10 Dec 2018

Pensions snapshot - December 2018

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This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:

 

Execute afresh or lose your PPF levy reduction

If your pension scheme has a contingent asset in place, it will not be able to recertify any previously compliant "Type A" (guarantee) or "Type B" (security agreement) contingent asset agreements for a levy reduction where the amounts guaranteed or secured by the agreement are subject to a fixed cap, unless the agreement is on the PPF's current standard form.

If your scheme is affected by this development, you should act now to ensure all necessary steps are taken by the 31 March 2019 deadline to enable the PPF to take your scheme's contingent asset into account for levy calculation purposes. Stephenson Harwood can help if you require assistance with the re-execution process.

DWP consulting on collective defined contribution schemes

On 6 November 2018, DWP published its consultation on collective defined contribution schemes (CDCs).  The consultation poses a number of questions on how CDCs may operate, drawing on the experience of Royal Mail who is seeking to establish such an arrangement.

CDCs are intended to provide a target income at retirement (as opposed to a pension promise which must be funded) and employers will therefore not be required to fund a shortfall. The risk of the target income objective not being met would fall on members as adjustments to member benefits would be made under CDCs where assets held are not sufficient to cover the original target income. This would result in target income being lowered accordingly.

The main areas covered in the consultation are:

  • the development of an authorisation process for CDCs;
  • the need for a valuation to determine whether member benefits require an adjustment; and
  • how to communicate with members about the balance between the income targeted for them and the potential need to adjust their benefits if targeted income is not achievable.

This is the beginning of a process for developing a framework for CDCs.  There is still a long way to go, including the development of a coherent legislative structure in which CDCs can operate.  The Royal Mail example shows there may be an employer demand for CDCs but it remains to be seen whether (and dependent upon appropriate legislation being put in place) CDCs will emerge as a market standard vehicle for pension provision, or be consigned to an anomalous trend.

Pensions Ombudsman determination (PO-16856): Dr E and the recovery of overpayments (and the Ombudsman's power to direct that disputed overpayments be recouped)

Dr E retired in 2004 and started to receive a pension from the Qinetiq Pension Scheme (the Scheme). The pension was overpaid by £2,664 between 2009 and 2016. The Scheme administrator contacted Dr E in August 2016 to inform him that the overpayments would be recouped by the Scheme trustees at a rate of £37 per month by reducing his pension income.

Dr E complained to the Pensions Ombudsman that the Scheme was not entitled to do this. In particular, he submitted that he had bought a property for his daughter, who had a complex personality disorder and was reliant on state benefits, in reliance on the overpaid pension. Dr E submitted that he would not have bought the property if he had known his true pension entitlement and that the purchase therefore constituted "a detrimental and irreversible change in position."

The Ombudsman determined that Dr E did not have a "change of position" defence against recovery of the overpayments. The Ombudsman concluded that, given the overpayments totalled £380 per year and given Dr E's daughter suffered from a medical condition, Dr E would most likely have made the purchase in spite of the overpayments. In short, Dr E's position had not changed detrimentally as a direct result of the overpayments.

Dr E also submitted that, if the Scheme was entitled to recover the overpayments, statutory time limitations should apply. Following the recent judgment in Burgess v BIC UK Ltd, the Ombudsman disagreed. He concluded that the recoupment attempted by the Scheme was an "equitable self-help remedy" and, as such, was not subject to a six-year limitation period under section 5 of the Limitation Act 1980.

The Ombudsman also commented on section 91(6) of the Pensions Act 1995. This states that, broadly speaking, where a member disputes the amount of a pension recoupment, the trustees cannot recoup the overpaid pension unless they have an order from a "competent court". In Burgess v BIC UK Ltd it was suggested (obiter dictum) by Mr Justice Arnold that the Ombudsman was not a competent court for the purposes of section 91(6). The Ombudsman used the Dr E determination to put forward arguments to support the view that the Ombudsman is a competent court which can be relied on in contested recoupment claims. However, confirmation of this issue by the courts is likely to be required in order to settle the point.

Pensions Ombudsman determination (PO-12962): Teachers' Pension Scheme member did not demonstrate detrimental reliance

A recent Pensions Ombudsman decision covered the treatment of Mrs P, a pension scheme member who was the subject of a substantive pension quotation error.

Mrs P received estimates of her pension entitlement from the scheme's administrator before taking voluntary redundancy. She then took voluntary redundancy and was subsequently informed that her pension would be roughly half of what had been quoted originally. The error arose from a payroll error, committed by her employer.

Mrs P claimed that she should receive a pension in line with the original estimate. She argued that she:

  • had questioned the initial estimate and had been assured the estimate was broadly accurate; and
  • would not have taken certain action, such as spending as much on a new property and associated renovations, had she known the correct position.

The Ombudsman sympathised with Mrs P's position and partially upheld her complaint with an award of £2000 for severe distress and inconvenience. However, the Ombudsman did not consider that Mrs P had surmounted the hurdle of demonstrating detrimental reliance on the erroneous estimates. The Ombudsman considered Mrs P would have incurred the expenses in any case because she knew that the pension quotations were wrong shortly before she committed to completing the property transaction and before she undertook any renovation work on the property.

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