03 Jun 2020

Pensions snapshot - June 2020


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


The Pensions Regulator’s new criminal investigatory powers

The draft Investigatory Powers (Communications Data) (Relevant Public Authorities and Designated Senior Officers) Regulations 2020 (the Draft Regulations) were laid before Parliament on 21 April 2020. They amend the Investigatory Powers Act 2016 (the IPA) in order to grant communications data powers to relevant public authorities, including the Pensions Regulator (TPR). TPR would need to demonstrate a necessary and proportionate requirement to use the powers to assist with investigations.

The Draft Regulations grant data-gathering powers to TPR to prevent or detect serious crime. TPR will have power to request authorisation to obtain ‘communications data’ which includes the ‘who’, ‘where’, ‘when’, ‘how’ and ‘with whom’ of a communication but not what was written or said.

In non-urgent cases authorisation can be sought from the Investigatory Powers Commissioner (IPC). The IPC will grant authorisation where it is necessary for TPR to obtain communications data for the ‘applicable crime purpose’ i.e. where the communications data is wholly or partly events data, has the purpose of preventing or detecting serious crime or, in any other case, has the purpose of preventing or detecting crime or of preventing disorder. In urgent cases, the ‘designated senior officer’ within TPR can grant authorisation when satisfied that the request is necessary, urgent and proportionate for the ‘applicable crime purpose’. The designated senior officer within TPR is to be the ‘head of department in an enforcement or intelligence role’.

Once authorisation has been granted, TPR will be able to:

  • obtain the communications data itself from any person or telecommunication system;
  • ask any person it believes to be in possession of or able to obtain data, to obtain and disclose data; and
  • require a telecommunications operator who it believes to be in possession of or able to obtain data, to obtain and disclose data.

It is hoped that TPR will clarify when and how it will use the data-gathering powers contemplated by the Draft Regulations. It seems highly likely that these powers will be used in the fight against pension scams.

TPR makes further COVID-19 guidance tweaks

The Pensions Regulator (TPR) made various tweaks to its growing body of COVID-19 guidance in May.

First, in a blog on 26 May, TPR stated that it will not take enforcement action against DB scheme trustees who have been unable to meet various statutory transfer deadlines due to COVID-19 related issues. TPR states that this easement only covers DB schemes and will cease to apply at the end of June 2020. The blog also emphasises that:

  • DB schemes that can process transfer requests should do so; and
  • for all transfers, due diligence is still key to minimising the risk posed by scams.

Second, TPR updated its COVID-19 guidance on DC scheme management and investment. A new section has been added about the requirements that may apply where DC scheme trustees redirect scheme contributions to different investment funds where members' self-selected funds become gated (closed to new contributions). TPR notes that, unless certain specific conditions are met, such re-direction activity would likely result in a new default fund being created and give rise to a number of compliance requirements such as the charge cap and a statement of investment principles.

Finally, TPR’s automatic enrolment (AE) COVID-19 guidance was modified to make it clearer that employers' AE duties carry on as normal. In particular TPR points out that:

  • AE assessments will need to take any furloughing into account, which may affect workers' eligibility for AE;
  • if a furloughed worker is not eligible for AE they may still have a right to opt in to an AE scheme;
  • anyone who becomes eligible for AE whilst on furlough (e.g. as a result of reaching age 22) must still be enrolled automatically; and
  • it will still be necessary for employers to automatically re-enrol workers who have opted out of an AE scheme periodically.

Mr Y (PO–20823) – Member not entitled to higher level of annual increases despite receiving correspondence to the contrary

Mr Y accrued pension benefits in the Cooper Security Limited Retirement Benefits Scheme (the RBS) in the period from 1 December 1988 to 31 December 2003. Mr Y’s benefits were subsequently transferred from the RBS to the Cooper Consolidated Pension Plan (the Plan) in 2007. Mr Y started to receive a pension from the Plan in March 2008.

It is worth mentioning at this point that the Plan comprised various membership sections with different levels of benefits. The relevant sections for the purposes of this Determination were:

  • the Crouse-Hinds Section, which related to members who were employed by Cooper Crouse-Hinds (UK) Limited after 31 March 2000 and accruing benefits under the Weidmuller Plan until that date (Mr Y did not fulfil this eligibility criteria); and
  • the Ex-ASH Section, which related to members who were members of the ASH Pension Plan prior to 1 December 1988, became members of the RBS from 1 December 1988, transferred their RBS benefits to the Plan and were notified in writing that they were eligible for membership of the Plan (Mr Y did fulfil this eligibility criteria).

