This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of July 2016 in relation to occupational pension schemes. The topics covered in this edition are:
Mrs R (PO-9309) - employer could not deny ill-health early retirement on grounds of "hypothetical cost"
Mrs R was a deferred member of the Greater Manchester Pension Fund (GMPF), which is part of the Local Government Pension Scheme (LGPS). In June 2014 she applied to Trafford Council (Trafford) for early payment of her deferred benefits on account of ill-health. Whilst Trafford agreed that Mrs R met the GMPF ill-health criteria, it refused the application on the grounds that the capital cost of paying the benefits would be in excess of £400,000. Trafford considered this hypothetical cost to be a material factor to be taken into account in exercising its discretion, particularly given ongoing budgetary constraints.
Mrs R complained to the Pensions Ombudsman that payment of her benefits had been wrongly refused because Trafford did not have an overriding discretion under the LGPS regulations to decide whether or not to pay ill-health early retirement deferred benefits. She also submitted that the cost to the public purse was not a relevant consideration. The Pensions Ombudsman upheld the complaint.
The Ombudsman held that the relevant words in the LGPS regulations did give Trafford discretion to agree to the early payment of deferred benefits (where the member met the ill-health criteria). Also, Trafford was entitled to have regard to its own financial interests when exercising that discretion.
However, agreeing to pay the ill-health benefits would not, in and of itself, result in any immediate cost to Trafford. The hypothetical cost of £400,000 was contingent on there being other subsequent ill-health applications under the GMPF in that financial year which would cause Trafford to exceed their annual capital allowance for early retirements. Refusing the application on these grounds risked turning applications for early retirement on the grounds of ill-health into a "lottery" where members' chances of success did not rest on the merits of their case but on the timing of an application. Trafford had therefore failed to consider Mrs R's application in the proper manner.
Pensions Regulator's (tPR) revised Code of Practice for schemes providing money purchase benefits now in force
tPR's revised Code of Practice for schemes providing money purchase benefits came into force on 28 July 2016. This Code applies to trustee boards of all occupational trust-based pension schemes with two or more members (whether active, deferred or pensioner) which offer money purchase benefits. This means that as well as applying to DC schemes and DC sections within schemes offering mixed benefits, it also applies to money purchase additional voluntary contributions within occupational defined benefit schemes, money purchase benefits with a DB underpin, and money purchase underpin benefits where these are provided by a scheme, insofar as the relevant legislation applies to them.
The Code of Practice sets out the standards of conduct and practice that tPR expects trustee boards to meet in complying with their duties in legislation. The code covers six key areas details how the governance standards may be met in practice:
- The trustee board.
- Scheme management skills.
- Investment governance.
- Value for members.
- Communicating and reporting.
tPR has also produced a “self-assessment” template to accompany the Code, which trustees can use to assess their scheme’s practices against the Code. tPR noted in its press release accompanying the revised Code that “in revising the Code, we have responded to calls from the pensions industry to shorten and simplify it, with an increased focus on legislative requirements”.
Mr L (PO-6365) - ill-health early retirement: trustee had no reason to delay decision by over 12 months
This follows a complaint by Mr L against Arriva Trains Wales Section Pensions Committee (the Committee) and its administrator, RPMI, in relation to the Arriva Trains Wales Section of the Railways Pension Scheme.
The scheme rules permitted early retirement through incapacity if the trustee considered the incapacity would "prevent, otherwise than temporarily, the Member carrying out his duties, or any other duties which in the opinion of the Trustee are suitable to him." The employer terminated Mr L's employment in April 2013 on grounds of incapacity. His subsequent application for an incapacity pension was refused by the Committee on the basis that the initial medical evidence indicated that he could undertake "other duties".
Following Mr L's appeal under the Scheme's internal dispute resolution procedure, a new medical report concluded that, without experimental surgery, Mr L's return to any form of employment was very unlikely in the foreseeable future. In June 2014, the Committee deferred their IDRP stage two decision for 12 months. Based on the new report, the Committee considered that, although it was unlikely that Mr L could return to work in any capacity within the next 6 to 12 months, he had not yet tried all reasonable treatment options and should now explore these.
