1. Budget 2014 changes: Statement on pension flexibility and changes to the Finance Bill 2014

Following the changes announced in the Budget 2014, HMRC has issued a statement that where a member has taken a pension commencement lump sum (PCLS) and bought an annuity but is within the increased trivial commutation limit of £30,000 (in relation to a member's overall pension savings) or £10,000 (in relation to a pension pot in a single pension arrangement), the member will now be able to commute their pensions benefits under these new trivial limits. This applies even if the member has taken the PCLS and bought an annuity but has then cancelled the annuity contract within the cooling off period and entered into a drawdown with a pension scheme. It also applies where the pension scheme has paid the PCLS and the annuity contract is set up but the total pension rights are within the new trivial limits - in these circumstances the annuity contract must be turned into a lump sum, which is taxed, and not cancelled.

HMRC also states that legislation will be introduced by the government in the Finance Bill 2014, broadly, to the effect that individuals who have taken a PCLS will be able to wait until April 2015 when the flexibility provisions that are currently under consultation (i.e. the changes enabling members to take their entire DC pot as a lump sum subject to the marginal rate of income tax) come into in force. The effect of pensions legislation currently is that if an individual has taken a PCLS, they must buy an annuity, drawdown or receive a scheme pension within six months of taking the PCLS. The changes, when they have been legislated for and are in force, will enable members who have taken their PCLS to wait until April 2015 to take the remainder subject to the marginal rate of income tax.

Comment

It is easy to understand how a member may be able to take their benefits under the new trivial limits when they have entered into an annuity they can cancel within the cooling off period. However, it is likely that HMRC's statement that, where a member has bought an annuity and their benefits are within the new trivial limits, the annuity contract must be turned into a lump sum will only be applicable if the terms of the annuity allow this to be done unless overriding legislation is introduced under the Finance Bill 2014. The FCA has, however, issued guidance (intended to cover the period until April 2015) which recommends that pension providers should take action to allow customers to access their pension funds as cash if they decide to do so under the new limits relating to 'small pots'. It also suggests that pension providers should be making changes to their processes to ensure customers are not put at a disadvantage in the period before the April 2015 changes. However, this guidance is not intended to apply to customers who have purchased an annuity or income drawdown product before Budget 2014 and where the cancellation period has expired.

Cases

  1. High Court holds that thirty pension deeds were ineffective and that scheme members were not 'estopped' from denying that those deeds were valid

In Christopher James Briggs & others and Gleeds (Head Office) and Gleeds (UK) and others [2014]EWHC1178(Ch), the High Court has held that members of the Gleeds Pension scheme were not prevented from denying that some 30 deeds (including deeds of amendment and deeds of appointment and retirement of trustees) were validly executed. The documents in question had not been validly executed as they failed to comply with the execution formalities for deeds set out in the Law of Property (Miscellaneous Provisions) Act 1989, in that the Gleeds' partners' signatures to the deeds had not been witnessed. The decision has serious implications for the scheme, not least that the cost cutting measures purportedly introduced by the deeds of amendment had not been effective, resulting in a significant increase in the scheme's on-going deficit and that some 20 years of the scheme's history may now have to be unravelled and benefits recalculated on the basis that the deeds are not valid. In light of this and given that the deeds were compliant with all other execution requirements other than that the partners' signatures had not been witnessed, the judgment seems quite harsh. Although just 40 pages long, the judgment also packs in some interesting points around construction of accrued rights restrictions in the amendment powers often found in scheme's trust deed and rules. For our briefing on the decision, click here.

  1. High Court develops the employment law and pension law duties of good faith in the context of closure to future accrual and pensionable pay agreements

The Court has found that IBM UK Holdings Limited, the Principal Employer of two IBM defined benefit pension plans, breached its duty of good faith to members of those pension plans. The case relates to proposed changes to the Plans that involved closing them to further accrual and freezing increases to pensionable pay for a limited period. The High Court found that these changes "confounded" the "reasonable expectations" of members that their benefit accrual in the Plans would continue into the future, except where there was a change in financial economic circumstances of the business. These reasonable expectations had been created by communications made by IBM to members directly and via the Plan trustees during the course of two previous successive changes made to members' pension arrangements. The Court also found that IBM had breached its good faith duty to employees over the way in which it had consulted with the employees in relation to the proposed changes to their pension arrangements. For our briefing on the decision, click here.

  1. Court of Appeal holds that a deed of adherence could not be construed so as to give new scheme members a lower scale of benefits

In Honda Motor Europe Limited and another v Powell and another [2014] EWCA Civ 437, the Court of Appeal has held that construction was not the appropriate remedy to interpret a deed of adherence in such a way so as to ensure that the correct scale of benefits applied to a new class of members (nor could the deed be interpreted as an amendment to the scheme rules to that effect). The deed extended the benefits of a pre-existing scheme to a new class of members. Though a different scale of benefits was intended to apply to those new members, the deed made no mention of this new scale and the new scale was not formally incorporated into the trust deed and rules until 1998, resulting in a significant unintended liability. For our briefing on the decision, click here.

Pensions Ombudsman

  1. Ombudsman partially upholds a pensioner's complaint in relation to a RPI/CPI change

In Anderson (PO –2008), the Pensions Ombudsman has partially upheld a complaint by a pensioner member of the Cromwell Hospital Retirement Benefits Plan in relation to a switch from the Consumer Price Index (CPI) to the Retail Price Index (RPI) as the basis for determining inflationary increases to pensions in payment.

