06 Jul 2017

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

 

Stage exit

The employer pension duties, most notably involving automatic enrolment, were first rolled out in October 2012. Since then, employers have been "staged", starting with the very largest employers through to, on a monthly basis, smaller employers.

The last staging date will be 1 February 2018. However, any employer who first pays PAYE income in respect of a worker on or after 1 October 2017 will be subject to an immediate "duties start date" – normally the date on which their first worker starts working.

Notwithstanding the ability to apply a postponement period, the reality for new employers will be a very short amount of time to ensure compliance with the pension duties. Anyone employing a worker for the first time will now need to ensure they:

  • know when the pension duties apply to them;
  • have a qualifying pension plan in place (if any worker is likely to be an eligible jobholder);
  • understand what information to issue to workers, and when;
  • ensure they have adequate payroll processes;
  • consider whether to apply a postponement period and are prepared for workers who decide to opt in to pension saving during any postponement period; and
  • understand the relevant record-keeping and regulatory reporting requirements.

As with most automatic enrolment related matters, there are some complex exceptions. In some cases, new employers might be subject to the pension duties already. There is also different treatment for director-only companies.

In addition to the end of staging dates, there are various changes that will affect employers who are already subject to the pension duties.

First, where employers have taken advantage of the transitional easement for defined benefit schemes, that easement will end on 30 September 2017. This means these employers will no longer be able to delay automatic enrolment into a defined benefit scheme.

Second, employers using defined contribution arrangements for compliance with the duties will see the first increase to the statutory minimum contribution rates on 6 April 2018. Employers should ensure that their scheme arrangements, payroll systems and HR budgets are set up to manage this change and take appropriate action if not. It may also be prudent to raise awareness of increased contribution rates with employees. In some extreme cases it might even be necessary to consult with members about the contribution rate changes.

Navigating the pension employer duties regime is a minefield with significant penalties and administrative costs for compliance failures, particularly where the Pensions Regulator (tPR) considers there has been a flagrant or reckless breach of the duties. We can assist with any queries about the duties to help ensure compliance with them.

tPR agrees Regulated Apportionment Arrangement (RAA) with Hoover

tPR has issued a report which confirms that it has approved an RAA in relation to the Hoover (1987) Pension Scheme (the Scheme). An RAA is an infrequently used restructuring mechanism designed to help financially distressed companies detach themselves from their defined benefit pension liabilities.

The Scheme has approximately 7,500 members and, as at March 2016, had a deficit on a buy-out basis of approximately £500 million. The Scheme trustee and Hoover Limited (Hoover) were unable to agree the deficit repair contributions (DRCs) payable to the Scheme by Hoover and, as a consequence, the Scheme's 2013 valuation was not completed by the statutory deadline of June 2014. tPR therefore decided to exercise its power under section 71 of the Pensions Act 2004 to appoint a "Skilled Person" to report on the level of DRCs that Hoover could afford (this is the first time tPR has exercised this power).

The Skilled Person's report highlighted that Hoover's financial position had deteriorated and that it could not afford to pay an appropriate level of DRCs. Negotiations therefore resumed between the trustees, Hoover, tPR and the Pension Protection Fund (PPF) and, in early 2017, an RAA was proposed by Hoover. This was approved by tPR on the basis that it was an appropriate and reasonable course of action. As a result of the RAA, the Scheme is expected to transfer into the PPF at the end of the PPF assessment period and will receive:

  • a cash lump sum of £60 million (materially more than the expected outcome of Hoover's insolvency);
  • the trustee's expenses in relation to the RAA; and
  • ordinary shares representing a 33% stake in Hoover.

In addition, Hoover will be able to continue trading.

However, tPR is at pains to point out that RAAs are rare and will only be agreed where strict criteria are met which balance the interests of the members, the PPF and employer. For example, tPR needs to be convinced that the RAA would provide better outcomes for the scheme members than could be achieved through the employer's insolvency and/or tPR's anti-avoidance powers. So, the message is clear - RAAs should not be seen as an easy "get out" for employers seeking to offload their defined benefit pension liabilities.

Recovery of overpayments – divergent Pensions Ombudsman determinations confuse the change of position defence

Two recent PO decisions (Mrs N (PO-10427), given by the Deputy Pensions Ombudsman, and Mrs R (PO-9632), given by the Pensions Ombudsman) have taken different views on whether scheme administrators can recover overpayments from a member who has erroneously received larger pension payments than she was entitled to.

