07 Feb 2017

Pensions snapshot - February 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 January 2017 in relation to occupational pension schemes. The topics covered in this edition are:

 

Time running out! Should you modify GMP revaluation provisions in your scheme rules?

As highlighted in our March 2016 edition of Pensions snapshot, the DWP introduced a statutory modification power from 6 April 2016 relating to GMP revaluation in formerly contracted-out schemes. However, time is running out for trustees to exercise this power.

Prior to the abolition of DB contracting-out on 6 April 2016, the legislation provided that schemes could provide for fixed rate revaluation of GMP to be triggered when a member left contracted-out service. However, this legislation was amended to take into account the end of contracting-out so that, after 6 April 2016, fixed rate revaluation is triggered, not when contracted-out service ends, but when pensionable service ends.

As we mentioned last year, schemes may have to amend their rules in order to provide fixed rate revaluation from the end of pensionable service rather than from the end of contracted-out service. Schemes that do not amend their rules may find that they have to provide members with the better of fixed rate revaluation and section 148 revaluation for the period from when contracted-out service ended on 6 April 2016 until the member leaves pensionable service.

Some scheme amendment powers might be too restrictive to allow for this amendment and so the DWP introduced a statutory modification power. This allows trustees to amend their rules by resolution so that fixed rate revaluation is only applied when a member leaves pensionable service. The amendment can have retrospective effect from 6 April 2016. However, the power must be exercised no later than 5 April 2017 and so trustees only have a couple more months to deal with this.

 

ET determines that age discrimination affecting judges' pensions was irrational

As part of the reforms to public sector pension schemes stemming from the Hutton Commission's report in 2011, the existing Judicial Pension Scheme (JPS) was closed to new entrants and accrual in 2015 and members of the JPS were moved to a new, less generous arrangement. The change included transitional protections for JPS members who were due to retire within ten years of the change. A subset of members who were the closest to retirement would receive full protection, meaning they would not be affected by the change at all.

An action group of 210 judges claimed, among other things, that the transitional provisions constituted age discrimination. While the Government acknowledged that the transitional protections were age discriminatory, it considered that they were objectively justifiable because they had the legitimate aims of (i) protecting those closest to retirement from the financial effects of the changes; and (ii) consistency with changes which had been made to other public sector pension schemes.

The Employment Tribunal (ET) considered that the aim of protecting those closest to retirement from the financial effects of the changes to the JPS was irrational and illegitimate because such individuals were the least affected by the changes, regardless of the transitional protection. The ET considered that the "consistency aim" might be a legitimate aim but the Government had not shown how that consistency was conducive to a social policy objective. In any case, the new judicial pension scheme would remain inconsistent with other reformed public sector pension schemes in many other respects.

Ultimately, the ET considered that, even if the Government’s proposed aims were justifiable, it would have found that the transitional protections were disproportionate, given the harshness of the impact of the pension reforms on those younger members who were unprotected or who did not have full protection.

 

Pension Schemes Bill 2017: "A Pension's Progress"

The Pension Schemes Bill 2017 (the Bill) has had its second reading in the House of Commons and it is fair to say that it has had a rockier ride there than in the House of Lords.

The Bill, which introduces an authorisation and regulatory regime for Master Trusts, responds to the quick growth of Master Trusts since the advent of auto-enrolment. This is seen as essential and there has been support for the Bill across all parties. However, some of the detail on the second reading appears to have caused some consternation amongst the opposition, who would have liked to have seen more included.

Skeleton arguments

Debbie Abrahams (Labour) led the opposition charge, saying that the Government has presented "a skeleton Bill, with much of the detail left to secondary legislation." This may well be the case: the Government intends to lay those regulations in the summer of 2018 with the expectation that the authorisation regime will come into play before 2019. Having said this, "the Bill also contains provisions that, on enactment, will have effect back to 20 October 2016, the day on which the Bill was published." It is difficult to understand how the Government expects these provisions, which require certain events to be notified to the Pensions Regulator, to be handled in practice – particularly when the Secretary of State has to lay the regulations that identify the events that must be notified and does not propose to do so for nearly two years after the requirement to notify comes into effect!

Cap in hand

There was some discussion about using the Bill to further the restrictions on early exit charges. The Bill amends the Pensions Act 2014 to allow regulations to be made "to restrict charges or impose governance requirements on pension schemes." This appears to be another "wait and see", but it seems that the intention is "to make regulations to introduce a cap that will prevent early exit charges from creating a barrier for members of occupational pension schemes who are eligible to access their pension savings." This appears to go hand in hand with the Government's introduction of pension freedoms.

Do not go gently…

Much of the debate was given over to discussion of what had not been included in the Bill. Points were raised about governance, member engagement and transparency and a call was made to have member-nominated trustees on Master Trust trustee boards (although there were no concrete suggestions as to how this should work in practice). It is unlikely that these points will make it into this Bill, but at least they are now on the radar for the future.

The Bill now goes to the House of Commons Public Bill Committee and you can submit your views here.

 

PPF Compensation Cap and Levy Ceiling Set for 2017/2018

The annual rise in the PPF compensation cap and levy ceiling has been announced and will take effect from 1 April 2017. The compensation cap will rise from £37,420.42 to £38,505.61. The overall PPF levy ceiling will rise from £981,724,264 to £1,007,249,095. Both increases reflect an increase in earnings from 2015 to 2016 of around 2.6%.

 

 

 

 

 

 

 

 

 

 

 

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