Top of the agenda
CPI/RPI – still a moving feast
The Government has now issued its response to its consultation of December 2010 on the switch from RPI to CPI as the measure of inflation for revaluing deferred pensions and increasing pensions in payment. In our May e-bulletin, we reported on the provisions in the Pensions Bill 2011 in relation to CPI/RPI and the obstacles they present for schemes. To view the bulletin, click here. The key points arising from the response are:
- Contrary to previous indications, the Government is now considering amending the Bill so that schemes with rules that revalue deferred pensions by reference to RPI will not have to provide a CPI underpin, despite the fact the Government believes that the issue will only affect "a scheme with RPI revaluation rules in rare circumstances."
- There are some gaps in the easement for schemes that pay RPI-based increases to pensions in payment so that those schemes do not have to provide a CPI underpin – the Government is considering tabling amendments to close off those gaps.
- As previously thought, the Government will not make provision for a statutory override or introduce a modification power for schemes whose rules refer expressly to RPI.
- The Government will go ahead with its proposal to require employers to consult with employees before switching to CPI under the employer consultation regulations.
- The Government will not legislate in relation to schemes that have separate indexation and revaluation rules for GMPs and which might need to implement a CPI underpin if their rules require RPI to be used in future; the Government considers such provisions to be uncommon.
We are currently advising a number of schemes on switching to CPI or retaining RPI as the measure of inflation for revaluing deferred pensions and increasing pensions in payment. The proposals in relation to the CPI underpin will certainly be welcomed by those schemes.
Auto-enrolment – trustees should liaise with the employer in complying with auto-enrolment duties
In our May e-bulletin, we suggested that large employers should now start considering putting a timetable in place for complying with their auto-enrolment duties. Smaller employers may of course also need to consider a timetable for compliance now if they want to bring forward their staging dates in line with other (larger) employers in the group. Trustees of pension schemes will need to liaise with the employers in relation to auto-enrolment compliance too. To assist trustees, the Pensions Regulator has issued a checklist of the actions that they should be considering. Recommended actions include:
- Finding-out from the employer when the employer's staging date is.
- Assessing whether the pension scheme meets the minimum statutory requirements for auto-enrolment compliance.
- Impact of the requirements on scheme design and communicating with scheme members as to how and when the changes could affect them.
The checklist can be viewed here.
Pensions Ombudsman: scheme administrators responsible for members' loss in delaying implementing instructions to switch investments
In Hoyle (81777/1), the Pensions Ombudsman found the scheme's administrator liable for the loss suffered by the members of a small self-administered pension scheme as a result of the scheme administrator's failure to act on an instruction to switch investments from one fund to another. When the mistake was discovered, the scheme administrator actioned the instructions but the delay meant that fewer units could be purchased than if the investments had been switched earlier. The administrator accepted that it had failed to act promptly but argued that the scheme's financial advisors were contributorily negligent in that they should have noticed the error and accordingly, the advisors should pay half of the compensation to which the member was entitled. The Ombudsman disagreed, holding that, in this case, the financial advisor's role was to conduct a yearly review of asset allocation and it was therefore reasonable for it to have spotted the administrator's mistake only at that stage.
Pensions Ombudsman: statutory duty of disclosure requires all members to be informed of scheme changes
In Halford (81134/1), the Pensions Ombudsman made a finding of maladministration against Hertfordshire County Council (the "Council") for failing to inform a member on long-term sick leave of a change to the Local Government Pension Scheme Rules that would have allowed her to nominate her co-habiting partner to receive a pension on her death. Because of the failure, the member, Ms Kerim did not make the nomination and accordingly her partner, Mr Halford, was not entitled to a pension on her death. The Ombudsman found that despite the Council having made substantial efforts to inform members generally of the change (via a note in their payslips, a 'Brief Guide' document, staff workshops and road shows and an update on its intranet page), there was a statutory duty under the disclosure regulations for all members to be notified of the change. As Ms Kerim did not receive a payslip (as her sick pay had been stopped at that point) nor had she received or had access to the information via the other means, the Council had failed in its duty to inform her.
The Council submitted that it had made reasonable efforts to inform Ms Kerim of the rule changes but the Ombudsman held that the duty of disclosure was a strict duty which required the Council not to make reasonable effort to provide the information but to actually provide it. The Ombudsman directed the Council to use it own funds to provide Mr Halford with a pension.
