08 Dec 2013

Pensions snapshot - December 2013

Linkedin

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

  • Regulator's Code of Practice for trust-based DC schemes is published
  • New revaluation order published
  • Pensions Ombudsman case (Smyth): Employer sanctioned for failure to make contributions on time
  • Regulator publishes updated guidance on auto-enrolment
  • Pensions Ombudsman case (Tuttle): incorrect benefits quotation and duty to mitigate loss
  • Consultation by DWP on the definition of "money purchase"
  • Regulator publishes guidance for trustees on asset-backed contributions

Regulator's Code of Practice for trust-based DC schemes is published

The Pensions Regulator (tPR) has continued its advances into defined contribution (DC) scheme territory by publishing a code of practice for trust-based DC schemes.

tPR has supported the publication of the Code by reference to the fact that it necessary to get DC schemes right in order to ensure the success of auto-enrolment.

The Code sets out five core areas of scheme governance, as well as practical suggestions as to how DC scheme trustees can meet the DC "quality features". The five core areas of scheme governance for DC scheme trustees under the Code are:

  • Know your scheme (for example, knowledge of the key trustee powers and scheme documentation);
  • Risk Management (for example, awareness of fraud including pensions liberation and ensuring management of costs);
  • Investment (for example, being clear as to what the investment powers of the trustees are and the setting of a default investment strategy);
  • Governance of conflicts of interest and advisers/service providers (for example, ensuring a proper agreed conflicts of interest policy is in place); and
  • Administration (for example, ensuring membership date is complete and accurate).

The Code should prove useful in giving structure to the activities of DC pension scheme trustees.

New revaluation order published

The Occupational (Pensions) Revaluation Order 2013 was published on 22 November.

The Order specifies the percentage by which deferred benefits coming into payment at normal pension age under a defined benefit scheme during 2014 must be revalued. This depends on how many completed periods of 365 days have elapsed since the relevant member left pensionable service. It applies to private sector pension schemes to the extent that the scheme rules provide that revaluation of deferred benefits is by reference to what is provided under statute.

The Government has once again decided that the Consumer Prices Index (CPI) is the most appropriate measure of inflation for these purposes. Under the statutory limited price indexation formula a cap of 2.5% applies in relation to post 6 April 2009 service.

CPI inflation was recorded at 2.7% for the 12 months to 30 September 2013 and therefore the higher and lower revaluation percentages for deferred benefits have been set at 2.7% and 2.5% respectively for the 2013 calendar year.

Pensions Ombudsman case (Smyth): Employer sanctioned for failure to make contributions on time

The Pensions Ombudsman (PO) has found in favour of an employee where an employer failed to make contributions on behalf of the employee on time under a salary sacrifice arrangement.

The employee, Mr Smyth, was a member of the Woolf Engineering Pension Scheme (the Scheme). He had entered into a salary sacrifice arrangement with his employer, Woolf Engineering Limited (Woolf), and gave up part of his salary in return for a corresponding contribution by Woolf to the Scheme (contributions which Woolf on various occasions failed to make, citing cash flow problems).

Interestingly, Woolf stated that it had received advice which said it did not have to make the contributions – even though the legislation imposes strict time limits for the payment of contributions to a defined contribution scheme. The basis for Woolf's argument (though not entirely clear from the PO's decision) seems to be that the contributions made under the salary sacrifice arrangement on behalf of Mr Smyth were employer, rather than employee, contributions and therefore not subject to such strict statutory time limits.

However, the PO had no sympathy with this line of reasoning. It made clear that Woolf could not reduce Mr Smyth's pay under the salary sacrifice arrangement and then not pay a corresponding contribution into the Scheme; this was breach of a specific agreement made between the employee and employer. Even if characterised as an employer contribution by reason of the salary sacrifice arrangement there were still statutory time limits that Woolf should have complied with when making the contributions.

The PO held that Woolf was required to put Mr Smyth back in the position he would have been had all the contributions been paid without undue delay and, in addition, pay Mr Woolf £250 for distress and inconvenience caused. The case shows that the PO will have no sympathy for an attempt to avoid statutory time limits for the payment of members' contributions even if, technically, they fall to be an employer contribution by reason of a salary sacrifice arrangement.

Regulator publishes updated guidance on auto-enrolment

tPR has published updated versions of its detailed guidance notes about auto-enrolment. The guidance notes have been updated to reflect various changes to the auto-enrolment legislation which came into force on 1 November 2013.

The revised guidance comes at a time when tPR is making its first auto-enrolment compliance visits to investigate how employers are implementing auto-enrolment. This is part of a programme of compliance visits and tPR has stated that, over the coming months, it will be visiting employers in other sectors who it considers will face significant compliance challenges when it comes to auto-enrolment.

