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Legal Developments in the The Legal 500 United Kingdom 2011
Personal accounts and auto-enrolment: looking ahead
The government plans to introduce a new national ‘personal accounts’ pension system in 2012. From October of that year, all employers will be required to auto-enrol eligible employees into either the government’s new personal accounts scheme or, if it meets certain ‘qualifying’ criteria, the employer’s own pension arrangement.
Equalisation: judicial common sense prevails
The Court of Appeal judgment in Foster Wheeler v Hanley & ors [2008] is a welcome judgment that sets out the principles that must be applied to sex equalisation cases for defined-benefit pension schemes. Schemes have been told that they can adopt pragmatic approaches to equalisation, with no need to allow members windfall bonuses where these are not required to comply with the basics of European discrimination law.
Pensions Regulator statement: defined-contribution schemes
In the lead up to the introduction of the government’s personal accounts system in 2012, and against the background of growing numbers of defined-benefit schemes closing to future accrual, the Pensions Regulator (the Regulator) is now turning its attention to defined-contribution schemes. On 22 July 2009, the Regulator issued a statement called ‘Engaged employers and informed retirement choices – key to good outcomes for members of defined-contribution pensions’.
No relief for pensions as Chancellor targets high earners
The ink had barely had a chance to dry on the pensions ‘tax simplification’ measures introduced in April 2006 before the Chancellor announced plans, in his 2009 Budget, to introduce complex new rules that will restrict tax relief on pensions contributions for high earners. While the Treasury estimates that this measure will bring an additional £3m per year into government coffers, the cost for ordinary pension scheme members and the wider economy could be far higher.
Managing pension costs in an economic downturn
As the economic downturn continues, employers are increasingly considering ways to reduce their pension costs to aid survival. Several organisations have recently announced plans to modify existing pension arrangements. In the coming months many other employers are expected to follow suit. So what are the options for employers who want to reduce future pensions costs and what are the legal issues that need to be considered?
What does the new Equality Bill mean for pension schemes and employers?
The long-awaited Equality Bill (the Bill) has finally been published. The Bill is designed to harmonise discrimination law and to strengthen the law to support progress on equality. To achieve the latter of these two objectives, the Bill contains some significant new requirements that may impact on pension schemes and employers.
A cautionary tale of self-investment and personal liability
As investment strategies become more complex it is crucial that trustees comply with the relevant legal requirements. Recently there has been a series of Pensions Ombudsman cases that have imposed personal liability on trustees for inappropriate scheme investments. This article looks at two of these cases and the lessons that should be learnt from them.
Pensions Regulator: alert in the economic downturn
So far the Pensions Regulator has issued two statements (October 2008 and February 2009) on how it expects pension scheme employers and trustees to deal with the impact of the current economic crisis. In April the Regulator issued a further statement highlighting the kinds of behaviour that would cause it to intervene.
A new disclosure regime: for better or worse?
The Department for Work and Pensions (DWP) has finally issued a consultation paper outlining how it plans to revise the disclosure of information requirements for occupational pension schemes. The consultation proposes a simplified, more principles-based disclosure regime.
What a difference Heyday makes!
On 5 March 2009 the European Court of Justice (ECJ) ruled (in Heyday ) that the UK legislation that permits forced retirement at age 65 is unlawful, unless the UK government is able to justify having such a policy. This will be decided by the High Court, probably later this year.
Surviving the credit crunch
The past year has seen a sharp decline in the funding position of defined-benefit schemes. Increased pension scheme deficits come at the worst possible time for employers, many of whom are struggling to survive the economic downturn. At the same time, trustees are faced with the difficulty of having to balance the need to support their sponsor through the current crisis with their duty to protect members’ benefits.
A more powerful Pensions Regulator?
The Pensions Regulator’s powers are being extended to enable the Regulator to respond more effectively to the emergence of new business models (including alternatives to traditional buyout structures) that may impact on the security of members’ benefits. One of the reasons for extending the Regulator’s powers in this area was the recognition that it may not be within the trustees’ power to address risks resulting from these models.
PPF consults on levy
The Pension Protection Fund (PPF), the lifeboat system for defined-benefit pension schemes, has been consulting on the future development of the PPF levy. The proposals promise a fairer distribution for the levy.
2009 and beyond: what is ahead for pension schemes?
The pensions industry is set to have another busy year in 2009 and beyond. Summarised below are some of the key issues to be addressed in the future.
