employer covenant and PPF compensation and on the liability side, the solvency capital requirements are taken into account). Industry bodies also suggested that the holistic balance sheet was unlikely to be successful in addressing the differences in national rules and markets. 
  • The Commission has not come to a decision on the discount rate to be used to value scheme liabilities. According to Solvency II, a “risk-free” discount rate should be used. In the early stages of Solvency II, the yields on government bonds were assumed to give the best indication of “risk-free”. The EC representatives in the House of Commons debate gave no hint as to the current position on the meaning of “risk-free”.

Since the house of Commons debate, EIOPA has also launched an impact assessment study on its advice (including advice in relation to the balance sheet approach) to the Commission in relation to the Commission’s proposals.