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LATEST NEWS - Pension Planner

FCA: pension transfer advice


Summary

The Financial Conduct Authority (FCA) has issued a Policy Statement (PS18/20) on pension transfer advice. The statement follows consultation earlier in 2018, plus consultation in 2017 and a policy statement (PS18/6) issued in March 2018.

With the exception of the proposal to amend the definition of a pension transfer, the FCA intends to proceed with all the proposals consulted on in March 2018:

  • Amending the pension transfer (PTS) qualification and exam standards;
  • Introducing guidance on how a PTS should work with another adviser in a two-adviser model;
  • Introducing guidance on the advice boundary when providing triage services to prospective clients (giving potential customers sufficient information about safeguarded and flexible benefits to enable them to decide whether to take advice on the transfer or conversion of their benefits);
  • Introducing guidance on assessing clients' attitude to transfer risk;
  • Requiring suitability reports when recommending that a transfer should not be made; and
  • Amending the assumptions for valuing limited inflationary pension increases (with collars and caps) in a defined benefit (DB) scheme.

Charging structures

The March 2018 consultation also sought views (without proposing rule changes) on charging structures for pension transfer advice. Following consultation, the FCA is undertaking further work in this area. If it considers that rule changes are appropriate, it expects to consult in the first half of 2019.


Key dates

Policy Statement PS18/20 issued on 4 October 2018.

Previous consultation paper CP18/7 issued in March 2018.

Changes in force with immediate effect: guidance on two advisers working together; assessing attitude to transfer risk; the requirement to prepare a suitability report in all circumstances.

In force on 1 January 2019: perimeter guidance on triage.

In force on 6 April 2019: changes to pension increase assumptions.

Remaining changes in force on 1 October 2020, including changes to Pension Transfer Specialist qualifications.


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Master trusts: guidance on authorisation


Summary

The Pensions Regulator has issued a number of guidance documents related to the authorisation of master trusts, ahead of the final master trusts regulations coming into force on 1 October 2018. This includes:


Key dates

Pensions Regulator guidance issued as per the above dates.

The majority of the Occupational Pension Schemes (Master Trusts) Regulations 2018 (SI 2018/983) in force on 1 October 2018.


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Pensions Ombudsman: redress for non-financial injustice


Summary

The Pensions Ombudsman has reissued his guidance on making awards for non-financial injustice, including the introduction of fixed awards. The guidance identifies five levels of distress and inconvenience which might result in different awards being made:

  • Nominal – no award
  • Significant – £500
  • Serious – £1,000
  • Severe – £2,000
  • Exceptional – more than £2,000.

When assessing the level of award, the Ombudsman will take the particular characteristics of the individual into account, but will also ask whether a reasonable person (with those characteristics) would have reacted in the same way. Where an applicant is vulnerable, might be reasonable that they would be more likely to suffer distress.

Relevant factors the Ombudsman may take into account include the following.

  • Whether the maladministration was obvious and whether the complaint could have been easily avoided or resolved at an early stage.
  • How well the respondent handled the applicant's complaint.
  • Whether there were excessive delays which were extensive or readily avoidable.
  • Whether the maladministration was a single event or occurred on many occasions, and how long the respondent took to correct this.
  • The level of distress and inconvenience suffered by the applicant.

Key dates

Updated guidance issued September 2018.


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PPF: amendments to compensation regulations


Summary

The DWP has issued a response to consultation on amending regulations concerning compensation from the Pension Protection Fund (PPF). The amendments were proposed in July 2018 to remedy the impact of the decision in Beaton v Board of the PPF in October 2017. The consultation response issued in September 2018 also takes account of the decision of the Court of Justice of the European Union (CJJEU) given on 6 September 2018 in Hampshire v Board of the PPF.

The final regulations also include provisions on pension scheme investment – for details please see the separate entry.

Background: decision in Beaton

In Beaton the judge held that a "relevant fixed pension", derived from a transfer in, was not attributable to "pensionable service" in the receiving scheme. It followed that, when assessing the level of the member's PPF compensation, the member's relevant fixed pension should not be aggregated with pension accrued in the receiving scheme when applying the PPF compensation cap.

Draft regulations

The draft regulations issued in July 2018 were intended to clarify that rights to a relevant fixed pension derived from a transfer in are to be treated as attributable to pensionable service in the receiving scheme – and so should be aggregated with pension rights accrued in that scheme when determining PPF compensation.

