Regulator (

Guidance on integrating risk management

The Regulator has published a guide  on  integrated  risk management  that  “provides  practical  help  on  what  a proportionate and integrated approach to risk management might look like and how trustees can use it as part of their plans for meeting their scheme’s  funding objectives”. It should be read alongside the DB Funding Code of Practice.

The DB Funding Code says that integrated risk management (IRM) is an internal control trustees should have which “forms an important part of good governance”.

IRM is: “a risk management tool that helps trustees identify and manage the factors that affect the prospects of meeting the scheme objective, especially those factors that affect risks in more than one area. The overall strategy the trustees have in place to achieve this objective will be dependent on the scheme’s and employer’s circumstances from time to time”. The IRM identifies risk, looks at approaches for monitoring risk and considers what should be done if a risk materialises.

Trustees should consider putting an IRM in place wherever they are in their valuation cycle. The IRM should look at the 3 fundamental scheme risks: funding, investment strategy and employer covenant and consider the relationships between them. The Guidance looks at the practical steps trustees could take to do this.

Where trustees conclude that the overall profile of the scheme is outside their or the employer’s risk appetites, they should work with the employer to examine ways of strengthening the employer’s covenant or modifying the funding and investment strategies to bring the scheme back within the relevant risk appetite. Risks also need to be monitored and, as a  minimum, trustees should  consider conducting high level monitoring at least once a year.

Action points: There is not much new in this guidance. Nevertheless, DB trustees should table it for consideration at an upcoming meeting and consider what further documentation they may need to produce.

Revised draft DC Code of Practice

This will replace the existing DC Code and incorporates the new DC Governance requirements. It will be supported by additional “how to” guidance (yet to be issued).  The draft is expected to change when the final version is issued, but some of the points to note currently are:

The trustee board: The Regulator expects trustees: “to conduct themselves with honesty and integrity, including in matters that arise outside their trusteeship”.

Scheme management skills: Trustees must understand the scope of delegations to third parties and the role of advisers. They should also understand the terms of service contracts and “regularly monitor the performance of… service providers”.

Administration: Administration should be a substantive item at every trustee meeting and trustees should ensure administrators have appropriate experience and expertise. In addition, there should be a “business continuity plan” in place which is reviewed at least annually.

Trustees should understand employers’ “responsibilities, and work with them to ensure they also fully understand those responsibilities”.

Investment governance: Trustees should assess the extent to which, and in what circumstances, any loss of scheme assets might be covered by a compensation scheme such as the Financial Services Compensation Scheme.

Value for members: Trustees are required to assess the extent to which charges and transaction costs represent value for money. Merely complying with the charges cap (where that applies) does not mean that an arrangement provides value for money.

Communicating and reporting: The chair’s annual statement should “provide a meaningful narrative of how, and the extent to which, the governance standards have been complied with”.

Action points: This Code of Practice is currently only a draft. The final version is due to come into force in May 2016, together with significant additional guidance. Trustees with DC benefits, including AVCs, should ensure that reviewing the DC Code and guidance is on the agenda for their third quarter meetings.


New framework for data transfers to US

Last year, the European Court decided that the existing safe harbour regime that allowed transfers of data to the US was invalid. However, the EU agreed a grace period which expired on 31 January 2016.

A new agreement has been reached which, when it comes into force, “will protect the fundamental rights of Europeans where their data is transferred to the United States and ensure legal certainty for businesses”. It is intended to be tougher than the previous regime and will provide stronger obligations on US companies to protect the personal data of Europeans. There will also  be stronger monitoring  and enforcement within the US. There is a commitment that US public authorities’ ability to access personal data will be subject to clear condition and oversight.

Action points: Trustees that routinely transfer data to the US (because for example administrators or employers are based there) need to continue to monitor whether data transfers meet EU requirements. Prior to the new agreement coming into force, data can still be transferred using model contract clauses and binding corporate rules (which were always alternatives to the safe harbour). UK guidance is still awaited.

Tax (

Newsletter 74

HMRC is concerned that members affected by  the reduction in the lifetime allowance due to take effect in April 2016 are agreeing salaries and pension savings for 2016/17  which  may  result  in  a  lifetime  allowance  tax charge. As a result, HMRC  is asking  administrators  to make “members aware of the change [and] let… members know that lifetime allowance protection regimes will be available to protect their pension savings when the lifetime allowance reduces to £1 million from 6 April 2016”. They have produced wording which can be used for members to explain the change and the new protection regimes.