Mrs R was a member of the NHS Pension Scheme and expressed a wish to retire in 2014. She received a letter from the administrators of the Scheme quoting her lump sum benefits as £78,000 but indicating that this was not a precise figure. On retirement, she received a further statement indicating that the lump sum figure was £124,902. She queried this with the administrators who responded that, if anything, the benefits may have been slightly under-estimated. She subsequently received the larger sum and made payments to her children, including payments towards her son's first house purchase and her daughter's wedding. When asked to repay the £44,875 overpayment, Mrs R said that it was not recoverable as she had made financial decisions which she would not have made had she received the lower sum. The Ombudsman determined that it was likely that Mrs R would have made the same gifts to her children even if she had not received the higher payment and she had not, therefore, demonstrated a change of position. On that basis, the administrators were entitled to recover the overpayment. The Ombudsman awarded £500 for distress and inconvenience.

In contrast, Mrs N was found by the Deputy Ombudsman to have changed her position in reliance on the higher monthly pension benefits paid to her because she had spent money on various home improvements, repaid her daughter's credit card debts and offered financial assistance to her brother. The Deputy Ombudsman found that she would not have made the purchases but for the overpayments and that her position had been irreversibly changed as a result. On that basis, the administrators were not entitled to recover the overpayments. Mrs N also argued that she should continue to receive the higher monthly pension payments as reducing her pension would cause financial hardship. The Deputy Ombudsman did not accept this argument and held that Mrs N was only entitled to the correct level of payment going forward.

Neither decision looks in any detail at the underlying legal authorities – they both focus on whether the expenditure would have been incurred had the member known the true position. The two determinations demonstrate the importance of the particular facts in any case and make the success of any change of position defence rather unpredictable.

FCA Consultation on pension transfers

On 21 June 2017 the FCA set out its Consultation Paper CP17/16: Advising on Pension Transfers (the Consultation). The Consultation makes interesting reading for all those who advise on transfers of safeguarded benefits i.e. DB to DC transfers, but will be equally interesting for employers and trustees considering liability reduction exercises such as pension increase exchanges (PIE) or enhanced transfer values (ETV).

It is estimated that up to £50 billion has been transferred out of DB pension schemes in the past two years (since the new pension flexibilities came into force). The FCA is concerned that those transferring out of DB schemes are not necessarily making the right financial decisions, particularly as they consider that "most consumers will be best advised to keep" DB pensions. The combination of individuals being able to transfer out of guaranteed income and the fact that transfer values are at historically high levels has largely been the impetus behind the Consultation.

In short, the FCA is proposing to:

  • replace the current transfer value analysis requirement with a comparison showing the value of the benefits being given up;
  • require all transfer advice to be a personal recommendation, which provides a suggested course of action i.e. to transfer or not to transfer; and
  • introduce guidance for pension transfer specialists (and update guidance for financial advisers more generally) on how they should approach this type of advice and judge whether or not a transfer is appropriate.

The Consultation's focus is on ensuring that all those seeking this type of advice benefit from a personal recommendation that they can then follow.

For financial advisers, the potential application of the Consultation outcome seems obvious. However, it is also likely to have an impact on employers and trustees, particularly where liability reduction exercises are proposed. Where the outcome of financial advice is likely to be a personal recommendation to large numbers of members not to sign up to a PIE or ETV, many employers may simply consider it pointless to put liability reduction proposals on the table. Conversely, when they do, trustees are likely to feel more secure in the knowledge that members will be getting personal advice that makes them think twice about what is on offer.

Alteration of ancient and modern PPF contingent asset agreements

The PPF is in the process of setting its levy policy for the next three levy years commencing with levy year 2018/19. Among a number of changes, the PPF has announced that some, if not all, of its standard form contingent asset documents are being reviewed and updated.

The PPF intends that all existing contingent asset agreements that are submitted for PPF recognition (and any consequent levy reduction) in the 2018/19 levy year will need to be amended or re-entered so that they are consistent with the corresponding new standard form documentation.

The reason for this change is twofold. First, there are a number of versions of the PPF's standard form documentation in existence and which have evolved since the PPF's inception. The PPF considers the current review to be an opportunity to consolidate changes that have been made to the standard form documentation over the last decade and to align all PPF recognised contingent assets on consistent terms. Second, the PPF has identified a potential interpretation issue with the operation of the cap on a guarantor's obligations under certain contingent asset documents and wishes to clarify the drafting to remove any possible ambiguity.

The final policy position on this proposal is yet to be confirmed by the PPF. It is significant for any scheme that benefits, or intends to benefit, from a PPF levy reduction using a contingent asset agreement. It is also significant for pension schemes that have a contingent asset agreement that may not be submitted for a levy reduction but is based on a PPF standard form document.

Schemes affected by this issue should carefully review the PPF's comments in its next consultation document (to be issued later in 2017). Given the time it might take to agree changes to existing contingent asset agreements, it is also to be hoped that the PPF will allow additional time to transition to the new standard form wording.







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Graham Wrightson

Graham Wrightson
Partner

T:  +44 20 7809 2557 M:  +44 7826 945 534 Email Graham | Vcard Office:  London

Alex Rush

Alex Rush
Senior associate

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