04 Feb 2019

Pensions snapshot - February 2019

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

 

Auto-enrolment minimum contributions: reminder for employers

As mentioned in last month's snapshot, the statutory minimum contribution rates necessary for a defined contribution pension scheme to qualify as an auto-enrolment scheme are increasing on 6 April this year.

The minimum total pension contribution requirement is rising to:

  • 8% where contributions are based on qualifying earnings; and
  • 9% where contributions are based on basic salary.

The qualifying earnings band is also changing.

Aside from ensuring their scheme meets the necessary minimum contribution requirements, employers should check that their payroll systems are prepared for these changes.

In addition, where the employee contribution rate is increasing, employers should consider:

  • informing their employees about the increase; and
  • whether the increase triggers a requirement to consult with employees about the increase.

We can assist employers who are uncertain about whether a consultation requirement applies, along with any other queries concerning general compliance with their statutory pension duties.

Pensions Regulator sets out lessons learnt from Kodak

The Pensions Regulator (TPR), in response to a request from the Work and Pensions Committee, has published a letter setting out the lessons learnt from its role in the Kodak restructuring and how it proposes to deal with such matters going forward.

By way of background, TPR approved a regulated apportionment arrangement in relation to the Kodak Pension Plan whereby the assets and liabilities were moved out of that pension arrangement into a successor pension arrangement.  The UK sponsoring employer and the US parent company were relieved of their pensions liability with the trustees of the pension arrangement acquiring a Kodak business which was projected to meet the funding liabilities of the successor pension arrangement.  However, that Kodak business has not performed as well as expected and the successor pension arrangement will now enter the Pension Protection Fund (PPF).

In its letter, TPR notes that it should have commissioned its own independent advice in relation to the viability of the Kodak business that the trustees were acquiring instead of relying on advice commissioned by the trustees themselves.  TPR also notes it will be taking a more cautious approach to agreeing to a restructuring proposal where no substantive sponsoring employer support remains in place, including putting in place a memorandum of understanding with the trustees which would allow TPR to trigger a scheme wind-up if necessary.  Trustees will also need to demonstrate a compelling case if they are to take ownership of a business as a means of ensuring scheme funding.

TPR notes that restructuring proposals can work and there are many examples of this having been a success with members being put in a better position than they would have otherwise been.  However, the Kodak case does demonstrate that more robust processes are needed to ensure the viability of restructuring proposals to avoid the PPF ultimately having to accept the burden of a failing scheme.

Airways Pension Scheme: Trustee successful in application for Beddoe order for Supreme Court appeal

The High Court has granted a Beddoe order in respect of an appeal being made to the Supreme Court by Airways Pension Scheme Trustee Limited (the Trustee) in relation to the Airways Pension Scheme (the Scheme).

The case concerns the Trustee's decision in 2011 to amend the Scheme to provide itself with power to award discretionary pension increases. Last year the Court of Appeal ruled by a majority decision that the amendment was invalid because it constituted a use of the amendment power for an improper purpose. It therefore followed that the Trustee’s subsequent decision in 2013 to award all pensioner members a 0.2% discretionary increase was also invalid.

Unusually, the Court of Appeal granted the Trustee permission to appeal to the Supreme Court and so the Trustee has filed a Notice of Appeal. The hearing is provisionally listed for 3 and 4 July this year.

The Trustee has also applied to the High Court for a Beddoe order in relation to the appeal. A Beddoe order provides the court’s prior approval for a trustee to take a specific course of action in the courts. It confirms that the associated costs will have been properly incurred and that the trustee is indemnified by the trust assets in relation to the costs of the court proceedings.

The High Court has granted the Beddoe order, with Arnold J concluding that there was no inflexible rule whereby a trustee appealing a decision, made in internal trust proceedings, did so at their own risk with regard to costs. He held that the Trustee is entitled to be indemnified from the trust assets if, in the specific circumstances of the particular case, they would be acting in the interests of the trust as a whole by appealing. He accepted the Trustee's argument that the appeal could be in the interests of the trust as a whole even though it involved balancing the interests of different beneficiaries or classes of beneficiaries.

The Trustee's costs will therefore ultimately fall on British Airways (BA) as the Scheme sponsor. However, the judge made it clear that the Trustee does not have carte blanche to spend whatever it wants on the appeal. The Trustee estimated its costs at just under £1,300,000 but Arnold J considered it necessary for the courts to intervene to ensure that the costs are "kept within some semblance of reasonableness". He therefore restricted the costs in respect of which the Trustee is entitled to an indemnity from the trust assets to £1,034,000, which matches BA's estimated costs for the appeal.

The Pensions Regulator's statement on Brexit

There is still no clarity as to how (or perhaps even if) the UK will leave the European Union (EU). Against this backdrop of uncertainty, TPR has issued a statement on the UK's exit from the EU which should be of particular interest to trustees and employers of occupational pension schemes.

In its statement, TPR highlights that most workplace pensions are mainly domestic in nature and therefore it does not expect Brexit (on either a negotiated settlement or 'no deal' scenario) to have a significant impact on pensions legislation or on the ability of trustees to administer their schemes effectively. However, TPR has drawn attention to some areas for trustees and sponsors to consider.

Trustees and sponsors are reminded of the Brexit-related steps TPR expected them to initiate after the referendum outlined in its 2016 statement and in its 2018 Annual Funding Statement. The 2019 Annual Funding Statement is due in March 2019 and will provide an update. In the context of a 'no deal' scenario, a review of any actions or contingency plans, where relevant, should be undertaken by trustees. Trustees should familiarise themselves with the guidance published by The Department for Work and Pensions on the payment of occupational pension benefits to EU citizens in the UK and UK nationals in the EU. There should be communication between trustees, administrators and members and TPR points out the importance of maintaining continuity in the payment of benefits.

The UK Government and institutions of the EU are working closely with TPR to ensure that the position of authorised and approved cross border schemes and their members is considered. Trustees, as well as sponsors, should consider contingency plans in a 'no deal' scenario. Trustees are advised to wait until there is more certainty regarding the UK's exit before instigating any new applications for authorisation to commence cross border activity. 

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