Because the on-line service for applying for the new protective regimes will not be available until July 2016, HMRC are introducing a temporary process for members to apply in writing for protection. The newsletter gives details of this process.

There is more information on when and how scheme administrators should report flexible DC payments to HMRC, including the information needed where payment is made to a trustee in bankruptcy.

Action points: Trustees should consider communicating with members to ensure that they are aware of the lifetime allowance changes in advance of 6 April 2016. Any accrual on or after 6 April 2016 might result in tax protections being lost.

Countdown bulletin 12

Schemes wanting to use HMRC’s scheme reconciliation service must register for it before 6 April 2016. From April 2016 a new GMP service will go live. HMRC says that this service will “provide… Administrators… with accurate GMP calculations, contracted-out contributions and earnings  information on a self-service basis. In order to gain the maximum benefit from this service, we recommend  that [they] firstly request and reconcile their scheme data using the Scheme Reconciliation Service”.

From October 2015, DWP have included a Contracted-out Pension Equivalent (COPE) amount within State Pension statements. This is intended to help members understand why they will not receive the full state benefit in respect of periods of contracted-out service. It is an  amount “equivalent to the additional State Pension they would have got if they hadn’t been contracted-out”. It will represent periods of contracted-out service in all schemes.

HMRC explains that, although members should usually receive at least the full COPE amount from their private pension arrangements, they may not do so where, for example: “their scheme had financial difficulties and is underfunded; or their rights were transferred to a scheme that wasn’t linked to salary and investments in that scheme didn’t perform well” or if they were contracted-out on a protected rights basis.

Action points: Trustees of schemes that are currently contracted-out or which were contracted-out and have not yet carried out a GMP reconciliation exercise, should ensure that they have registered for the reconciliation service before 6 April 2016. Trustees should be prepared for questions from members on what the COPE amount actually means.

Ombudsman (

Belk – rejection of members’ claim that recovery  of overpayment was “illegal”

In this case, the member contended that the reduction of his pension in payment to the correct rate was “illegal”. He disputed recovery on the basis that he had a change of position defence (apparently arguing that he would have spent some of the overpayment on ice-creams for his grandsons, beer, and lobster suppers).

The Ombudsman held that as the member had been unable to supply any evidence of this extra spending, a court would require him to return the overpayment, and the administrators were entitled to make recovery. The Ombudsman said: “In my opinion, it was reasonable for the Respondents to have asked Mr Belk to prove that he had spent the money on something which he would not otherwise have done ... I would expect the Respondents to be pragmatic and not apply a very strict standard of proof though when doing so.”

The member also complained that the trustees had incorrectly terminated the scheme’s Internal Dispute Resolution Procedure (IDRP). The trustees explained that at stage 2 of the IDRP they had confirmed the decision at stage 1, but said that as the member would not accept any further explanation and could not be brought closer to a mutually agreeable position, they would not deal with every point again. Instead, they had invited the member to seek independent adjudication from TPAS, or the Ombudsman, since the mediation process had run its course. The Ombudsman said that he accepted the trustees’ reasons for completing stage 2 in such a way, in order that the member could refer his complaint to the Ombudsman. The trustees had not terminated the IDRP incorrectly.]

Action points: The Ombudsman’s approach to overpayment cases lacks consistency, but this determination confirms that it is reasonable for trustees to expect some evidence of a change of position defence and in the absence of any such evidence, they can reclaim an overpayment. 


Dutton & Ors v FDR Ltd (High Court)

The scheme was established in 1972 and provided for pensions in payment to increase by 3% pa compound. In June 1991 it was amended to provide for annual increases at the lesser of 5% and RPI (“5%/RPI”) in respect of past aswell as future service. The scheme was administered on that basis  until 2012.   It was  accepted that the change made in  1991 was  not effective for past service as  the amendment power protected accrued rights.

The employer argued that the effect of this was that members’ rights in respect of pre-1991 service were protected by an underpin which entitled members to increases at the higher of 3% fixed or 5%/RPI, calculated cumulatively on their initial starting pension. This would mean that members would commonly receive increases of significantly less than 3% per annum in respect of pre-1991 service, due to higher increases received by them in other years. The trustees contended that members were entitled to the better of 3% fixed and 5%/RPI, applied on an annual basis, to pensions attributable to pre-1991 service.