Equalisation: another sleeping dog bites
From 17 May 1990 (as a result of the European Court of Justice decision in Douglas Harvey Barber v Guardian Royal Exchange Assurance Group) it became a legal requirement for pension schemes to equalise normal retirement ages between male and female members. This process, which became known as ‘sex equalisation’, was often not carried out properly by schemes, resulting in significant additional liability for employers.
Public sector outsourcing
Outsourcing involves employers in the public sector contracting with private sector bodies for the external provision of a wide variety of public services. Members of staff are often transferred from the public sector to private sector contractors.
The financial services compensation scheme
The Financial Services Compensation Scheme (FSCS) was set up by the Financial Services and Markets Act 2000 and came into operation on 1 December 2001. The FSCS will pay compensation to consumers if a firm authorised by the Financial Services Authority is unable, or likely to be unable, to pay a claim brought against it by a consumer.
The Pensions Bill 2008: what’s in it for you?
At the heart of the new Pensions Bill 2008 (the Bill), and subject to much discussion, is the proposed personal accounts scheme. With the Bill granted royal assent on 26 November, now is a good time to consider this and some of its other key provisions.
EU case law and age discrimination: a case of certain uncertainty?
Age discrimination is complicated and many aspects of it remain uncertain. One area of particular difficulty is in relation to mandatory retirement ages. Recent comments from the Advocate General (AG) of the European Court of Justice (ECJ) are the latest salvo in Heyday’s battle to overturn mandatory retirement ages (see Incorporated Trustees of the National Council on Ageing (Age Concern England) v Secretary of State for Business, Enterprise and Regulatory Reform [2008] (Heyday)).
Pension scheme inducements: issues to consider
Defined benefit schemes in deficit are a headache for employers. For most schemes, the majority of the deficit relates to past service benefits. Increasingly employers have been seeking ways to reduce past service deficits. Most deficit reduction schemes include some form of inducement to encourage member consent to the proposal.
Appealing the PPF levy
This financial year, the Pension Protection Fund (PPF) intends to raise £675m from its levy. Thus far, few appeals against the levy have progressed to the new PPF Ombudsman, with those that have meeting with universal failure. Employers need to focus the minds of trustees to make sure the information provided is accurate in order to minimise the levy before it arrives – challenging it seems doomed from the outset.
New regime for cash-equivalent transfer values
FROM 1 OCTOBER 2008 PENSION SCHEME TRUSTEES will be responsible for deciding the basis on which cash-equivalent transfer values are calculated under their scheme. To coincide with this, the Pensions Regulator (the Regulator) has published guidance for trustees on the calculation of transfer values.
Winding-up: Pensions Regulator’s good practice guidelines
WINDING-UP A PENSION SCHEME TENDS TO BE A time-consuming and onerous task. At the end of June, the Pensions Regulator (the Regulator) published ‘Winding-up: avoiding delays’. This contains guidance setting out good practice guidelines with a view to wind-ups beings completed within two years. To help achieve this, trustees are required to make regular reports to the Regulator about the progress of their scheme’s wind-up.
Pensions Regulator consults on record-keeping
PENSION SCHEME TRUSTEES HAVE ALWAYS BEEN under an obligation to keep records in order to ensure that members’ benefits are paid correctly and in accordance with the rules of the relevant scheme. This duty under trust law has been supplemented by the statutory requirements of the Pensions Acts 1995 and 2004 and supporting regulations, which impose strict record-keeping obligations on trustees.
Trustee training: doing the knowledge
TRUSTEE TRAINING HAS BEEN A REGULAR FEATURE of pensions life for many years. It recently received a significant revision, under the terms of the Pensions Act 2004. That Act creates a legal requirement for pension scheme trustees to:
Pension scheme trustee companies and their directors: new developments
IN A PENSIONS CONTEXT IT IS COMMON TO USE the term ‘trustees’ to refer to the directors of a corporate trustee. Strictly speaking they should be referred to as ‘trustee directors’ rather than ‘trustees’, as the latter refers to individuals who hold the office of trustee. Often the distinction between individual trustees and trustee directors is not focused on too heavily. Two recent developments, however, are of greater significance where a corporate trustee is in place.
Maternity absence: is clarity in pension rights long overdue?
THE LAW GOVERNING MATERNITY LEAVE AND pension rights is often criticised as lacking cohesion, due to the amount of conflicting legislation relating to the subject.
VAT and investment services fees: getting something back from the taxman
THE SPONSORING EMPLOYER OF AN OCCUPATIONAL pension scheme generally has the ability to recover input tax incurred on costs for services procured in managing such a scheme, but not necessarily on costs for investment services.