The Plan administrator conducted a review of the Plan’s benefits in 2017 and concluded that the annual increases that had been applied to Mr Y’s pension since 2008 were incorrect. As such, an overpayment of benefits had arisen amounting to £5,424. The administrator sent a letter to Mr Y in October 2017 confirming that, due to an administrative error, he had been incorrectly provided with annual increases in line with the rules of the Crouse-Hinds Section rather than of the Ex-ASH Section. The letter also confirmed that Mr Y’s future pension instalments would be reduced to the correct amount.

Mr Y initially filed a complaint under the Plan’s IDRP where he disputed the calculation of the overpayment. He claimed that a number of documents, including the Plan’s 2004 actuarial valuation and a pension increase letter he had received from the administrator in 2008, supported the view that he was a member of the Crouse-Hinds Section. The Plan’s trustee rejected the complaint on the basis that, whilst Mr Y had erroneously received the increases required under the Crouse-Hinds Section, he was only eligible for membership of the EX-ASH Section and his benefits should be calculated accordingly.

Mr Y subsequently asked the Pensions Ombudsman to decide if an overpayment from the Plan had occurred. This required the Ombudsman to decide whether, on the balance of probabilities, Mr Y was entitled to membership of the Crouse-Hinds Section or the Ex-ASH Section. The Ombudsman held that Mr Y had fulfilled the criteria for admission to the Ex-ASH Section but not for admission to the Crouse-Hinds Section. He therefore concluded that, in the absence of any evidence of a contractual promise to provide additional benefits over and above those under the rules and regardless of any conflicting documents, the Plan rules took precedence. As such, Mr Y was only entitled to the benefits promised under the Ex-ASH Section rules.

The Ombudsman recognised that the part of the Plan’s 2004 actuarial valuation which dealt with the Crouse-Hinds Section explicitly referred to Ex-ASH Pension Plan members, but considered that inclusion of those members within that section for the purposes of assessing the overall Plan funding position did not equate to their inclusion in that section for the purposes of determining benefits. In addition, the Ombudsman determined that the 2008 pension increase letter, which contained incorrect information, did not confer any entitlement to Crouse-Hinds Section benefits.

The Ombudsman noted that the Plan trustee had failed to confirm its position in respect of recovery of the overpayments and, as such, he could not make any findings on whether any defences against the recovery of overpayments might apply. However, this failure did mean that Mr Y was prevented from making any counter-arguments on recovery which, in turn, had caused him unnecessary and avoidable distress. He therefore directed the trustee to pay Mr Y £1,000 for the significant distress and inconvenience caused. He also welcomed the trustee’s offer to limit its recoupment to six years of overpayments rather than the full ten years, and its commitment to allow Mr Y a further opportunity to make representations and submit evidence in support of a “change of position” defence.

Mrs Y (PO-23903) - Recovery of overpayments following a widow’s cohabitation

Mr Y was a member of the Teachers’ Pension Scheme (TPS) until his retirement in 1986. He died in January 2011 and his widow, Mrs Y, began receiving a widow’s pension in April 2011. TPS rules provided that, if a member had been in pensionable employment on or after 1 January 2007 (a 2007 Member), the surviving adult’s pension would be paid for life. However, where that was not the case, the pension would cease to be payable if the recipient married, formed a civil partnership or started living with another person.

Annual letters to individuals were provided along with reminders reiterating this position. In June 2016, the TPS asked Mrs Y to complete a “dependant’s declaration form” in order to assess her continued entitlement to a pension. Mrs Y completed her form and indicated that she had been cohabiting in 2014. Consequently, TPS sought to recover an overpayment of £4,633.85 but offered a period of 22 months over which this could be repaid.

Mrs Y was unsuccessful in her overpayment appeals to TPS, the Department of Education and, also, the Pensions Ombudsman. She unsuccessfully argued that, although she was cohabiting, she did not (and did not expect to) receive any financial help from the person with whom she was living.

She also argued, albeit unsuccessfully, that the TPS rules discriminated against her since widows of 2007 Members received a pension for life. However, her claim for direct discrimination failed as a complaint under the Equality Act 2010 as Mrs Y was unable to demonstrate that she had been treated less favourably because of a protected characteristic such as age, marriage or sex. The difference in treatment was because her husband had not been in pensionable service after 1 January 2007. In addition, any suggestion of indirect discrimination could be justified if it was a proportionate means of achieving a legitimate aim; this extended to the additional cost burden on TPS and, as such, the decision not to make the change retrospective was proportionate. Finally, Mrs Y could not establish a defence of change of position as she had received sufficient information from TPS about the fact that her pension would cease if she cohabitated.

