13 Apr 2017

Pensions snapshot - April 2017

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This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of March 2017 in relation to occupational pension schemes. The topics covered in this edition are:

 

DWP's response to the GMP consultation

The DWP has published its response to the GMP equalisation consultation that began in November last year. It appears that the Prime Minister's triggering of Article 50 will provide no respite from the need to equalise GMPs.

  • CEPs - Not the mushrooms, but Contributions Equivalent Premiums. The response confirms that proposed changes will go ahead, meaning that CEPs are available in more circumstances and schemes can then focus on bigger-ticket issues in their reconciliation process.
  • Methodology for equalising GMPs - The long and the short of the Government's response on methodology (or rather, the short of it) is that schemes should compare the overall value of a male's benefits with those of a comparable female (and vice versa) and provide the higher benefit. The comparison is carried out on a one-off basis and benefits would then be converted to ordinary scheme benefits. This appears to be a welcome change when compared to the Government's previous methodology which proposed a year-on-year comparison.
  • And talking of conversion - Although the Government may have seen the light, it seems to be progressing legislative amendments to allow schemes to convert GMPs into normal benefits with some trepidation. There is general acknowledgement of the industry's view that conversion is a good idea, but the DWP has not made any concrete suggestions as to the ways in which the legislation will be amended to implement conversion. More on this to come, we hope.
  • GMP revaluation - The response makes clear that the rate of fixed rate revaluation applying to GMPs will be set at 3.5% a year, rather than the 4% which the DWP had initially suggested, which is good news for schemes.
  • Bulk transfers - And finally, the Government promises that it is looking into issues around bulk transfers (i.e. it is no longer possible to create a contracted-out scheme into which employees of a previously contracted-out scheme, perhaps inherited as part of a transaction, can be transferred). We are told to expect more in autumn 2017, leaving this issue open for another few months.

Overall, there is some interesting material here and the Government has responded with some good news and helpful commentary. That said, it really seems as if this party is just getting started…

Pensions Ombudsman determination – Mr N (PO/5395) – Scheme administrator's refusal to make transfer not maladministration despite incorrect interpretation of the law

Mr N was a member of the Netwindfall Executive Pension Plan (the NEPP) which was administered by Clerical Medical (CM). In October 2013, Mr N asked CM to transfer his funds under the NEPP to the Marchar Ltd Retirement Benefits Scheme (the Marchar Scheme). Mr N had established Marchar Limited and the Marchar Scheme purely to facilitate the transfer - he had no earnings from Marchar Limited.

CM refused to carry out the transfer on the grounds that it fell outside the definition of a "recognised transfer" under section 169 of the Finance Act 2004. CM had carried out due diligence checks in respect of the transfer and was not confident that the funds would be held within the receiving scheme or represent rights under that scheme.

Mr N complained to the Pensions Ombudsman (the PO) that he had suffered a financial loss because of CM's failure to make the transfer payment. He claimed that, had the transfer gone ahead, it would have been invested in the shares of Eligere Investments plc. The value of those shares increased from £0.001 per share in November 2013 to £0.61 per share in February 2014, at which point, Mr N claimed, he would have sold them and made in excess of £1 million.

The PO did not uphold the complaint. In his view, it was not maladministration for CM to decline the transfer because, at the time in question, CM's decision was in line with the PO's determinations in the cases of Jerrard (PO/3809) and Hughes (PO/7126). In both of those cases, the PO had determined that a transferring member had to be in receipt of earnings from an employer of the receiving scheme in order to obtain transfer credits and establish a statutory right to a transfer.

The PO recognised that his determination in Hughes had been subsequently overturned by the Courts (Hughes v Royal London [2016] EWHC 319 (Ch)) - with the result that earnings from any capacity were sufficient to obtain a statutory right to a transfer - but also considered that it would be "…inequitable to find against Clerical Medical for an incorrect interpretation of the law prior to that judgment." The PO added that an incorrect interpretation of the law did not necessarily constitute maladministration.

CM must now review its position based on the Hughes judgment and decide whether a transfer can proceed if Mr N still wishes to transfer.

Overseas pension schemes – regulatory requirements amended in April

The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendments) Regulations 2017 (SI 2017/398) (the Regulations) will come into force on 6 April 2017, amending the requirements which overseas pension schemes need to meet before transfers to them may be made.

  • In short, the Regulations amend the test to qualify as an overseas pension scheme. The amendments:
  • remove the "70% rule", which required overseas schemes to provide 70% of UK tax-relieved funds to be used for the provision of a pension income for life;
  • allow the payment of benefits earlier than normal minimum pension age (age 55), provided the payment remains an authorised payment if it were to be paid by a registered pension scheme; and
  • require the provider of a non-occupational scheme which is not regulated, to ensure that the provider is at least regulated in the same country in which the scheme is established.

HMRC has published guidance in relation to the proposed changes here.