The entitlement of civil partners to survivor’s benefits
ON 1 APRIL 2008 THE ECJ RULED IN MARUKO V Versorgungsanstalt der deutschen Bühnen (VddB) that refusing a surviving same-sex civil partner a widower’s pension was direct discrimination, contrary to the principle of equal treatment in EC Directive 2000/78 (the Directive). Significantly, the ECJ also held that there was no need to restrict the effect of the judgment in time.
Ill-health pensions and the limited powers of the Pensions Ombudsman
ON 29 APRIL 2008 THE HIGH COURT IN SAMPSON & ors v Hodgson & ors awarded victory to the trustees in an ill-health matter.
Interim rent: are you missing a trick?
THE ABILITY TO OBTAIN AN AWARD OF INTERIM RENT in business lease renewal procedures under the Landlord and Tenant Act 1954 (the 1954 Act) has developed over time. It would be nice to be able to say that the developments have all been positive, but the legislation as it now stands is over-complex and not always logical.
Salary sacrifice: something for nothing?
IF ALL PRIVATE COMPANIES WERE TO SET UP SALARY sacrifice arrangements for their workforce, it is estimated that those companies and their employees could save an estimated £1bn a year in tax. This ‘loophole’ is unlikely to be closed in the foreseeable future and more and more employers are jumping on the bandwagon.
Myners gets set for a facelift
YOU WILL NO DOUBT HAVE HEARD OF THE ‘MYNERS principles’, which stem from an investigation by Paul Myners into the investment practices of pension schemes and other institutional investors in 2000. This subject has recently resurfaced, with the Treasury, the Department for Work and Pensions (DWP) and the Pensions Regulator launching a consultation (the Consultation) on developing a ‘refreshed and simplified’ set of Myners principles.
Employers nervous about Pensions Regulator’s new powers
AS IF THE CREDIT CRUNCH WERE NOT BAD ENOUGH, the government’s recent announcement that it intends to make significant changes to the Pensions Regulator’s powers has created more anxiety among employers. The proposed changes (most of which are intended to apply with effect from 14 April 2008) are designed to give the Regulator more power in situations where firms buy businesses with a view to profiting from the pension scheme. However, the new powers could have a much wider impact than that.
Conflicts of interest: what’s new?
THE PENSIONS REGULATOR RECENTLY PUBLISHED draft guidance on conflicts of interest. This guidance strongly urges trustees to implement a specific policy in order to manage conflicts of interest in UK occupational pension schemes. In 2007, the Regulator’s survey revealed that only 35% of schemes had a specific policy in place. In publishing this guidance, the Regulator is now looking for a ‘marked improvement’ in the management of conflicts.
Clearance: does it need to be sought?
THE PENSIONS REGULATOR HAS CREATED A FURTHER obligation for pension scheme trustees that will also impact on employers. In its new clearance guidance, the Regulator emphasises the need for trustees to negotiate with employers where an event could have a detrimental impact on the pension scheme, even in situations where the employer has no intention of seeking clearance.
Employer debt: the final word
IN OCTOBER 2007, WE REPORTED ON THE PROPOSED changes to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (see IHL154, p111).
The proposed changes were designed to make the law relating to multi-employer, defined-benefit pension scheme debts (exit debts) ‘easier to operate’ and ‘more flexible’.
Extracting surpluses from pension schemes
In recent years trustees have been encouraged by the Pensions Regulator to strengthen their funding assumptions and seek accelerated recovery of deficits. On average, contributions to pension schemes have risen, and during the first half of 2007 the headlines were full of pension fund accounting surpluses.
Requirement to consult: why it’s good to talk
It's good to talk, and that's official. In fact it has always been good to let your employees know about changes that may affect them. From a pure pensions perspective, the requirement to consult has been official since the Pensions Act (PA) 2004 and the introduction of the snappily titled Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (the Consultation Regulations).
Offloading pension liabilities: should schemes look to buy out members’ benefits?
Many sponsoring employees and trustees of defined-benefit pension schemes are facing the question of whether or not they should buy out members’ benefits. Driven by a desire to offload pension scheme liabilities and to eliminate the risks associated with funding members’ benefits, employers and trustees are increasingly looking to transfer the obligation to pay members’ benefits to an insurance company. Some employers and trustees are also keen to lock in good scheme funding levels, ahead of the predicted economic downturn. So, should your scheme follow suit?