The determination makes it clear that when making a change to a scheme, it is not sufficient to make reasonable efforts to inform members of the change; to satisfy the duty under the disclosure regulations, each member must actually get the information. Since December 2010, the Disclosure Regulations have permitted schemes to use electronic communications to disclose information to their members. A message on a website is now deemed to be enough (subject to certain conditions being satisfied) or members may be notified by e-mail (although a member must be contacted in writing if he has declared that he does not wish to receive notifications by these means). It is therefore possible that a similar case may now be decided differently, if information is posted on a website.
High court holds that Pensions Ombudsman should make "generous allowance" for a member who did not have legal representation
In Grievson v Grievson and others  EWHC 1367, the High Court has considered an appeal by Mr Grievson, a member of a Small Self Administered Pension Scheme on a determination by the Pension Ombudsman. (An appeal from an Ombudsman's determination can only be made on a point of law (and not on a question of fact)). The member had made a complaint to the Pensions Ombudsman that under the rules of the scheme, he should have been given a transfer value on a share of fund basis. The High Court rejected this aspect of the member's claim but said that an argument could be made that the member was entitled to a transfer value on a share of fund basis under the legal principle of estoppel (broadly, a legal principle that stops a person from relying on facts that are inconsistent with what the person had said before). The ingredients were there in the member's complaint for an argument of estoppel to be made and that despite the fact that the member had not specifically referred to estoppel, the Ombudsman should make "generous allowance" for the fact that Mr Grievson was unrepresented and that the process of complaining to the Pensions Ombudsman is an informal procedure. On that basis, the appeal was allowed and the High Court referred the question of estoppel back to the pensions ombudsman to determine. We will cover the decision in more detail in our next e-bulletin.
Houldsworth v Bridge Trustees (Supreme Court decision) and Bloom v the Pensions Regulator (Court of Appeal decision)
In March 2010, we reported that the Court of Appeal had considered whether certain hybrid benefits (such as where a money purchase benefit is subject to a guarantee) could be classified as money purchase benefits on a winding-up in the case of Houldsworth v Bridge Trustees and the Department for Work and Pensions  EWCA Civ 179. The DWP was given leave to appeal to the Supreme Court as the judgment had implications for wider areas of pensions law (click here for our earlier e-bulletin). The appeal before the Supreme Court was heard on 20 June 2011.
In Bloom v The Pensions Regulator (re Nortel), the High Court held that Financial Support Directions and Contribution Notices can be made against insolvent companies and that they will rank as expenses. This gives them super-priority in that they rank ahead of unsecured claims, preferential debts, floating charges and the fees of the administrator. However, in his judgment, Briggs J had said that he was bound by precedent to reach this decision and that he hoped a higher court would consider the issues in the case. Leave to appeal was granted and the Court of Appeal is due to hear the appeal this month.
Judgment in both Houldsworth v Bridge Trustees and in Bloom v The Pensions Regulator (re Nortel) is expected after the courts' summer break.
Pensions Bill – Government to consider transitional arrangements in relation to the changes to state pension age for those most affected
The state pension age for women is currently lower than age 65 but is being increased gradually to age 66, by April 2020. The Pensions Bill 2011 contains further provisions increasing the state pension age for men and women. In particular, the state pension age for women is to be increased more quickly so that it will become age 65 in November 2018 instead of April 2020. This will have the greatest impact on women who were born between December 1953 and October 1954 because their state pension age will be increased by up to 2 years. At the second reading of the Bill in the House of Commons on 20 June 2011, the Government stated that it is not proposing to change these provisions in the Pensions Bill but that it will be prepared to consider offering some form of transitional relief for those most affected. It is not clear, however, what form the relief will take.
The proposed changes to state pension age under the Bill will impact on defined benefit schemes that provide for early retirement 'bridging pensions' (where an early retirement pension is enhanced until state pension age). For more details about the impact on bridging pensions, see our March e-bulletin.
Bonas – Pensions Regulator settles its dispute with VDW and issues a considerably smaller contribution notice of £60,000
In our previous e-bulletins, we reported on the Pensions Regulator's issue of its first ever contribution notice ("CN") of £5.089 million against Michel Van de Wiele NV ("VDW"), the Belgian parent of Bonas UK Limited ("Bonas") and the subsequent appeal by VDW to the Upper Tribunal to bar the Regulator from pursuing the CN. At the interlocutory hearing of the Upper Tribunal which followed, Warren J made a number of comments about the scope of a CN, in particular that the scope of a CN is limited to providing compensation for the detriment suffered by a pension scheme and, other than in exceptional circumstances, is not meant to act as a penalty. (To view our earlier e-bulletin, click here ). However, on 9 June 2011, and before the final hearing was heard by the Upper Tribunal, the Pensions Regulator announced that it had settled the case with VDW by agreeing to issue a CN for £60,000 (being the amount Warren J had suggested to be the most that the Pensions Regulator could reasonably have imposed in these circumstances).
