10 Jan 2018

Pensions Snapshot - January 2018

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

 

Mr N - deferred member not entitled to unreduced pension benefits despite early payment of pension on ill-health grounds

Mr N became a deferred member of the Mitchells & Butlers Executive Pension Plan (the Plan) on 14 November 2010 following a business sale which resulted in Mr N being employed by an employer which did not participate in the Plan.

All being well, Mr N's deferred pension from the Plan would have been payable from his normal retirement age of 60, which he would have reached in October 2022.

Mr N had a history of narcolepsy. The effects of his sleeping disorder became progressively worse such that, in June 2013, aged 50, Mr N applied to the Trustee of the Plan for early payment of his pension on ill-health grounds. He was a deferred member at the time he made the application and so his pension was reduced by 4% for each year by which his pension date preceded his normal retirement age.

In August 2013, Mr N complained to the Company and the Plan administrator that his pension should not have been reduced because the Plan rules stated that pensions payable due to ill- health would not be reduced. Mr N's complaint eventually reached the Pensions Ombudsman.

In dismissing Mr N's complaint, the Pensions Ombudsman agreed that the Company and the Trustee had calculated Mr N's pension correctly because:

  • Under the governing trust deed and rules of the Plan, pensions for members retiring from active membership were not identical to pensions for members (like Mr N) retiring from deferred membership.
  • Had Mr N applied for an ill-health early retirement pension whilst he was an active member of the Plan, he would have been entitled to an unreduced pension. However, Mr N never did this. Instead he applied for early payment of his deferred pension nearly three years after his active membership had ceased.
  • Although Mr N's deferred pension would normally have been payable from age 60, the Plan rules allowed Mr N to take his deferred pension from as early as age 55 or earlier where (as in Mr N's case) the pension was payable on ill-health grounds.
  • The Plan rules clearly provided that a reduced pension would be payable to Mr N if he retired as a deferred member before his normal retiring date.

In this Plan, the rules distinguished between a deferred pension payable early because of Mr N's ill-health (which would be reduced) from an ill-health early retirement pension (which would not be reduced). The case illustrates the importance of checking the provisions of the rules and highlights how these can sometimes create confusing results for members. In this particular instance, the Company was not prepared to offer an augmentation to allow Mr N to take his deferred pension benefits unreduced.

 

DWP consultation on transfers of contracted-out rights without consent to schemes that were never contracted-out

The DWP has launched a consultation in relation to draft regulations which would enable a bulk transfer of salary-related contracted-out rights without member consent to a salary-related occupational pension scheme that has never been contracted-out, provided certain conditions are met. The regulations are intended to address current legislative restrictions which mean it is not possible to transfer GMPs and section 9(2B) rights without consent to a pension scheme which has never been contracted-out (including any salary-related scheme established on or after 6 April 2016).

Broadly speaking, the transfer of the contracted-out rights (including any rights to pensions in payment) would be subject to the following conditions:

  • The transfer would need to be a connected employer transfer from one salary-related scheme (defined as a scheme which is not one under which all the benefits are money purchase benefits) to another.
  • The rights of the member could not be adversely affected. The same protections would have to be provided by the receiving scheme (for example, the same level of revaluation and indexation that would have been provided had the transfer been made to a formerly contracted-out scheme).

Contracted-out rights transferred under the new regulations would continue to be treated as GMPs or section 9(2B) rights under the receiving scheme.

The consultation closes on 17 January 2018 and the regulations are expected to come into force on 6 April 2018. Assuming they do come into force, the regulations could remove a significant barrier for employers looking to restructure pension provision for their employees.

 

Automatic enrolment review: Maintaining the momentum or glacial change?

The DWP provided an early Christmas present on 18 December with its "Automatic Enrolment Review 2017: Maintaining the momentum".

The review sets out proposals to "maintain the momentum achieved by the auto-enrolment regime to date and build a stronger, more inclusive savings culture for future generations". There are some substantial changes, which will involve considerable cost for employers and the Treasury. However, the review states that the Government's ambition is to implement the changes by the mid-2020s.

The key changes are as follows:

  • Reducing the age limit for automatic enrolment - The age limit would be reduced from 22 to 18. It is anticipated that this change will sweep a further 900,000 young people in to pensions saving.
  • Adjusting the contribution structure for automatic enrolment - At the moment, the minimum statutory requirement is that the minimum rate of employer and employee pension contributions to qualifying auto-enrolment schemes are applied to a band of earnings starting at £5,876 and capped at £45,000. The Government is proposing to scrap the lower end of this earnings band so that contributions will be calculated from the first pound earned.

    When combined with the age limit change, it is estimated that this change will place an additional contribution burden of around £1.4 billion on employers, £1.8 billion on individuals and £0.6 billion on the Treasury. In addition, it will render the "entitled worker" category redundant, meaning a worker will either be an "eligible jobholder" or a "non-eligible jobholder". This will mean that lower earners would be granted a right to join a qualifying pension scheme (and receive employer pension contributions).
  • Contributions - The review contains no fixed proposal to change the minimum contribution rates for money purchase arrangements after the proposed increases that will occur in April 2018 and April 2019. However, the review does state that rates will be reviewed after the April 2019 increase.

In addition to the changes announced in the review which are not due for implementation until the mid-2020s, the Government has announced that for the 2018/19 tax year:

  • the earnings trigger for auto-enrolment will remain at £10,000; and
  • the qualifying earnings band will increase from its current position (of £5,876 to£45,000) to £6,032 to £46,350.

 

Mr S - No maladministration where trustees interpreted scheme’s indexation provisions in line with legal advice

In this case the trustees had continued to apply the Retail Prices Index (RPI) for increases to pensions in payment; albeit that the statutory measure of inflation had changed to the Consumer Prices Index (CPI) in 2011. The Trustees took legal advice from Counsel and, in 2017, it was concluded that the Trustees should have applied CPI from 2011. According to the legal advice received, the better interpretation of the Scheme rules was that any change in legislation from RPI would automatically feed into the Scheme rules and therefore CPI should have been applied from 2011. The alternative interpretation (and one that Counsel for the trustees did not think a Court would find favour with) was that the rules should be read as applying the index in place when they were actually drafted (which was RPI).

The Deputy Ombudsman concludes that the trustees had acted properly in light of Counsel’s advice and that their approach to recovering overpayments (arising from the application of RPI as opposed to CPI) since 2011 by offsetting against future increases was reasonable. The case demonstrates that, provided trustees take appropriate legal advice, it is difficult for a member to challenge a rational decision made by trustees in light of that advice.










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