This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of June 2016 in relation to occupational pension schemes. The topics covered in this edition are:
High Court confirms that substitution of principal employer was effective
In the recently handed down judgment of Shannan & Ors v Viavi Solutions UK Limited & Ors, the High Court held that a historic substitution of principal employer was effective. The power of substitution (the Power) in the scheme rules did not require any particular formality (such as a substitution to be effected by deed) and the judge considered that there was no need to imply a “degree of formality” within the Power.
The judge also considered that a 1999 trust deed and rules (the 1999 Deed) was itself effective to exercise the Power. The new principal employer (New PE) and the trustees were parties to the 1999 Deed. The Power required the consent of the outgoing principal employer (Old PE) (who was not a party to the 1999 Deed). However, relying on the principle in the Re Duomatic case, the judge held that the relevant consent could be given on behalf of the Old PE by the New PE as the Old PE was a wholly owned subsidiary of the New PE. The judge further noted that the intention to exercise the Power could be imputed under the 1999 Deed.
As a result, the membership were successful in arguing that the 1999 Deed was valid as it had been entered into by the correct principal employer. Stephenson Harwood LLP acted for the successful Representative Beneficiary in this case (Nicolas Stallworthy QC and Simon Oakes of Outer Temple were counsel).
British Steel Pension Scheme Consultation
DWP ran a short consultation on the options for the British Steel Pension Scheme (BSPS) last month. The consultation should be put in its specific context – the government is committed to taking action on steel and, in particular, Port Talbot and the scheme is very large (130,000 members, assets of £13.3 billion). Its deficit is relatively small on a technical provisions basis (around £700 million – based on a solvent employer) but around £1.5 billion on a PPF basis and around £7.5 billion on a buy-out basis. The government is exploring a number of options, including two which would involve changing the law:
- To allow a reduction in accrued benefits – specifically, reducing the levels of indexation and revaluation (which would require a change to section 67 of the Pensions Act 1995); or
- To allow for bulk transfers without individual member consent to a new scheme paying lower levels of indexation and revaluation (requiring a change to the provisions on bulk transfers). It was recently confirmed in Pollock v Reed that these provisions do not currently allow such a transfer even if the only viable alternative is PPF entry.
The changes would likely be specific to the BSPS - outcomes in each case would be similar but the bulk transfer option would allow for a degree of member choice (i.e. they could choose to opt out and go into the PPF).
Both the trustee (whose proposals they are) and the PPF have published their responses. The trustee is arguing that the Scheme can be self-sufficient and would represent (if anything) a lower risk to the PPF by seeking to remain outside. The PPF has highlighted the risks with an approach where the BSPS goes on with (in all likelihood) a shell employer. It also points out that the proposals raise significant questions of equity between the treatment of BSPS and the PPF’s members and levy payers and in a way which sees limited benefits for the majority of members - the biggest winners are those who are subject to the PPF compensation cap.
In our view, care should be taken about setting a precedent here. Whilst there are particular circumstances in play, the BSPS is unlikely to be unique and other schemes may argue that, if this is permitted, they should benefit from similar relaxations in the future. A little known point is that one of the trustee’s arguments for remaining outside relies on an anomaly in the PPF legislation which currently means those with bridging pensions get significantly better benefits in the PPF than outside it. There has been a regulation making power available since 2008 to fix this, but it is yet to be brought into force.
European Court of Human Rights (ECHR) rejects appeal for same-sex survivor's pension
Señor Tomás was in a long term same-sex relationship that ended when his partner died in 2002 - three years before same sex marriage was permitted under Spanish law. Tomás appealed to the ECHR against the Spanish court's refusal to grant him a survivor's pension. The main ground of his appeal was that Spanish law changed in 1981 to permit married opposite sex couples to divorce and that part of that legislative change gave couples in a stable cohabiting relationship entitlement to a survivor's pension (the Entitlement). That Entitlement was introduced with retroactive effect.
Tomás submitted that the Spanish court's refusal to apply the Entitlement constituted discriminatory treatment based on his sexual orientation, breaching Article 14 (prohibition of discrimination) and Article 8 (right to respect for private and family life) of the European Convention on Human Rights.
The ECHR rejected his appeal. Tomás' position was different to that of an opposite sex couple in relation to the Entitlement because:
- the Entitlement provided an "extraordinary solution" for affected opposite sex couples. It had to be construed against a context where there was an imbalance of access to, and accrual of, pension benefits between the sexes, with women being under-represented in the Spanish workforce.
- Tomás had a different obstacle to marriage, namely a restriction on same sex marriage, whereas the Entitlement was designed for individuals who could not remarry.
- the Entitlement was not based on sex or sexual orientation but, rather, on the individual status of having been married or being in a position where a person could not divorce.
The ECHR also held that it would be inappropriate for it to require States to provide for the legislation connected with same sex marriage to have retroactive effect.
Pensions Ombudsman Determination – Mr N (PO-10167)
The trustee of the Philips Pension Fund (the Fund) completed a buy-in of the Fund's pensioner liabilities in 2013 and a full buy-out of the Fund at the end of 2015. Prior to the buy-out, a pension increase exchange (PIE) exercise was conducted from which certain pensioner members, including Mr N, were excluded. A deed was executed on 6 August 2015 (the 2015 Deed) which was designed to facilitate the PIE exercise. The 2015 Deed provided that Philips Electronics UK Ltd (Philips) could offer a Fund member a benefit augmentation in exchange for surrendering the right to non-statutory pension increases.
Mr N complained that the buy-in had been undertaken without either consultation or consent and that the decision to exclude him from the PIE exercise had been made by the buy-in insurance company rather than Philips. Also, the trustee's decision to execute the 2015 Deed was in breach of its duty to treat each member fairly.
The initial determination was made by an Ombudsman's adjudicator with a subsequent determination made by the Deputy Pensions Ombudsman (which agreed with the adjudicator's determination). In summary:
- The decision to buy-in benefits fell under the remit of the trustee and its discretionary powers and did not affect the amount of Mr N's pension. The trustee did not have to consult members although it had to observe some well-established principles when exercising the discretion, e.g. taking into account only relevant matters. The trustee had taken appropriate advice in choosing an insurer and, arguably, members' benefits were more secure. The trustee had therefore exercised its discretion properly.
- The decision to commence the PIE exercise was taken by Philips and the decision as to who should be offered the PIE fell within its discretion under the 2015 Deed. There were a number of reasons why a member might be excluded and it was not the Ombudsman's role to decide which members should be included. Mr N's exclusion had not caused him any financial loss in relation to his Fund benefits.
- The 2015 Deed made it possible for any of the members to be offered the PIE option and did nothing to rule Mr N out of the PIE exercise. The trustee had therefore acted appropriately in executing the 2015 Deed.
Ultimately, there was no breach of the trustee's or Philips' duties to members, either in relation to the buy-in or selection for PIE.
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