The judge preferred the trustees’ argument, having regard to the clear language of the scheme’s pre-1991 increase rule and the impractical consequences of the employer’s construction. The trustees’ construction avoided technicality and would have been straightforward to operate in 1991, the employer’s construction was “unnatural” and “not the meaning which would be conveyed to a reasonable person with all the relevant knowledge and background”.

Action points: This  case (which is being appealed) provides welcome confirmation for trustees struggling over the interpretation of rules that the court will go for natural interpretations, avoiding overly complex ones.

Re BCA Pension Trustees Ltd (High Court)

This was a claim made under section 48 of the Administration of Justice Act 1985, which applies to any question of construction relating to a trust. It permits trustees to obtain a written opinion from a senior barrister and then ask the Court to make an order authorising the trustees to follow the opinion when administering the trust.

A 2011 deed had accidentally deleted the provision in the increase rule which set out which tranche of pension was to be increased by RPI/5%, and which was to increase at 3% fixed. The trustee sought an order under section 48 that it could administer the scheme on the basis that the inadvertent deletion had not occurred. They relied on an opinion from Leading Counsel which stated that the lack of direction in the rule made it unworkable and the court could conclude that something had gone wrong with the drafting. Reading the deleted wording back in would make sense of what was otherwise a nonsensical provision.

The judge agreed. It was self-evident that there had been a mistake with the drafting. Both on its face and read in light of the background and context, the rule no longer made sense. The judge also agreed that the mistake and corrective construction necessary to cure it were obvious. He held that the rule should be construed by reading back in the accidentally-deleted wording.

However, an order  under  section 48 does not  bind members or beneficiaries. This order would protect the trustee against complaints that it had wrongly administered the scheme, but members were free to argue that a different construction should apply.

The judge also said: “if an order… directly relates to the level of benefits that will be payable to members of a pension scheme, I think that members should be told of the order unless there are compelling reasons to the contrary.”

Action points: Few orders are made on the basis of section 48, but where the position is clear and reflects what members have always understood to be the case, it may provide a cost effective solution.

Alexander & Ors v Pattison & Sim & Ors (Court of Sessions - Scotland)

The trustees  sought to recover outstanding contributions from a former employer, arguing that it was liable to contribute to the scheme deficit following a 2009 rule amendment. The recitals to the amending deed confirmed that the required amendment formalities had been met. However, the employer questioned whether the formal amendment procedure set out in the original trust documents had been followed in relation to this deed, and in relation to other deeds going back as far as 1980.

The Court of Session held that it was not for the trustees to establish that amendments had been properly effected; it was for those who challenged the regularity of past procedures to establish that proper procedures were not followed. Without such a rule the sensible administration of pension funds, and indeed other long-term contracts and trusts, would be rendered unacceptably difficult. The court also noted the general principle that documents regulating a pension scheme must be interpreted in such a way as to give the scheme practical effect.

Action points: Although this is a Scottish case, the presumption of regularity that it is based on is also a principle of English Law. The case shows the importance of recording proper procedure has been followed in recitals to deeds.


2016/17 Levy Policy Statement, Determination and associated documents

The  final  determination  and  associated  documents  for 2016/17 are, in the PPF’s words: “very substantially unchanged from the previous year”.

Contingent assets: there are no changes in the overall approach from 2015/16. Standard form type C contingent assets (letters of credit and guarantees) can now be provided by insurers, as well as banks.

Asset backed contributions (ABCs): The ABC guidance sets out where an updated rather than a new valuation is required. It also says that it is acceptable for trustees to use previous legal advice, provided the  underlying  legal position has not changed. In addition, a valuer may now value an ABC asset as “no less than £X…” rather than a specific figure.

Last man standing (LMS) schemes: Following its promise to claw back underpaid levy, the PPF has identified schemes that incorrectly described themselves as LMS in previous levy years, and will contact them shortly. This includes schemes where no action is to be taken, due to the limited sums involved. A scheme selecting the LMS option for 2016/17 will be asked whether they have received external legal advice.

Mortgage/charge certification: This is one area where there are some changes for 2016/17 and schemes considering certification should ensure that they consider the new requirements carefully.

