07 Nov 2016

Pensions snapshot - November 2016

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This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of October 2016 in relation to occupational pension schemes. The topics covered in this edition are:

 

BHS - the latest instalment

In the latest twist to the BHS pension deficit saga, the Pensions Regulator (tPR) has commenced formal enforcement action against Sir Philip Green and Dominic Chappell.

tPR has sent warning notices to both individuals, as well as to a number of the companies involved in the BHS insolvency. The notices (each of which apparently runs to over 300 pages) set out why tPR believes that the particular person or entity should provide support to the BHS pension schemes and include detailed evidence to support the use by tPR of its powers to issue contribution notices (CNs) and financial support directions (FSDs). A CN demands a specified sum of money, whilst an FSD requires recipients to put in place ongoing support for a pension scheme, which must first be agreed with tPR.

Although no CN or FSD has yet been issued, the issue of warning notices is an important indication of tPR's intentions in this case, which has received a huge amount of press coverage. The Chief Executive of tPR, Lesley Titcomb, said that "Issuing Warning Notices at this time reflects the outcome of our investigations and that we are yet to receive a sufficiently credible and comprehensive offer in respect of the BHS schemes… If parties wish to approach us with settlement offers, that course remains open to them."

 

High Court allows rectification of indexation rate to be applied to spouse's pension

In Sovereign Trustees Ltd and Anor v Lewis [2016] EWHC 2593 (Ch) the High Court granted rectification, by way of summary judgment, of a provision relating to the increases to be applied to a spouse’s pension in payment.

A deed of amendment was entered into in April 2011 in relation to the scheme. The purpose of the April 2011 deed was simply to amend benefits to allow the scheme to be deemed “broadly comparable” to the Local Government Pension Scheme. Prior to that April 2011 deed, a spouse’s pension would only be increased at a rate of 5% fixed per annum on the death in service of a member. However, the April 2011 deed erroneously provided for all spouses’ pensions (not just those where the member had died in service) to be increased at a rate of 5% fixed per annum. This mistake was carried through to an October 2011 deed in relation to the scheme. Once the mistake was discovered, a deed was entered into in 2012 which attempted to amend the position to the correct one, for the future, pending rectification. However, the 2012 deed also mistakenly repeated the error (that had been made in the April and October 2011 deeds) in relation to the indexation rate for spouses’ pensions.

Chief Master Marsh held that rectification should be granted, thereby effectively removing the error from the scheme documentation. In coming to this conclusion on the April 2011 and October 2011 deeds, Chief Master Marsh considered that the witness evidence before him was such that it was clear that no such change (i.e. applying the 5% fixed rate across all spouses’ pensions) was intended. If there had been such an intention this would have surely been announced to members (and no such announcement was made) and no instructions had been given to the drafting solicitors to make the change (the only instructions being given to draft a deed to allow the scheme to achieve the status of being “broadly comparable”).

The case is another example of the summary judgment procedure being used to rectify a scheme document where there is an obvious error.

 

Pensions Ombudsman decides one-off error did not create entitlement to higher tax free lump sum

A member, Mrs N, alleged that she had taken her decision to retire based on an incorrect retirement quote. The main error related to her pension commencement lump sum (PCLS) which turned out to be around £22,500 less than the amount that was first estimated and communicated to her in a retirement benefits statement.

The scheme's trustees provided Mrs N with the option to change her retirement plans and not take the PCLS but Mrs N complained that she should be entitled to the higher PCLS. The Deputy Ombudsman, while accepting that there had been maladministration, rejected her complaint, stating that the retirement quote did not constitute a contractual offer. The member's entitlement from the scheme could only be the one provided for by the scheme's rules. Following on from this observation, the Deputy Ombudsman stated she would only need to consider any loss that Mrs N had suffered as a direct result of the initial, incorrect, retirement quote, if she considered that Mrs N had relied on that quote to her detriment and that such reliance was reasonable.

The Deputy Ombudsman found that it was not reasonable for Mrs N to rely on the incorrect quote because earlier pension statements she had received before the incorrect retirement statement showed a much lower PCLS figure and that discrepancy should have put her on notice that the retirement quote might be wrong.

This determination suggests that trustees and scheme administrators may not be liable for clear one-off mistakes. It also confirms that £500 for this type of error (which had been offered to Mrs N) constitutes reasonable compensation for any distress and inconvenience caused.