The Pensions Regulator exercises its powers… again
The Pensions Regulator (TPR) is approaching its third birthday and despite an initially quiet infancy, it is becoming more public in the use of its powers. In the last year, it has sought to issue a financial support direction (FSD) (on Sea Containers Ltd) and more recently has made its first appointment of independent trustees. This took place in respect of the GEC 1972 Pension Plan (the Plan), of which telent plc (formerly GEC Marconi) is the principal employer.
Sex equalisation – an unresolved problem?
From 1990 it became a legal requirement for pension schemes to equalise normal retirement ages between male and female members.
The Pensions Regulator and recovery plans: how to recover shortfalls
Trustees of most underfunded defined-benefit schemes are obliged to send recovery plans to the Pensions Regulator (TPR) indicating how they are going to rectify the position. TPR has the power to intervene if the recovery plan seems unsatisfactory – even to the extent of replacing trustees or imposing its own recovery plan. Consequently it is far better for trustees and employers to agree a satisfactory recovery plan and avoid expensive and time-consuming intervention.
Pensions and Age Discrimination: an update
At the end of 2006 there was a flurry of activity as the pensions aspects of the Employment Equality (Age) Regulations 2006 (the Age Regulations) were finalised. This was not a straightforward exercise: it took three sets of Regulations to implement the provisions. However, although a number of the initial concerns about the legislation have been clarified, it is still not clear how the Regulations operate in practice in relation to pension arrangements.
The local government pension scheme - time for change
The Local Government Pension Scheme (LGPS) provides benefits for employees in a variety of local government jobs. Some private sector contractors who are carrying out a local government function and have had staff compulsorily transferred to them under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (previously 1991) may participate in LGPS through an admission agreement.
Companies Act 2006 - rescue from director's liability?
Many trustee bodies, particularly in larger pension schemes, operate through corporate trustees. In this kind of position, the decision-makers are directors of a trustee company, with the company itself being the named trustee.
Pension scheme trustees: managing conflicts of interest
'A good manager doesn't try to eliminate conflict; he tries to keep it from wasting the energies of his people…' – Robert Townsend.
Clearance - playing by the new rules
The Pensions Regulator's current guidance on clearance (the term used to describe the voluntary process of obtaining a clearance statement) is focused on the employer. The emphasis is on the employer choosing whether to obtain assurance that the Regulator will not issue a contribution notice or a financial support direction before the employer embarks on an event which could be detrimental to the pension scheme (such as granting a charge over the assets of the company). Contribution notices and financial support directions require money to be paid into, or financial support put in place for, a defined benefit pension scheme.
Personal accounts - a headache for employers?
From 2012, employers with workers based in the UK will be required to automatically enrol all eligible employees into the new Personal Accounts Scheme or a qualifying workplace pension arrangement, according to the government's latest proposals. Employers will also be required to pay minimum contributions on behalf of eligible employees. This represents a fundamental shift in UK pensions policy and could dramatically alter the pensions landscape in the UK.
Companies should plan now to minimise their pension protection levy
The amount that pension schemes have to pay to the Pension Protection Fund (PPF) for the year 2006/07 may have increased by as much as five times the previous year's levy. Employers who ultimately bear the cost of many pension schemes will need to make plans now to ensure the levy payable for the year 2008/09 is kept to a minimum.
Demanding contributions from an employer - have trustee powers been overridden by the Pensions Act?
British Vita Unltd v British Vita Pension Fund Trustees Ltd and another recently examined the effect of the new scheme funding requirements under the Pensions Act 2004 (PA 2004) on a defined benefit occupational pension scheme's contribution rule. It was concluded that trustees may continue to demand contributions according to the contribution rule under the pension scheme until the first schedule of contributions required by the PA 2004 has been entered into. However, once the schedule of contributions is in place, it is not clear whether trustees may continue to demand contributions in excess of the statutory funding objective by using the pension scheme contribution rule.
Who owns a service charge surplus?
The Court of Appeal has clarified what should happen to unspent contributions towards service charges still held by the landlord at the expiry of a lease. It was held in Brown's Operating System Services Ltd v Southwark Roman Catholic Diocesan Corporation that the unspent money belonged to the tenant, where the lease was silent on what to do with such money and the landlord had retained more than a reasonable provision for future expenditure.
Financial inducements to give up final salary pensions
The Pensions Regulator has issued guidance setting out how final salary pension scheme employers, trustees and members should deal with the growing practice of offering members some form of financial inducement or incentive (such as cash payment or an enhanced transfer value) to accept a reduction in their benefits or to transfer their benefits into another pension arrangement.