The Pensions Regulator's report
Despite settlement with VDW, the Pensions Regulator issued a report effectively stating that it did not agree with Warren J's observations at the Upper Tribunal about the scope of a CN, stating that:
- Warren J's comments were obiter dicta (observations that do not form part of the judgment itself and are not legally binding) and therefore should not be taken out of context and relied on in other circumstances.
- It does not consider that Warren J meant to restrict the amount of a CN to the detriment suffered by a pension scheme in all cases.
- The Regulator will be operating "business as usual" in its approach to investigating and enforcing avoidance activity.
Despite the comments by the Pensions Regulator that it will operate "business as usual", the reality is that the Pensions Regulator has settled the Bonas case. There is a good possibility that if the case had been heard by the Upper Tribunal, it would have agreed with Warren J's analysis of the scope of a CN. Until the issue comes before the Upper Tribunal again, the scope of a CN therefore remains uncertain – in particular can the Regulator impose a CN up to the full amount of the employer debt or whether the Regulator is restricted to imposing a CN only for an amount that the act or omission of the person on whom the CN is imposed has prevented the scheme from recovering?
Given the possibility of a future challenge, the Pensions Regulator may decide to use a combination of Financial Support Directions and CNs in order to maximise the likelihood of recovering any outstanding employer debt rather than relying on CNs alone. Had the Regulator opted for an FSD in the Bonas case at the outset, it is possible it could have recovered more.
HMRC Pension scheme newsletter 47 and disguised remuneration FAQs
Pension schemes newsletter 47
HMRC has published issue 47 of its pension scheme newsletter. Matters covered in the newsletter include:
- Regulations dealing with the reduced annual and lifetime allowances and the removal of the requirement to annuitise at age 75 – HMRC's intention is that the regulations will be laid immediately after the Finance Bill receives Royal Assent, coming into force 21 days later.
- Information on how the pension input amount is calculated for the purposes of valuing defined benefits against the annual allowance. Examples are given, illustrating how HMRC considers the rules for working out the pension input amount should be applied in a range of circumstances. These cover standard accrual, accelerated accrual, accrual for a limited number of years, adjustments for early leavers and an N/NS adjustment for an active member.
- A summary of the proposed changes to pension input periods under the Finance Bill. Broadly, the changes are:
- From 6 April 2011, unless a different date is nominated, the first PIP default end date for new schemes and new members of existing schemes is 5 April. If a different date is nominated, it must be within 12 months of the PIP starting and cannot be for a date before the date on which the nomination is made.
- Subsequent PIPs will end on a nominated date in the following tax year after the PIP ended or if there is no nomination, the anniversary of the date the previous PIP ended.
HMRC has confirmed that retrospective nominations can be made up to the date the Finance Bill receives Royal Assent.
Disguised remuneration FAQs
HMRC has issued the third version of its FAQs on disguised remuneration.
They replace the version issued on 31 March 2011.To view the FAQs click here.
Changes made to IAS19 in relation to the costs of defined benefits
On 16 June 2011, the International Accounting Standards Board ("IASB") announced amendments to IAS 19 'Employee Benefits'. IAS19 governs how to calculate the pensions costs that should be recorded in the company profit and loss account and the pension liabilities that should be reflected in the company balance sheet and applies to companies that prepare their financial statements using International Financial Reporting Standards. The amendments relate only to defined benefits and are effective for financial years beginning on or after 1 January 2013 (although earlier application is allowed). The key amendments are:
- A requirement to account immediately for actuarial gains and losses (now called "remeasurements") in the cost of providing defined benefits.
- More information to be given about defined benefit pension plans, including their characteristics and the risks arising from those arrangements.
- A new approach to presentation in the income statement, including a requirement to differentiate between the components of defined benefit costs.
The requirement to account immediately for actuarial gains and losses in the cost of providing defined benefits means that it will no longer be possible to use the "corridor method". The method allows actuarial gains and losses to be deferred and recognised in net income in later periods.
Government to review scheme disclosure obligations
The DWP is currently informally seeking views on the disclosure requirements for pension schemes with a view to consolidating the disclosure requirements for occupational pension schemes, trust-based personal pension schemes and stakeholder pension schemes. We understand that the DWP intends to consult formally on the issue later this year.