Pensions developments over the last few months have resembled shifting sands underfoot. This has made it harder for employers and trustees to reach pensions decisions on a range of issues. These developments are notable for their significance, going to the heart of core pensions concepts around which schemes have been designed.
Default retirement age
What do you do as an employer or as a trustee in the wake of the default retirement age abolition? If you are an employer then you will either have to abandon the whole concept of retiring staff at a particular age or, if you are going to stick with a set age, justify the retirement age that you are going to impose in a way that satisfies the law.
Justification is a tricky area. Strictly speaking, the employer must show that the age is objectively justified as a legitimate means of achieving a proportionate aim. With no case law yet on justifying a set retirement age for employees, employers and their advisers are left looking for inspiration from other attempts to defend actions/policies that would otherwise fall foul of age discrimination laws.
From a pensions perspective, how would the scheme approach benefit provision for people staying on beyond normal retirement date (for example, would late retirement factors be applied or should a link to final salary be maintained)? Will flexible retirement be on offer? If a defined benefit scheme decides to get rid of its normal retirement date, how would funding be targeted? What about any life-styling features used by defined contribution schemes: does the age at which investments are moved into less risky territory need to change?
These are issues that schemes will need to think about in conjunction with their advisers. Any arrangements would also need to take account of the auto-enrolment requirements being phased in.
To read more about the default retirement age abolition, please see our alert: 'Default retirement age: last orders please'.
State pension age (SPA)
There remains a certain amount of confusion about the next SPA hike: how and by when will that hike happen? The Government announced a while ago that it would be bringing forward the planned increase from age 65 to age 66 so that the hike would be implemented by April 2020. The vehicle for this change is the Pensions Bill. There appeared to be a delay in the Bill's progress, accompanied by rumours in the press concerning possible changes to the next SPA hike (in recognition of the impact that an accelerated hike would have on women in their fifties, who would only have a short period within which to plan for a delayed retirement). The Government has since decided to stick with its acceleration timetable.
The SPA is directly relevant to those occupational pension schemes designed with some measure of State pension integration (for example, members retiring before SPA experiencing a reduction in scheme pension on reaching SPA, to take account of the fact that they will start receiving their State pension). The Budget announced that future increases (aside from those already planned for) will be automatic and stem from independent longevity reviews so this is likely to be an ongoing issue.
As a first step, it would probably make sense for trustees to start looking at any provisions in their rules intended to refer to SPA, to establish whether the future hikes in SPA will apply automatically (where the provision simply cross-refers to the legislation) or whether an amendment would be needed (for example, where the provision refers to a particular age).
April 2012 brings with it the abolition of rights accrued by virtue of a scheme deciding to contract-out from the State second pension on a money purchase basis, known as protected rights (PRs). Pensions legislation has allowed schemes to limit what counts as PRs and most schemes will have done this. In order to achieve that result, schemes had to comply with legislation requiring them to identify what counts as PRs. Unfortunately, most schemes have re-stated the requirements in the rules rather than cross-referring to the legislation.
The main concern for schemes which have written the PR requirements into their rules (PR rules) is that they will not be affected by any abolition achieved solely through the removal of references to PRs in legislation and the cessation of contracting-out certificates. The only way to make the abolition reach those schemes would be through the imposition of overriding legislation (currently being considered by the DWP). Without an override, schemes with PR rules are likely to encounter obstacles to removing those rules (for example, restrictions on amendments contained in section 67 Pensions Act 1995 and any restrictions included in the scheme amendment power). Schemes with PRs will be required to disclose certain pieces of information regarding the abolition. Until there is more clarity on what the abolition means (especially the question of whether there will be any override), it is hard to know what shape that disclosure should take.
Even where the abolition does work for a scheme, how should defined benefit schemes with PRs go about converting those ex-PRs into what the legislation refers to as 'ordinary scheme rights'? This question is key and will require careful consideration by trustees and their advisers.