Pensions Ombudsman case (Tuttle): incorrect benefits quotation and duty to mitigate loss

In this case the PO upheld a complaint that a member of the NHS Pension Scheme, Mrs Tuttle, relied on an incorrect benefit quotation when she decided to retire age 54.

The quotation provided did not incorporate an appropriate actuarial reduction to reflect Mrs Tuttle's retirement at age 54. The PO took the view that, had it not been for the incorrect benefit quotation, Mrs Tuttle would not have retired at age 54; she would have instead retired at age 55. The PO decided that, on this basis, there were two heads of compensation to which Mrs Tuttle was entitled:

  • The equivalent of the pension that she would have received at age 55; and
  • Compensation based on the net income she would have received in her normal employment had she stayed on in that employment until age 55.

The PO also decided that it was relevant to take into account the fact that Mrs Tuttle had effectively mitigated her loss by working extra shifts for the Marie Curie Cancer Centre on her retirement at age 54. Therefore, in deciding the compensation to be paid to her, an appropriate deduction would be made to reflect the amount earned by Mrs Tuttle by reason of the extra shifts undertaken at the Marie Cure Cancer Centre for the period between her actual retirement and reaching age 55.

The case is interesting in that it demonstrates that the PO considers it has sufficient standing to order a remedy based on loss of earnings (as opposed to simply loss of benefits under a pension scheme). It also shows that the PO considers there is a duty to mitigate loss on the part of the pension scheme member and that it will closely examine all amounts involved to arrive at suitable compensation.

Consultation by DWP on the definition of "money purchase"

The Department for Work and Pensions (DWP) has issued a consultation paper, draft statutory instrument and impact assessment on transitional changes in relation to the new definition of "money purchase benefits" in section 29(1) of the Pensions Act 2011.

The issue regarding the definition of "money purchase benefits" arose because of the Supreme Court ruling in Houldsworth and another v Bridge Trustees Ltd and another [2011] UKSC 42 (Bridge Trustees). The DWP did not agree with the way in which the statutory definition of "money purchase benefits" was construed in Bridge Trustees and therefore proposed legislation to clarify that the statutory definition of "money purchase benefits" should only apply to a situation where there was no risk of a funding deficit.

It is anticipated that the majority of schemes affected by this change will be hybrid schemes. The draft regulations make clear that schemes affected by this new definition of "money purchase benefits" will not have to revisit key decisions taken before 27 July 2011 (this is the date of Supreme Court ruling in Bridge Trustees and the date the DWP issued its announcement that it would amend the statutory definition of money purchase benefits). Therefore, for example, pension schemes will not have to revisit employer debt events occurring on or before 27 July 2011. The consultation closes on 12 December 2013. Please click here to access all the consultation documentation.

Regulator publishes guidance for trustees on asset-backed contributions

tPR has published guidance for trustees to assist them in evaluating whether entry into an asset-backed contribution structure (ABC) would be beneficial for the pension scheme. In summary, an ABC is a contractual arrangement between trustees and a member of the sponsoring employer’s group which involves regular payments to the scheme for the duration of the arrangement, with the payment stream deriving from an underlying asset.

The guidance notes that, in considering any ABC, tPR will generally expect trustees to obtain extensive legal, actuarial, covenant and asset valuation advice and to consider whether there are any viable alternatives to entering into the ABC. Trustees will also need to consider carefully the payment profile under an ABC in the context of managing the scheme's deficit and whether the value of the underlying asset justifies the length of the payment plan proposed. It will also be important for trustees to determine whether they might be giving up any claims, interests or assets on entry into the ABC, whether it could jeopardise negotiation of increased deficit repair contributions in the future and whether it would impair their ability to carry out de-risking exercises.

The guidance also sets out some of the main risks that trustees should consider when entering into such arrangements – for example, potential illegality of the ABC proposed, a weaker underlying asset than anticipated or an inflexible schedule of payments delaying full funding.

tPR notes that it will carry on with its current approach to ABCs and reiterates that entry into an ABC is a decision for the trustees to which it will not give "approval". However, tPR also makes it clear that, where appropriate, it will challenge trustees’ decisions to enter into ABCs, but in a risk-based and proportionate manner. The full guidance can be found here.

Linkedin

KEY CONTACT

Graham Wrightson

Graham Wrightson
Partner

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

Naeem Noor

Naeem Noor
Senior associate

T:  +44 20 7809 2092 M:  +44 7785 464 458 Email Naeem | Vcard Office:  London