Background

There has been a statutory requirement from April 1997 for pensions paid from occupational pension schemes to be increased by a method known as Limited Price Indexation (LPI) for benefits accrued after 6 April 1997. Under this method, pensions are to be increased by, broadly, the lower of the annual increase in inflation over the preceding year and a specified limit. The statutory inflationary measure for these purposes was RPI (but from 2011, this was changed to CPI) and the statutory limit was 5% ("5%LPI") reduced to 2.5% ("2.5% LPI) in April 2005.

Facts

Mr Anderson retired from the plan and started to take his pension in 2008 and until 2011 he received increases of:

  • 3% on the pension in excess of GMP accrued before April 1997;
  • RPI increases subject to a 5% cap on pension accrued after then.

Following the change in the statutory basis relating to pension increases from RPI to CPI in 2011, Mr Anderson's post April 1997 pension was increased in line with CPI, rather than RPI. Mr Anderson complained about the change, arguing, among other things that under the scheme rules , he was entitled to increases based on RPI and that the Trustees could not change the inflationary basis retrospectively.

The Trustees position was as follows:

  • The Plan rules provided for fixed increases to pensions in payments at the rate of 3% a year.
  • When the Pensions Act 1995 introduced the requirement for increases to pensions by 5% LPI, the scheme provided 5% LPI increases subject to (as required under the rules) an underpin of 3%.
  • From 6 April 2005, when the minimum statutory increase was reduced to 2.5% LPI, the Plan continued to be administered on the basis of 5% LPI. This was not achieved by way of an amendment to the rules but through the exercise of the augmentation power under the scheme's rules (which requires the employer's agreement). When the statutory basis for the measure for inflation was changed by legislation to refer to CPI from 2011, the trustees followed the legislation (as they are bound to do) and so awarded increases of the lower of CPI and 5% - this change, they argued, was automatic.

Determination

The Pension Ombudsman agreed with the trustees that the rules only provided expressly for 3% annual increases to be provided. He also agreed that there was no mention in the rules that member's pensions would be increased by reference to RPI. RPI was mentioned in the rules in relation to Inland Revenue limits; however, the Ombudsman agreed with the Trustees (and not Mr Anderson who argued otherwise) that a mention of RPI in connection with Inland Revenue limits was specific to that rule and did not have application elsewhere. Consequently, there was no right, as Mr Anderson had argued, for increases to be based on RPI under the rules of the Plan.

However, as for the post 2005 tranche of benefits, as the statutory minimum increase was 2.5% LPI, the scheme could not apply this without an amendment to the rules as the rules provided for a 3% fixed increase, which was always going to be greater than the post 2005 statutory minimum. Whilst "arguably", a decision to retain the 5% limit had been done by exercising the augmentation power, the Ombudsman was not convinced that that decision involved a decision to use the statutory index as may be amended; he doubted that the Trustees would have considered the issue at the time

The Ombudsman therefore directed Cromwell Hospital and the trustees to actively decide the statutory increases below 5% they should apply to the post-2005 tranche of benefits. In the event that the increase decided is higher than that already paid (ie because BCH and trustees now decide that RPI should be maintained), past additional instalments with simple interest should be paid to the member.

Comment

There have been a number of cases and complaints before the Pension's Ombudsman challenging the decision by the scheme to switch the inflationary index from RPI to CPI for the purposes of revaluing deferred pensions and increases to pensions in payment. However, most of those cases have been based on members arguing that they had effectively been promised that RPI would be maintained. Whilst Mr Anderson did try to argue this, the Ombudsman turned down his complaint to that extent, the issue here is different in that the rules only provided for fixed 3% increases and had never been amended in light of the Pensions Act 1995 requirements. The case highlights the importance of ensuring that any switch from RPI to CPI is done with proper regard to the extent to which the scheme rules need amending.

Legislation

  1. Ministerial Statement in relation to the change to the statutory definition of 'money purchase benefits'

In November 2013, the Department for Work and Pensions (DWP) issued a consultation proposing to bring into force provisions in the Pensions Act 2011 changing the statutory definition of “money purchase benefits” with retrospective effect from 1 January 1997 to the effect that a money purchase benefit will be a benefit in respect of which a deficit cannot arise – this despite considerable representation from various pensions groups during the informal consultation stage recommending that the change should be prospective.

To temper the impact on schemes of the retrospective nature of the amendment, the DWP also issued for consultation draft regulations introducing transitional measures to ensure that affected schemes will not have to revisit past decisions – originally this applied to past decisions made from 1 January 1997 to the DWP’s Statement of 27 July 2011 (the date the DWP announced that it proposed to change the statutory money purchase definition). However, In a written ministerial statement, Pensions Minister Steve Webb, has confirmed that in "most cases" the transitional protection will now apply to past actions taken between 1 January 1997 and the date the Regulations come into force (which the statement confirms will be sometime in July 2014). Before then, the response to the consultation and the final version of the regulations will also be published.

Comment

The confirmation that the Regulations will in "most cases" not require for past decisions from 1 January 1997 to the date of the coming into force of the Regulations to be revisited is to be welcomed. No details have, however, been given in the ministerial statement as to what is meant by "most cases". Under the draft regulations originally issued with the consultation, at the very least employer debts triggered after 27 July 2011 and any wind-ups commenced after then and completed before the date of coming into force of the Regulations would have required revisiting in light of the changes to the statutory definition. It will be interesting to see precisely the extent to which past decisions have to be unpicked under the revised Regulations.