 

The Pension Schemes Bill

"We are introducing the Bill now because it will, from the day it becomes law, protect consumers by preventing providers winding up an existing master trust while raising charges to cover the costs of doing so." So said Lord Freud during his introduction to his motion that the Pension Schemes Bill (the Bill) be given a second reading in the House of Lords on 1 November. The Bill seeks not only to protect members, it does so in some circumstances from the date of the Bill's publication (i.e. 20 October 2016) if it becomes law and it introduces a wide ranging authorisation regime for master trusts (MTs).

MTs will need to show they are run by fit and proper persons, are financially sustainable and have an approved business plan, have assurance about the scheme funder's financial situation, that the administration and governance systems and processes are adequate and that there is an adequate continuity strategy in place. Existing MTs will be brought under the authorisation regime and tPR will publish and maintain a register of all authorised MTs.

tPR will be given new powers to intervene where MTs are at risk of failing. Such powers will include penalty notices and the ability to withdraw authorisation entirely. Requirements placed on trustees in the event of wind-up or closure focus on continuity of member saving and support for employers in relation to auto-enrolment. Although, where tPR "presses the pause button" on contributions into MTs, it is still unclear where the liabilities lie for compliance with auto-enrolment.

The Bill should encourage consolidation in the market and protections offered to members through the Bill may already be in place, if provisions are to have retrospective effect from 20 October 2016. As the intention in the Lords appears to be to regulate DC schemes that are neither single-employer trust based schemes nor GPPs, some are concerned about the definition of MTs and how wide the authorisation net is being cast. Also, where there's additional regulation, there's additional cost - it may be that some schemes that will be caught by the Bill will not appreciate either.

 

Trustee's decision to not change pension payment date reasonable despite adverse tax consequences for members

Mr E was a pensioner member of the HSBC Bank (UK) Pension Scheme (the Scheme). The Scheme rules stipulated that pensions were paid on the first day of each month.

In 2013, the Scheme's trustee informed Mr E that, following the introduction of real time information (RTI) at the beginning of the 2013/14 tax year, his pension payment due on 1 April 2014 would be taxed as income received in that tax year (previously it would have been taxed as income received in the following tax year). This meant Mr E had to pay additional income tax of £582.30 for the 2013/14 tax year.

Mr E complained to the Scheme administrator that the additional tax could have been avoided by changing the pension payment date to 6 April. The administrator informed Mr E that, after careful consideration, it had decided not to recommend to the trustee that it change the payment date to 6 April.

Mr E subsequently complained to the trustee under the Scheme's IDRP. The trustee endorsed the administrator's decision, noting that the administrator had discussed the impact of RTI with tax experts, was aware of the impact on members and had decided (in the interests of treating all members fairly, and taking into account the associated time and expense) that it was not appropriate to recommend the payment date change. The trustee itself took a number of factors into account in endorsing the administrator's decision:

  • the rules governed when pensions were paid;

  • the trustee had a discretion to change the payment date but it was, arguably, not a proper use of that power to change the date because of the introduction of RTI;

  • the trustee had no obligation to help members manage their individual tax affairs; and

  • RTI had resulted in 358 out of 601 pensioners paying extra tax, whereas a rule change would have affected all pensioners and could have impacted existing standing orders and direct debits.

Mr E complained to the Ombudsman's office that the trustee should have changed the pension payment date to 6 April and had disregarded advice from its appointed advisers to do so. He also submitted that the trustee had ignored his legitimate expectations that his financial losses would be considered.

The Deputy Pensions Ombudsman (the DPO) dismissed the complaint and noted that, whilst she sympathised with Mr E’s unfortunate position, this was not due to any maladministration by the trustee. The DPO noted that, when considering how a discretion has been exercised by a trustee, she would generally look at whether:

  • the correct questions had been asked;

  • the applicable scheme rules or regulations had been correctly interpreted;

  • all relevant but no irrelevant factors had been taken into account; and

  • the decision arrived at was perverse (i.e. one that no reasonable body would make).

The DPO held that the trustee had acted in accordance with these principles and within its powers under the Scheme's6 rules. Also, the trustee's decision to ignore advice from its appointed adviser was its prerogative as the decision-maker and it was reasonable for it to prefer its own opinion. The decision process was therefore not flawed and the trustee's decision was not perverse. Consequently, the DPO could not overturn the exercise of the discretion even if she might have acted differently.

This case is a useful reminder of the limits of the Ombudsman's power to intervene in decisions made by trustees. Unless the decision is one that no reasonable body would make, the Ombudsman will not replace its own view for that of the trustee – and trustees are free to disregard advice from their advisers should they wish to do so.

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