Section 75 - a word of warning
We are seeing more and more cases of problems for multi-employer schemes concerning the triggering of section 75 debts. One potential area of difficulty occurs where an employer ceases to have any active members. This may occur where the underlying business is sold or a restructuring takes place or may just be a result of the maturity of the business. If an employer ceases to have active members and that employer participates in a multi-employer defined benefit occupational pension scheme, it may well trigger a debt. That debt can include a share of orphan liabilities attributable to former participating employers. Therefore, don't fall into the trap of thinking that an employer with a few members necessarily means a small debt.
Statutory scheme funding requirement
Increasingly, employers need to get involved in the contribution setting process to protect their interests. That process is now largely governed by statute and many employers are going through it for the first time. What follows is a summary of those requirements from an employer's perspective.
Beware the employer covenant
Trustees of occupational defined benefit pension schemes (DB schemes) need to know how to assess the strength of the employer covenant as it has become a crucial factor in determining scheme-specific funding and in the progress of corporate transactions. Employers must also be aware that if the covenant is weak, this could stop a corporate transaction in its tracks.
Limits on trustee indemnities – a timely reminder
The introduction of the Pensions Act 2004 provisions requiring trustees of occupational pension schemes to have knowledge and understanding of the law relating to pensions and trusts has prompted many trustees to enquire about the extent to which their sponsoring employer is able to indemnify them. It is therefore worth reminding trustees and employers of the changes in the law in recent years restricting indemnities provided by a company to its directors and trustees that may have been missed following the relentless onslaught of other pensions legislation.
Contingent asset agreements - start getting ready for levy year 2007/08
The Pension Protection Fund's (PPF) guidance for the next levy year (2007/08) was issued in September and is available on its website at www.pensionprotectionfund.org.uk. The guidance covers existing contingent asset agreements which will require re-certification to be effective for levy period 2007/08 and new contingent asset arrangements. Experience has shown that these arrangements require a high degree of compliance (see below) and always take longer to complete than anticipated, and it is advisable to start planning ahead in order to be ready for 31 March.
Act now to avoid a death trap
It is often the case that a company occupational pension scheme provides not only pension benefits for staff in retirement but also lump sum benefits on death for employees. This is generally known as life cover. Due to the recent implementation of s255 of the Pensions Act 2004, trustees and employers will urgently need to review their occupational pension scheme documentation to check whether they should be setting up a separate pension scheme for the provision of lump sum death benefits instead of providing them within the pension scheme.
Pan-European pension schemes – a developing opportunity
Recently, certain pensions consultants have begun actively promoting the set up of pan-European pension schemes, also known as cross-border pension schemes. They are being promoted on the basis that pan-European pension schemes offer the opportunity to save costs, increase administrative efficiency and to retain talented employees. This article summarises our view of the pros and cons of setting up such an arrangement.
Informing and consulting on listed changes to schemes
The information and consultation requirements of the Pensions Act 2004 have now been in force for six months but there are still some important aspects of their application which need clarification. Most important is whether they apply in commercial transactions. If they do, as the Pensions Regulator appears to contend, then it makes the conduct of those transactions very difficult.
Stop press: new age discrimination implementation date
Further to our article covering the pensions aspects of age discrimination in the September edition, the government has announced that the age discrimination regulations, introducing new age discrimination laws, will delay the implementation date of the pensions-related aspects of the new age discrimination until 1 December 2006.
This delay is as a result of the representations made by the pensions industry concerning the impact of the regulations on occupational pension schemes. The government has advised that, during this time, there will also be a further informal review of the exemptions from the age discrimination legislation provided for pension schemes.
New member-nominated trustee laws require immediate action
Trustees of most trust-based occupational pension schemes will need to urgently check what action they need to take to secure compliance with the new requirements relating to member-nominated trustees (MNTs) and member-nominated directors (MNDs), which were introduced on 6 April 2006. These require trustees to ensure that arrangements are not only in place but also implemented to ensure that at least one-third of trustees or directors are member-nominated.
Age discrimination reaches the company pension scheme
Employers and trustees may be shocked to learn that the long tentacles of the new age discrimination laws will extend to and significantly impact on the operation of their company pension schemes. The Employment Equality (Age) Regulations 2006 (the Regulations) outlaw direct and indirect age discrimination. They come into force on 1 October 2006, leaving little time for employers and their pension funds trustees to review and amend scheme documentation and practices in light of age discrimination issues. Failure to do so could result in significant costs and potential claims from employees, and all the associated adverse publicity.