In 2015, the Scheme's medical advisers concluded that there were still treatment options available from which Mr L might benefit and "some uncertainty" as to whether he could undertake alternative duties in the future. Following this, the Committee awarded an incapacity pension in July 2015, subject to review in 2017.
Mr L complained to the Pensions Ombudsman. The Deputy Ombudsman held that the Committee could have reached their July 2015 decision to award an incapacity pension in June 2014. The Committee had deferred the decision in June 2014 on the basis that Mr L had not tried all reasonable treatments – but this was also the case in July 2015 when they awarded incapacity benefits that were subject to review, so it was unclear what had actually changed in the interim.
As well as awarding interest, the Deputy Ombudsman directed the trustees to pay £750 for distress and inconvenience. She also concluded that Mr L was not entitled to the reimbursement of legal fees (as he could have used the free services of The Pensions Advisory Service) nor the costs of medical reports which he had himself commissioned.
Parris – indirect discrimination on grounds of sexual orientation
The Advocate General (AG) to the European Court of Justice (ECJ) has provided her opinion on the case of Parris v Trinity College Dublin. While not binding, AG decisions are influential and are often followed by the ECJ.
The case was brought by Mr Parris who was a pensioner receiving benefits from the Trinity College Pension Scheme (the Scheme) and in a same sex marriage. Mr Parris brought a claim against Trinity College for refusing to agree that his husband would be entitled to a survivor's pension from the Scheme. To receive a full survivor's pension under the Scheme's rules, Mr Parris and his partner would need to have been married or in a civil partnership before Mr Parris reached age 60 (the Age 60 Rule). Due to the legislative environment in Ireland, it was impossible for him to satisfy the Age 60 Rule.
Among other things, the AG considered that the Age 60 Rule was indirectly discriminatory on grounds of sexual orientation. The AG dismissed arguments brought by the defendants (and the UK Government) that the Age 60 Rule had a legitimate aim of preventing death bed marriages, saying it was an "extremely drastic measure…which went beyond that which is necessary in order to attain the legitimate aim". Accordingly she held that the Age 60 Rule constituted a breach of the European Equal Treatment Directive (the Directive).
Of real interest in this case is the AG's opinion on the effect of her conclusion; that the decision should not be subject to any temporal limitation. While she agreed that the Directive could not give rise to claims for payments in the past that predated the time limit for transposing the Directive, she considered that a survivor's benefit in respect of Mr Parris would be entirely prospective. In other words, the same sex spouse's survivor benefit would take into account all of Mr Parris' pensionable service in the Scheme, not just his pensionable service on and after the date civil partnerships or same sex marriages were recognised in Ireland. This outcome seems to be at odds with the recent decision reached by the UK Court of Appeal in the Innospec case, which has been appealed and is set to be heard by the Supreme Court.
tPR publishes consultation paper on 21st Century Trusteeship and Governance
On 22 July 2016, tPR published a discussion paper entitled "21st Century Trusteeship and Governance". The paper (which can be accessed here) offers tPR's views on a number of key issues on which it is consulting with trustees of pension schemes. Responses from trustees to the questions set out in Annex A of the paper are due by 9 September 2016. This is a tight timeline, particularly at the height of the summer holiday season, but appears to be a good opportunity for trustees to provide input into what will become tPR's policies and guidance on some important key issues.
The paper covers the following key themes:
- board effectiveness and the importance of diversity
- the role of the Chair
- meeting TKU standards and the role of training and development
- managing conflicts of interests
- engagement with key governance activities and working with third parties
- small schemes
Of particular interest are some of the fundamental questions regarding the qualification levels of trustees and how to balance the provision of more effective training against mandating certain qualification requirements for new trustees. There is also an opportunity for trustees to feed back about whether the recent developments requiring DC schemes to have a Chair who will sign off a statement of compliance should apply to DB schemes in future.
tPR has also set out some of the good practices that stood out when carrying out its research into the paper. These include effective chairing, engaged trustees, flexible and proportionate board structures and practices, constructive and robust relationships with advisers and service providers and focus on members.
All in all, this consultation provides trustees of pension schemes with a good opportunity to see where their regulator's current thinking stands and to have a stake in shaping its future policy.