CPI for RPI
After a court decision, more schemes may now be able to switch from RPI to CPI for revaluation and pension increases. The change can reduce scheme liabilities substantially.
The High Court’s decision in the Arcadia case may be helpful to schemes with similarly worded rules that are considering the change.
The scheme rules provided for revaluation and pension increases to be based on an index defined as “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of [HMRC]”.
It is quite common for rules to define the reference point for inflation in a way that allows for it to change. But, unlike others, these rules did not say who was to select any new measure.
Even so, on the facts of the case, the judge was willing to imply a decision-making process into the rules, exercisable jointly by the trustees and the employer. He also held:
- they could make a change even though RPI continues to exist,
- CPI was a “similar” index to RPI and
- there were no grounds on which HMRC could consider CPI “unsatisfactory”.
Finally, the judge agreed with the decision in the QinetiQ case a couple of years ago that s.67 of the Pensions Act 1995 did not prevent the change being made in relation to benefits already accrued. That section of the legislation, he said, protected members’ rights to rates of revaluation and pension increases consistent with the scheme’s definition of “index”, but not specifically to rates based on RPI.
In QinetiQ the court allowed a change to CPI where the measure for inflation was defined as “RPI …. or any other suitable cost of living index selected by the Trustees”.
Arcadia goes further than QinetiQ in reading in machinery for making a change and in deciding HMRC would have no grounds for considering CPI “unsatisfactory”.
Schemes with rules that have the same or similar wording to the Arcadia scheme may want to review the possibility of switching indices.
Investment and non financial issues
When carrying out their duties on investment, trustees should take account of environmental, social and governance (ESG) factors where they are financially material, the Law Commission says The Commission says trustees are required to balance returns against risks: “When investing in equities over the long-term, trustees should consider, in discussion with their advisers and investment managers, how to assess risks. This includes risks to a company’s long-term sustainability”. ESG risk factors, like many other kinds, can go to an investee company’s ability to prosper in future.
But the law, the Commission says, does not prescribe a particular approach: “It is for trustees’ discretion, acting on proper advice, to evaluate which risks are material and how to take them into account”. The Commission observes that the ESG label is ill-defined and is conventionally taken to cover a wide range of risks. For trustees, the key distinction is whether a risk is financially material, not whether it is categorised as ESG.
The Commission’s guidance note “Is it always about the money? Pension trustees’ duties when setting an investment strategy” is brief, clear and, for trustees in particular, well worth reading: http://lawcommission.justice. gov.uk/docs/lc350_fiduciary_duties_guidance.pdf
The guidance goes on to consider how the law stands on ESG considerations influencing investment decisions for non-financial reasons e.g. to mark disapproval of a particular industry.
The Law Commission is an independent statutory body tasked with reviewing whether the law in particular areas is fit for purpose and recommending changes. It is highly respected and courts are likely to take its views to be authoritative.
No breach of duties of good faith
The Pensions Ombudsman (PO) has rejected a claim that an employer breached its duty of trust and confidence to scheme members when it decided not to grant a discretionary annual pension increase after 20 years of doing so.
It would have been surprising if the decision had gone the other way. Schemes depend on a balance between duties and discretions, and need the distinction to be recognised. To have found a breach of the duty of trust and confidence here would have lowered the threshold too far.
The PO decided that neither the history of increases nor an alleged oral assurance of their continuation raised members’ “reasonable expectations” that they would continue in future. Had the employer engendered such expectations, it would not have been lawful for it to thwart them. This is the argument that succeeded in the IBM case but here it failed, apparently by a margin.
Elements of the PO’s decision included:
- under the scheme rules, pension increases were clearly discretionary, unlike the benefits IBM sought to change. As a result, it was hard for the complainant to argue the employer had acted with the irrationality or perversity required to breach its duty of trust and confidence,
- a history of discretionary increases was insufficient on its own to raise any “reasonable expectations” of their continuation,
- there was no documentary evidence of the assurance (said to have been given eight years before increases ended) other than the complainant’s recollection,
- nor would a mere statement of intention to continue increases without some additional commitment or guarantee have been sufficient to ground the claim and
- although the scheme was big and the covenant strong, the employer was entitled to consider its own interests in exercising its discretion. Notably there was a deficit of some £700 million.
DC: Independent Governance Committees
If the Financial Conduct Authority’s (FCA) proposals are adopted, the main duties of the independent governance committees (IGCs) providers of contract-based workplace schemes will be required to set up from April 2015 will be:
- to act in the interests of scheme members;
- as their main focus, to assess value for money for members;
- to raise concerns within the provider, including (if the IGC sees fit) with the firm’s board;
- as the case may be, to escalate concerns to the FCA, to scheme members and employers, and to make its concerns public.
Where the IGC raises concerns, the provider will have a “comply or explain” obligation.
IGCs are among a number of measures due in force in April 2015 designed to raise the governance and performance of DC schemes.
Consultation on the FCA proposals closes on 10 October. It aims to publish its requirements in final form in January 2015.
Trustees of occupational DC schemes will be subject to a parallel set of requirements promulgated by the Pensions Regulator. The idea is to have a core set of minimum governance standards across trust and contract-based schemes.
In more detail
In gauging value for money, IGCs will:
- consider the amount and transparency of all costs and charges;
- consider whether default investment strategies are designed in the interests of members, with a clear statement of aims and objectives;
- ensure the provider reviews regularly the characteristics and net performance of investment funds available to members, and makes any necessary changes and
- check a scheme processes its financial transactions promptly and accurately.
IGCs will have a minimum of five members, with a majority, including the chair, independent of the provider. “Independent” will mean not being an employee in the last five years and not having had a material relationship with provider for three years.
Smaller providers with less complicated workplace schemes will have less intrusive “governance advisory arrangements” to comply with.