Ketley v Revenue and Customs Commissioners - Loss of enhanced protection

The first-tier Tribunal (Tax Chamber) (FTT) has found that a taxpayer had unreasonably delayed in applying for enhanced protection, resulting in a potential charge to tax of over £1.5 million.

Enhanced protection is a form of transitional protection made available at 6 April 2006 to protect members’ pension benefits above the lifetime allowance. It was available to taxpayers who submitted a form to HMRC before 5 April 2009. HMRC has discretion to accept late applications where the taxpayer has a reasonable excuse.

The appellant in this case, Mr Ketley, had built up a pension fund of around £5.2 million by 6 April 2006. Mr Ketley was aware of the changes to the lifetime allowance and the possibility of enhanced protection, and instructed his financial adviser to apply for the protection. In October 2015, after a change of financial adviser, it became apparent that HMRC had not received Mr Ketley’s application form and Mr Ketley did not have a certificate from HMRC confirming his protection was in place. Mr Ketley took steps to investigate whether he could bring a professional negligence claim, but no steps were taken to see whether Mr Ketley could rectify the position with HMRC until August 2016. A new application form was not submitted to HMRC until December 2016.

The FTT confirmed it was reasonable for Mr Ketley to have relied on his financial adviser to organise and submit the application to HMRC. This was the case even though Mr Ketley was an experienced businessman and financially literate. Mr Ketley therefore had a reasonable excuse for the delay in submitting his application.

However, the FTT found that the reasonable excuse ended in October 2015 when it was discovered that HMRC had not received Mr Ketley’s original application. There was a delay of 10 months between the end of the reasonable excuse and the submission of the new application. The FTT found that the 10 month delay was unreasonable, and that was sufficient to entitle HMRC to decline the late application. While this may seem to be a harsh decision in the circumstances, it does highlight the need to act promptly where errors are discovered – particularly when it comes to pensions taxation.

The RPI rules lottery continues

Whilst the DWP consultation on reform of the Retail Prices Index (RPI) remains open, there have been two recent High Court cases which consider whether a sponsoring employer was permitted to move away from RPI for the purposes of uprating member benefits.

The first of these is Carr v Thales Pensions Trustees Limited. This was an appeal against a Pensions Ombudsman’s determination which had concluded that the pension scheme could not move away from RPI for the purposes of calculating pension in payment increases. There were two limbs to the relevant definition:

"[1]  the percentage increase in the retail prices index over the year ending 30 September in the calendar year prior to that in which the increase is due to take place subject to a maximum of 5 per cent [2] as specified by order under Section 2 of Schedule 3 of the Pension Schemes Act".

The pension scheme had moved away from use of RPI in 2016 in reliance on the fact that the second limb of the definition would allow the use of CPI, which was now the measure of inflation stipulated in statute. The High Court, upholding the Ombudsman’s decision, held that the first limb of the definition was in fact determinative and RPI was therefore hard-coded into the scheme rules. The second limb was merely a descriptive aid. At the time of drafting the draftsman would not have contemplated a divergence between the two limbs (as RPI was also used under statute at that time). As there was now a divergence, the first limb of the definition meant that RPI was hard-coded.

The second High Court case (Ove Arup v Trustees of the Arup UK Pension Scheme) considered whether the following wording would allow a move away from RPI:

"If the composition of the Index changes or the Index is replaced by another similar index, the Trustees, after obtaining the Actuary's advice, may make such adjustments to any calculations using the Index (or any replacement index) as they consider to be fair and reasonable".

It was argued by the employer that, despite the fact that RPI continued to be published and had not been discontinued there had been a ‘functional replacement’ of the RPI due to the changes made to the index and criticism of its appropriateness. This argument was dismissed on the ground that replacement of the index was an act to be done by the producer of the index (not the user of the index in terms of decrying its function). As RPI continued to be published there was no replacement. Moreover, the ‘adjustments to any calculations using the Index’ did not mean that RPI could be departed from but, instead, the trustees could counteract any changes to its composition in a fair and reasonable way when uprating scheme benefits.

Both of these cases demonstrate that the ‘rules lottery’ in determining whether RPI can be departed from is still very much alive and kicking!  It seems that the courts will not readily allow a switch to an alternative index.