PPF compensation due to improve for members with long service

Legislation to adjust the PPF cap for members with long service has been approved and takes effect on and from 6 April 2017. This will result in the standard compensation cap (currently set at £33,678 per annum at age 65) being increased by 3% for each year of a member's pensionable service above 20 years, subject to a maximum of double the standard cap.

Individuals who are already in receipt of PPF compensation and who have been capped will have their compensation "redetermined". A scheme will not be required to reflect this adjustment to the cap in valuations where the scheme is in an assessment period or is winding up outside the PPF.

The Pensions Regulator (tPR) bandies penalties

“We have already made clear our intention to impose monetary penalties where trustees and managers fail to…complete and submit a scheme return…we also intend to make greater use of our powers, including our power to impose monetary penalties, where there have been wider scheme governance and administration failings.”

So says tPR in the introduction to its consultation on a new draft monetary penalties policy. The consultation proposes three different penalty bands – related to the severity of a transgression. In addition, different penalties will apply depending on whether a trustee is an individual, a corporate trustee and/or a professional trustee. tPR sets out who, in its view, might be viewed as a professional trustee (essential reading for anyone who is remunerated as a trustee). The guidance goes into detail on what behaviours or factors are likely to result in tPR construing a failure as falling into a lower or higher band of severity.

The general approach on penalties is:

Band level Person at fault Normal range of penalty
Individual trustee £0-1,000
Corporate trustee or other  £0-10,000 
2 Individual trustee  £0-2,500 
Corporate trustee or other £0-25,000 
3 Individual trustee £0-5,000 
Corporate trustee or other  £0-50,000

 

The draft is not clear on what tPR’s approach will be where, as is common, there is a mixture of different trustee types on one trustee board.

And, while tPR's general approach to non-compliance with pensions law requirements has been “educate, enable and enforce”, we can perhaps expect a stricter and more robust approach going forwards. The consultation closes on 9 May 2017.

FDR v Dutton – Court of Appeal overturns High Court case on calculation of pension increases

Until 1991, the rules of the scheme in question provided that pensions in payment should be increased each year at a rate of 3% compound. A Deed of Amendment (which took effect on 20 June 1991) purported to replace the old rules and substitute new rules which provided that pensions in payment would, in future, be increased by 5% LPI.

The scheme had been administered on the basis that all pensions would receive an annual increase of 5% LPI with the pre-20 June 1991 position being ignored. The trustees applied to the High Court for directions as to how to administer the scheme in light of the pre-1991 position.

Asplin J noted that the scheme’s power of amendment provided that pensions in payment or accrued rights to a pension could not be prejudicially affected by any amendment. In light of this she concluded that, in respect of any member with a pre-20 June 1991 pension, an annual approach should be taken whereby that element of pension should be increased by the higher of 3% compound or 5% LPI. In effect, the restriction in the power of amendment meant that the 3% rate acted as an annual underpin. This reflected the trustees' approach but was the most expensive, and least favourable, outcome from the employer's perspective.

On appeal to the Court of Appeal, the High Court decision was reversed. The Court of Appeal found in favour of the employer’s interpretation of the rules. That interpretation required two calculations to be conducted in respect of a member with pre-20 June 1991 service with the calculation that produced the better result for the member then being applied. The first calculation would consider the value of the pre-20 June 1991 element of a pension increased year on year by 3% compound basis up to the date of the latest increase. The second calculation would consider the value of that element increased year on year by 5% LPI compound up to the date of the latest increase. The restriction in the power of amendment was meant to protect the value of the pension and the Court considered that this approach preserved that right.

Pensions Ombudsman determination – Mr E (PO/8518) – member allowed benefit of preserved pension by reason of employer misrepresentation

The complainant was employed by Lloyds Banking Group on 6 January 2014 and joined its pension scheme on that date. He was then the subject of a TUPE transfer to TSB on 1 April 2014 and became a deferred member of the pension scheme with Lloyds from that date. He was just short of completing three months' qualifying service with the Lloyds pension scheme and, as a result, was simply offered a refund of contributions on his ceasing employment with Lloyds.

Mr E complained that he had only joined the pension scheme on 6 January 2014 because Lloyd’s had asked him to join with another starter on that day. Otherwise, he could have joined earlier and then completed three months' qualifying service by the time he TUPE transferred to TSB. He also noted that Lloyds had sent an update in November 2013 stating that anyone with benefits in the Lloyds pension scheme who was TUPE transferred would have their benefits preserved.

The Deputy Ombudsman found in favour of Mr E. By the time of the November 2013 update, Lloyds had decided not to allow those with less than three months' qualifying service to preserve benefits in the scheme. The statement in the November 2013 update was therefore misleading and, by starting employment earlier, Mr E could have ensured preservation of his benefits in the Lloyds scheme. The Deputy Ombudsman ordered that Mr E should be put in the position he would have been in had he had three months' qualifying service in the Lloyds pension scheme and a transfer value (including employer contributions and investment returns) had been made to the receiving scheme. Mr E was also awarded £500 for distress and inconvenience.

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