The Government is also looking at whether to abolish contracting-out on a defined benefit basis. This has been put forward in the context of proposals to change the State pension scheme in 2015. One proposal moots the possibility of moving from a two-tier arrangement to a single tier (although retaining two tiers is also on the table). There is no indication yet of how any abolition might be achieved, however. For instance, how will accrued contracted-out rights be treated?
The question of how to equalise guaranteed minimum pensions (GMPs) remains open, at least at present, and that uncertainty is likely to have played a part in schemes being slow to convert GMPs into normal scheme rights (available as an option since April 2009). As with the abolition of PRs, an abolition of defined benefit contracting-out could present a natural opportunity for trustees and employers to discuss any existing issues or concerns regarding scheme design.
In the meantime, contracting-out on a defined benefit basis is about to become less attractive as a result of planned reductions in National Insurance rebates from next April. Schemes' administration teams should be made aware of this forthcoming change.
When can decisions be set aside?
A number of cases over the years have ruled that where the effect of trustees exercising a discretionary power is different from that which they intended then the court will set aside what the trustees have done if it is clear that they failed to take into account all relevant considerations, or took account of irrelevant considerations. This has been referred to as 'the rule in Hastings-Bass' (HB rule), after the case of that name. The Court of Appeal* has recently taken a different view, however, about what that case actually decided. After considering several cases relevant to this point, the court decided that:
- A decision is void (meaning struck out, as if it never existed) only if the trustees have acted outside the scope of the power in question.
- A decision cannot be voidable (meaning that the decision is capable of being set aside if the court so decides) unless there is a breach of fiduciary duty. The duty to take account of relevant (and not irrelevant) matters is a fiduciary duty.
- However, trustees acting on the advice of professional advisers, whose advice is materially wrong and results in the trustees not having regard to a relevant matter, will not be in breach of their fiduciary duty in the absence of any other basis for a challenge.
The HB rule has been redrawn. In the complex world of pensions little is done without advice. If the advice is not limited to a small corner of whatever the trustees are considering and they follow that advice then (in the absence of any other challenge) it would appear that the HB rule is off limits.
Another aspect of this decision is the likely conduct of future cases. Even where the HB rule appears to be available, how many trustees will take the initiative in future proceedings in view of the need to show a breach of fiduciary duty? The judge acknowledged that trustees will be less likely to bring cases themselves. However, he contemplated (for example) trustees seeking directions from the court where a beneficiary alleges a breach of trust but doesn't bring his own proceedings.
This ruling has already been referred to in the recent case concerning the Prudential pension scheme's discretionary increases to pensions in payment, but only with regard to the extent to which trustees must familiarise themselves with the scope of their powers. The Pitt decision was handed down a few months ago so we must wait to see its full application in another case.
* Pitt v Holt/Futter v Futter
A mixed bag of uncertainty
The above big questions for schemes are by no means exhaustive.
Auto-enrolment is on the horizon, particularly for larger schemes (which will be required to comply first). How will each employer meet its auto-enrolment responsibilities? Will trustees be asked to put in place any tweaks to existing schemes?
Incentive exercises continue to make the news, with reports of Pensions Minister Steve Webb meeting industry figures to discuss bad practice. Current or planned incentive exercises will need to be squeaky-clean. This has always been the case, but it is perhaps more important than ever to be in a position to back up due process with full paper trails.
The debt on employer laws are the subject of an informal consultation, looking at two possible changes. One proposal concerns the possible use of guarantees (which must meet certain conditions) to avoid triggering a debt. Another proposal concerns extending the period of grace that applies once an employer has ceased to employ any active members from the current 12 months to 24 or 36 months. Any new regulations implementing these changes are planned for October. The outcome of that consultation, and any formal consultation following on from it, may well impact on pension scheme planning for defined benefit arrangements.
Finally, family leave is also in the frame. Additional paternity leave was introduced for all births expected/adoptions scheduled for 3 April 2011 onwards. The Government is now consulting on plans to replace that leave with shareable parental leave, some of which would be paid, alongside consequential changes to maternity leave. It is too early to say how any changes may impact on scheme rules, but some amendment may be required.