05 Sep 2016

Pensions snapshot - September 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 ​​​​August 2016 in relation to occupational pension schemes. The topics covered in this edition are:

The Regulator suggests compulsory clearance

In the wake of the collapse of BHS, the Chief Executive of the Pensions Regulator (tPR) has suggested that the clearance regime should be enhanced to protect members of defined benefit pension schemes more effectively.

In an interview with the Financial Times, Lesley Titcomb said "Another BHS-type sale could happen because of clearance being voluntary. That is why…we need to look at…whether, in certain circumstances, corporate transactions should come to us. We are talking about a limited set of circumstances here, perhaps where there is underfunding…any such power has to be proportionate. To require all corporate transactions to come through us would gum up the system."

Ms Titcomb's suggestion comes at a time when applications under its clearance regime have fallen by more than 97% over the last ten years. The indications are that the idea of compulsory clearance has some traction within the DWP and so it will be interesting to see whether the Government develops the Regulator's suggestion further and, if so, what the thresholds for compulsory clearance might be.

EU General Data Protection Regulation – Clock ticking on big changes to data protection law

Sweeping changes to data protection requirements for all organisations are due to come into force across the EU from 25 May 2018 further to the EU General Data Protection Regulation (GDPR) which was finally approved earlier this year after four years of legislative debate.  Despite the UK electorate's decision to leave the EU in June's referendum, the position of regulators and experts is that UK organisations should still continue to prepare for implementation of the GDPR (see, for example, the Information Commissioner's Office post).  This is due to the extra-territoriality of certain provisions, the timing of the implementation of the law (at which point, the UK is unlikely to have actually left the EU) and the importance to the UK of ensuring its laws are "adequate" and therefore equivalent to those across the EU to assist with data flows.  Some key changes to be aware of for pension funds, trustees, administrators and employers are as follows:

  • Administrative fines - Fines are greatly increased from the current regime (the current UK maximum fine is £500,000) with a maximum fine of EUR 20,000,000 or 4% of an undertaking's total worldwide annual turnover.  While there is uncertainty about how "turnover" will be applied with respect to a pension scheme, either way, the potential liability of trustees is greatly increased.
  • Breach notification – a formal breach notification regime is introduced requiring data protection breaches to be notified to the regulator, where possible, within 72 hours and also to data subjects, for the worst breaches.
  • Legal grounds and notice provisions tightened – while existing mechanisms – such as consent or legitimate interests grounds – are retained, the burden to evidence these is greater under the new requirements.  There is also an increased level of detail required in privacy notices to individuals which will require the re-papering of relevant terms and conditions associated with pension policies.
  • Controller v Processors – some obligations (such as those relating to security, international transfers and breach notification) are imposed directly on so-called "data processors", as well as data controllers, for the first time.  This is important for scheme administrators (who are generally considered to be "data processors" meaning they process only on behalf of the scheme's controllers, namely the trustees) and means they may be directly liable to regulators and individuals for the first time.
  • Accountability – the principle of accountability requires organisations that handle personal data to have in place appropriate processes to document permissions obtained and risk assessments taken.  This is accompanied by greatly increased powers of audit for regulators.

With the law coming into force with direct effect (that is without needing national implementation) in 2018, all employers, trustees and scheme administrators should begin preparing for the changes required to meet the greatly enhanced requirements.

Mr X:  Please trustees, may I have some more? Deputy Pensions Ombudsman (DPO) rejects claim for interest on Barber window uplift

When Mr X's scheme entered a PPF assessment period, it came to light that its “Barber window” had not actually been closed until 26 April 1999 so pension ages were not equalised until that date – the scheme had been administered on the basis that equalisation was achieved on 1 December 1994 but the announcement consistent with that administration was deemed technically defective.

Therefore, male members (such as Mr X) were given an uplift to take into account a prolonged Barber window running from 1 December 1994 through to 26 April 1999 with their normal pension age for that period being 60.  In respect of Mr X this led to a further payment of £18,779.28.  Mr X claimed interest on the late payment of the pension arrears which had arisen as a result of the equalisation issue.  The DPO held that Mr X was not entitled to any such interest; there was no such requirement in the scheme rules or at law.  The DPO also noted that the scheme was in a PPF assessment period with no recourse to a sponsoring employer for ongoing contributions. As such, any further payment to take into account interest in respect of Mr X could have a detrimental impact on the scheme’s membership.

The outcome of this application is not particularly surprising. As a practical matter, the DPO did not engage with the question of how the interest would have actually been calculated; presumably this was out of scope given the dismissal of the complaint. Also, whilst the trustees had accepted the view that the scheme’s Barber window had not, on the face of the documentation, been closed until 26 April 1999, it was notable that there was some insistence at trustee board level that there was undiscovered documentation from 1994 that reflected closure of the Barber window at that date.

Pensions Ombudsman determination: Mr N (PO-9344) - employer under no obligation to provide top-up pension in most tax efficient manner

Mr N was a member of his employer's defined benefit (DB) pension scheme until it closed in 1998. At this point he joined his employer's defined contribution (DC) pension scheme and was told in an announcement (the Announcement) that he would receive the higher of the benefits under the DB scheme or the DC scheme on retirement from age 60 or later until age 65. The Announcement stated that the employer would make up any funding shortfall for this "top-up" pension by using any of the following methods:

1.   paying an extra contribution to the DC scheme;
 
2.   transferring the member's accumulated DC scheme fund to another employer scheme from which augmented benefits would be provided; or
 
3.   paying the top-up pension out of the employer's payroll.

When Mr N retired in 2013 the sponsoring employer of the DC scheme decided to provide the top-up pension by transferring his DC scheme fund to another scheme and providing augmented benefits. This augmentation gave rise to an annual allowance charge and Mr N complained that he had to pay more tax than was necessary because of the method chosen to fund the top-up pension.

The Ombudsman dismissed the complaint, noting that:

  • the employer had funded the top-up pension in full and had kept the promise made to Mr N when he joined the DC scheme; 
  • the Announcement made it clear that the employer could choose which method to use when funding the top-up pension;
  • the employer was therefore under no obligation to pay Mr N's benefits in a way that was most tax efficient for him, bearing in mind that what was the most tax efficient would be different for different members; and
  • the employer had made a considered decision after taking legal advice and had made considerable efforts to alleviate the effects of the tax charge on the member.

This determination demonstrates that the Ombudsman will not necessarily expect an employer to adopt the most tax-efficient approach when providing these types of top-up pensions. It also highlights the potential tax problems that can be encountered when top-up pensions are funded by means of a one-off augmentation, particularly in light of recent reductions in the annual allowance.

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