This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of October 2015 in relation to occupational pension schemes. The topics covered in this edition are:
Court of Appeal rules on same sex survivors' pensions
The Court of Appeal has ruled in the case of Walker v Innospec Limited that same sex survivors' pensions may be calculated only by reference to post-4 December 2005 service.
Mr Walker claimed that his former employer, Innospec, had unlawfully discriminated against him because its pension scheme would only provide his surviving civil partner with a spouse's pension in relation to his post-4 December 2005 service (the effective date of the Civil Partnership Act 2004 being 5 December 2015). All of Mr Walker's service pre-dated 5 December 2005.
The Court rejected Mr Walker's appeal. The Equal Treatment Framework Directive did not have retroactive effect and so his scheme benefits had to be determined by reference to the law in force when he was in service. The discriminatory treatment highlighted was lawful at the time Mr Walker accrued his benefits.
The judgment will be welcomed by sponsoring employers of schemes which provide same sex survivors' pensions only in respect of post-4 December 2005 service.
Court of Appeal rules on part-time workers' pensions
During the same hearing, the Court ruled in the case of O'Brien v Ministry of Justice that pension benefits relating to part-time service need only take account of part-time service completed on and after 7 April 2000.
Mr O'Brien was a part-time, fee-paid judge who had been excluded from membership of the Judicial Pensions Scheme (JPS). In 2013 the Supreme Court had ruled that his exclusion could not be objectively justified and an Employment Tribunal subsequently decided that he was entitled to a pension from the JPS in respect of all his service.
The Tribunal's decision was subsequently reversed by the Employment Appeal Tribunal which decided that Mr O'Brien was only entitled to a pension in respect of service from 7 April 2000 (when the Part Time Workers Directive was required to be transposed into national law).
The Court rejected Mr O'Brien's appeal on the same grounds as Mr Walker's appeal. Mr O'Brien did not accrue pension rights in relation to his pre-7 April 2000 service and could not accrue such rights retroactively.
HMRC publishes further brief on reclaiming VAT charged on pension fund management costs
HMRC has recently issued Revenue and Customs Brief 17/15: deduction of VAT on pension fund management costs. This provides further information on HMRC's position regarding the circumstances in which pension scheme sponsors may reclaim VAT charged on pension fund management costs. Some highlights are:
HMRC's view is that an employer would not be entitled to a Corporation Tax deduction where it pays directly for pension fund investment management costs under a tripartite contract.
- other options which might be used to obtain a VAT deduction are considered, including the supply of scheme administration services by the trustees to the employer and adding a corporate trustee to the employer’s VAT group.
- the transitional period during which employers may continue to use the VAT treatment outlined in the existing HMRC VAT Notice has been extended to 31 December 2016. This provides some respite as current invoicing practices can continue for a while longer.
We have recently provided a separate update on this.
High Court rules on interpretation of amended pension in payment increase provisions
The High Court has given judgment in the case of Dutton v. FDR Ltd concerning the construction of the pension increase provisions in the FDR scheme rules.
Before June 1991, the scheme rules provided for DB pensions to increase by 3% per annum compound. The rules were amended in June 1991 to instead provide for increases equal to the lower of RPI and 5% (5% LPI) and the Scheme was administered on this basis.
The trustees and employer agreed that applying 5% LPI to pre-June 1991 pensions breached a restriction in the scheme's power of amendment that prevented pensions in payment and accrued rights from being affected prejudicially. However, the employer argued that pre-June 1991 pensions should be increased each year by the greater of 3% fixed and 5% LPI but with each of these figures calculated in any given year on a cumulative basis using the initial starting pension (rather than by reference to the pension actually in payment when the increase was applied).
The Court rejected this argument and concluded that the Trustees' submission gave the "most natural meaning" to the rules and was consistent with the effect of the amendment power restriction, i.e. that members' pre-June 1991 pensions should be increased annually by the greater of 3% fixed and 5% LPI on a compound basis.
DWP consults on further legislative changes relating to abolition of contracting-out
The DWP is consulting on further changes to existing legislation to reflect the abolition of salary-related contracting-out from April 2016. Most changes are fairly minor but some are important to note. For example, the DWP proposes changing the "connected employer" test which must be satisfied in order to make a transfer of benefits without member consent.
Government puts CDC, DA and "pot-follows-member" on hold
Collective Defined Contribution, Defined Ambition arrangements and the proposed "pot-follows-member" transfer regime have all been put on hold by the Government.
The Minister of State for Pensions, Ros Altmann, said in a ministerial statement that it was "not the right time" to ask the pensions industry to "absorb the new swathe of regulation that would be needed to make such further reforms work effectively…The market needs time and space to adjust to the other reforms underway and these areas will be revisited once there has been an opportunity for that to happen."
Pension scams – Regulator Determinations Panel removes three trustees
The Pensions Regulator has published details of its investigation into a suspected multi-million pound pension scam case in which funds totalling £13.7 million across 17 pension schemes, and belonging to 242 members, have disappeared. As a result, the Regulator's Determinations Panel has removed three trustees and appointed an independent trustee to the schemes. The Regulator uncovered various breaches of trust by the trustees, including misappropriation of scheme funds and receipt of commission payments derived from members' transfer values.
Chancellor delays announcement on pensions taxation until spring Budget
George Osborne has confirmed that further details regarding the reform of pensions tax relief will be unveiled in the March 2016 Budget. In a parliamentary answer concerning the ongoing consultation on pensions taxation, Mr Osborne said, "It is a completely open consultation that will lead to a genuine Green Paper, and we are receiving a lot of interesting suggestions on potential reform. We will respond to that consultation fully in the Budget."
The next few months could therefore see high earners piling contributions in to pension schemes in order to make the most of the current tax system.
Ongoing surpluses – final reminder!
As reported last month, the legislation permitting trustees of a scheme to pass a resolution to preserve any power to pay any ongoing funding surplus to a scheme's sponsor falls away after 5 April 2016.
If Trustees have not yet passed a resolution, they should consider whether it would be appropriate to do so before the end of this year.