This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- The Pensions Regulator issues its annual funding statement
- Trustees do not owe a fiduciary or equitable duty to the sponsoring employer
- The government gives green light to the introduction of Collective Defined Contribution (CDC) pension schemes
- Disclosures relating to pooled funds – changes from 6 April 2019
- Pensions Ombudsman restricts application of the Supreme Court Brewster decision
The Pensions Regulator issues its annual funding statement
Trustees and sponsors of defined benefit pension schemes should be aware of the Pensions Regulator's expectations set out in its 2019 annual funding statement.
The Regulator notes that it expects all schemes to set a long-term funding target (LTFT) in order to ensure schemes meet the objective of paying the benefits due. This LTFT will generally achieve funding at a level higher than where a scheme is fully funded on a technical provisions basis. Trustees need to be prepared to evidence that their short-term investment and funding strategies are aligned to allow the scheme to become fully funded up to the LTFT.
In addition, the Regulator continues to highlight that dividend payments should not be excessive relative to deficit reduction contributions (DRCs). The Regulator makes clear that it will intervene with schemes whose valuations do not reflect an equitable position relative to other stakeholders, regardless of sponsor covenant. The Regulator would expect, for example, a weak sponsor who is unable to support the scheme to have ceased payment of all shareholder distributions. For sponsors who are "weak" or "tending to weak", DRCs should be larger than shareholder distributions unless there is a strong funding target and short recovery plan.
The Regulator also notes that the median recovery plan is seven years and schemes with strong covenants should have recovery plans which are significantly shorter than this. The Regulator will be engaging with schemes ahead of their 2019 valuations where it considers that recovery plans are unacceptably long.
For more detail on the annual funding statement, please see our briefing on the topic here.
Trustees do not owe a fiduciary or equitable duty to the sponsoring employer
KeyMed (Medical and Industrial Equipment) Ltd (KeyMed) brought proceedings against two of its former directors (the Defendants). The Defendants were trustees of KeyMed's main occupational pension scheme and of its Executive Scheme.
Some years after the Defendants had left its service, KeyMed claimed that they had abused their position as directors and dishonestly breached their fiduciary duties. The case contained a number of allegations but one key (at least, from a pensions perspective) line of argument was that the Defendants had subordinated KeyMed's interests to their own, thereby intending to cause loss by unlawful means. The judge was therefore required to consider the duties owed to KeyMed by the Defendants as trustees (which he did by reference to the contribution rule).
It was noted that there was no authority directly considering the question of whether a pension scheme trustee owed a fiduciary or equitable duty to the employer sponsoring that pension scheme. The judge concluded that the duty of a trustee to act in the beneficiaries' best interests could not be separated from the proper purpose of the trust itself (Re Merchant Navy Ratings Pension Fund  EWHC 448 (Ch) applied). In the case of the contribution rule, it was very clear that the trustees' obligation was to ensure that the employer's contributions were at a level necessary to provide the scheme benefits. Subjecting trustees to a divided loyalty – owing duties to both the beneficiaries and to the employer – “was profoundly undesirable”. In the judge’s view, the critical point was that "a fiduciary should serve only one master".
In the ultimate analysis, therefore, provided the trustees had regard to their primary purpose and did not subordinate it to other interests, they could have regard to the employer's interests. However, that was only to the extent that the employer’s interests did not conflict with those of the beneficiaries – in which case, the employer’s interests would be subordinate.
The case is notable in reaching a conclusion as to whether trustees owe "fiduciary or equitable duties" to a scheme's sponsoring employer and, perhaps surprisingly, there is remarkably little law on this point. The judge came to a clear conclusion that no such fiduciary duty to the employer exists and that, while trustees are entitled to have regard to the employer's interests, they should only do so where these do not conflict with their primary duty.
The government gives green light to the introduction of Collective Defined Contribution (CDC) pension schemes
In its response to the consultation paper Delivering Collective Defined Contribution Pension Schemes the government has set out its plans for introducing legislation to facilitate CDC schemes.
In a CDC arrangement, contributions are invested in a collective fund. The income the member receives is then based on the value of his/her contributions to the fund, but this is not guaranteed. Benefits fluctuate to ensure that the total value of benefits credited to each member is equal to the total value of the scheme's assets.
The government is committed to legislating for CDC schemes and has stated that it will draft fresh legislation to achieve an appropriate framework. It will make clear that CDC schemes are money purchase benefits – the apparent intention behind this being to provide assurances that it is not employers who will ultimately be liable for any shortfall.
The government will initially look to legislate for CDC schemes set up by single or associated employers to be based on the model agreed between the Royal Mail and the Communication Workers Union.
Much like master trusts, an authorisation regime for CDC schemes will be established. CDC schemes will therefore have to be authorised before they can begin to take on contributions. This process, and on-going supervision more generally, will be undertaken by the Pensions Regulator and is still in the throes of development.
Disclosures relating to pooled funds – changes from 6 April 2019
From 6 April 2019, trustees of most occupational defined contribution pension schemes will be required to disclose, upon request, certain information about pooled funds. Such information includes:
- a statement identifying the international securities identification number (ISIN) in relation to each collective investment scheme in which assets are directly invested on behalf of members;
- the ISIN relating to each collective investment scheme directly attributed to each unit-linked contract entered into by the trustees in relation to members; and
- the name given by the manager of the collective investment scheme to the scheme to which the ISIN relates.
The information provided cannot be more than six months old and must be provided within two months of the date the request is made. A member can only request information once in a six month period.
Pensions Ombudsman restricts application of the Supreme Court Brewster decision
Miss A was not married to her partner (Mr D) at the time of his death. Mr D had been a member of the Police Pension Scheme 1987 (the 1987 Scheme) which did not provide for a survivor’s pension for an unmarried partner. In 2006, the Police Pension Scheme 2006 (the 2006 Scheme) came into force which did provide for a survivor’s pension for an unmarried partner. The 2006 Scheme was an opt-in arrangement - a member of the 1987 arrangement had to complete an application form to be admitted to the 2006 Scheme and have their past service from the 1987 Scheme transferred.
On the death of Mr D, it was found that he had never been a member of the 2006 Scheme. Miss A claimed that he had completed an application setting out his intention to join the 2006 Scheme. However, this does not appear to have made its way to the administrator. At the adjudication stage it was decided that there was not sufficient evidence to show that Mr D had completed and sent the paperwork to be admitted as a member of the 2006 Scheme. Therefore, it was the death benefit under the 1987 Scheme which applied. Unlike the 2006 Scheme, the 1987 Scheme did not provide for a survivor’s pension where the survivor had not been legally married to the member.
Miss A further submitted that, in issuing its determination, the Ombudsman should consider the Supreme Court decision in Brewster where a death benefit had been awarded to an unmarried survivor. The Ombudsman, however, held that the Brewster decision was distinguishable on its facts from the present case. This was because the scheme under consideration in the Brewster case allowed a survivor’s pension to be paid to an unmarried partner – in that case, unlike a married member, an unmarried member had to nominate his partner to receive the survivor’s pension. It was the extra administrative burden imposed on an unmarried member to nominate which was therefore deemed discriminatory. However, Miss A's case was different as the 1987 Scheme did not allow for a survivor’s pension to be paid to any unmarried partner.
Miss A’s complaint was accordingly dismissed. However, she was awarded £500 for significant distress and inconvenience arising from the way in which her complaint had been handled.
The case demonstrates the limits of the Brewster decision and highlights that it is not authority for a general proposition that unmarried couples should be treated in exactly the same way as married couples for the purpose of survivor benefits. Ultimately, the survivor benefits payable will depend on what a particular scheme’s rules prescribe.