Certificates submitted for 2015/16 in respect of rent deposit deeds, pension scheme mortgages, re-financing and public credit ratings do not  need to be re-submitted.  New certificates will be required for schemes claiming mortgage exclusions on the basis of immateriality or where a credit rating has not been carried forward.

Assessing insolvency risk: the PPF will allow interim accounts to be submitted where an entity has only been trading for a short period and Experian would otherwise be unable to score it.

Action points: The deadline for most actions in relation to the 2016/17 PPF levy is midnight on 31 March 2016. Trustees who want to take any action to reduce the 2016/17 levy need to ensure that they allow enough time to meet the deadline.

Legislation (

Finance Act 2015

This Act contains provisions dealing with:

Tapered annual allowance: A taper will be introduced from 6 April 2016 for those with incomes above £150,000. For each £2 of income above £150,000, the annual allowance will reduce by £1 down to a minimum of £10,000. Income includes employer pension contributions. Where income is below £110,000, the taper will not apply irrespective of employer pension contributions (except for salary sacrifice arrangements entered into after 8 July 2015).

Alignment of pension input periods: All Pension Input Periods (PIPs) open on 8 July 2015 ended on that date. The current PIP runs from 9 July 2015 to 5 April 2016 and then all PIPs will be aligned with the tax year. The legislation provides for an annual allowance of £80,000 for the mini-tax year from 6 April 2015 to 8 July 2015 and a DC annual allowance of £20k. There is a second mini-tax year from 9 July 2015 to  5 April 2016  which has  an  annual allowance of nil but some unused annual allowance can be carried forward for this period. There are also provisions dealing with the calculation of pension input amounts.

Death benefits: The 45% special lump sum death benefit tax charge will no longer apply in most cases where a lump sum is paid after 5 April 2016. Tax will be payable at the recipient's marginal rate. The tax treatment of DB lump sum death benefits is brought in line with other lump sum death benefits, so where they are not paid out within two years, the lump sum will not be an unauthorised payment but will generally be taxed at the recipient’s marginal rate.

Action points: Scheme administrators will need to be on top of the annual allowance changes to ensure that the right information is communicated to scheme members. They will also need to have processes in place so they can determine if the taper applies.

The Pensions Act 2014 (Commencement No. 7) and (Savings) (Amendment) Order 2015

This order makes various changes to the legislation that will apply to formerly contracted-out schemes after 6 April 2016. In  particular,  there  is  a  new  definition  of  “Reference

Scheme Minimum Benefit” which is a “a salary related benefit which is defined by reference to section 12B of the 1993 Act (reference scheme) and which, under the provisions of the scheme, will be provided as a minimum pension payable to the member”. The reference scheme test provisions in the Pension Schemes Act 1993 will continue to have effect for schemes that were contractedout salary related schemes and which provide Reference Scheme Minimum Benefits in relation to contracted-out service prior to 6 April 2016. 

Action points: These Regulations are relevant for schemes that provided a reference scheme test underpin (particularly DC schemes). Trustees with such benefit structures will need to consider the impact of the Regulations on their scheme.  


Revised Code of Practice on Incentive Exercises: The Code was introduced in 2012 and is voluntary. It sets out the way in which incentive exercises (such as pension increase exchanges and enhanced transfer values) should be carried out to ensure members make informed choices. Generally it will be the employer’s obligation to consider the Code, but where an exercise is initiated by the trustees, it is their responsibility to consider compliance.

The 2016 version is similar to its predecessor but does contain some changes. In particular, there is now a “Proportionality Threshold” of £10,000 for transfer values and lump sums, or £500 p.a. for pension. Where the value being converted, transferred or modified falls under that threshold, the Code does not require the provision of advice or guidance, although guidance should still be made available to all who want it.

The Code is not intended “to apply generally in relation to exercises associated with winding-up, on the basis that trustees can be expected to set terms for all options appropriately in the context of the wind-up. Therefore, in many cases, wind-up lump sums can be expected to fall outside of the scope of the Code. However, all parties should be mindful of the principles of the Code… to ensure that members’ interests are appropriately protected.” Further consultation is expected on winding-up lump sums.

Action points: Trustees involved in incentive exercises should ensure that they consider the provisions of the new Code for offers made on or after 1 February 2016.