Hampshire v Board of the PPF

The CJEU held that EU insolvency law requires that every employee and former employee of an insolvent employer must be given protection of at least 50% of the value of their pension rights in the employer's occupational pension scheme. Under PPF compensation rules, some members – especially high earners, those with long service, or those with significant pre-1997 pensionable service – can receive PPF benefits of less than 50% of their entitlement under their scheme's rules.

September 2018 consultation response

  • In relation to Hampshire, the DWP is "carefully considering the implications" and will set out a response in due course.
  • Following Hampshire, the regulations will not aggregate relevant fixed pensions with other benefits for the purposes of applying the PPF compensation cap. Instead, a relevant fixed pension and a member's other benefits will be subject to two separate caps.
  • The regulations will be amended to ensure that (following the interpretation of "pensionable service" in Hampshire):
    • PPF compensation can continue to be paid to survivors;
    • PPF compensation may continue to be revalued in deferment and increased in payment in line with PPF compensation rules; and
    • relevant fixed pensions will be included in the application of the 90% level of compensation (subject to the cap) for individuals who are already receiving pension and who were below normal pension age at the PPF assessment date.
  • The DWP intends to remedy the effects of the Beaton judgment fully once it has considered the judgment in Hampshire. Primary legislation will be brought forward at the "earliest opportunity".


Key dates

Consultation paper and draft regulations issued on 3 July 2018.

Consultation response issued on 11 September 2018.

The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018/988 in force (in relation to PPF compensation) on 2 October 2018.


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Investment: ESG factors and members' views – final regulations


Summary

The DWP has issued final regulations and a response to consultation in relation to clarifying and strengthening trustees' investment duties. The regulations also concern the calculation of compensation from the Pension Protection Fund (PPF) where the member has pension attributable to a transfer in – please see the separate entry.

In relation to investment, the points to note include the following.

Statement of investment principles (SIP): policy in relation to financially material considerations

The requirements below will apply from 1 October 2019.

The SIP must cover the trustees' policy in relation to financially material considerations over the appropriate time horizon of the investments, including how those considerations are taken into account in the selection, retention and realisation of investments. This follows from the Law Commission's conclusions that, where environmental, social or governance risks or opportunities are financially material, trustees should take account of them.

The reference to the "appropriate time horizon of the investments" (defined as "the length of time that the trustees … consider is needed for the funding of future benefits by the investments of the scheme") was inserted following consultation. The DWP intends this to act as a prompt to schemes which are approaching buy-out or winding-up to consider short-term financially material risks, while schemes with a longer time horizon should consider financial considerations over the longer term, regardless of whether some of the portfolio is turned over more rapidly.

The reference to "financially material considerations" will replace the current requirement for the SIP to cover the extent (if at all) to which social, environmental or ethical considerations are taken into account.

"Financially material considerations" will include (but is not limited to) environmental, social and governance considerations (specifically including climate change), which the trustees consider financially material.

The consultation response explains that where concerns are not financially material, for example – concerns which are primarily ethical – trustees may only take the concerns into account where there is broad consensus. Where there are differing views around an investment issue, such as in relation to fossil fuels, trustees should focus exclusively on financially material risks and opportunities.

SIP: non-financial matters

The requirements below will come into force on 1 October 2019.

Following consultation, the proposed new requirement to prepare a separate "statement on members' views" when preparing or revising the SIP has been removed.

Instead, the SIP must cover the extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments. "Non-financial considerations" is defined as meaning the views of members and beneficiaries including (but not limited to) their ethical views and their views in relation to social and environmental impact and present and future quality of life.

The consultation response confirms that trustees are not required to invest in line with members' wishes, or in accordance with government policy objectives, nor are they required to survey members' views. Following the Law Commission's approach, the government considers that the ability to take account of non-financial factors such as members' wishes is permissive and may only be done when a two stage test is met:

  • the trustees should have good reason to think the members hold the concern; and
  • the decision should not involve a significant financial detriment.

SIP: stewardship and engagement

The requirements below come into force on 1 October 2019.

The SIP will have to cover the trustees' policy on undertaking engagement activities in respect of their investments, including how and when the trustees would monitor and engage with "relevant persons" about "relevant matters".

For this purpose, a "relevant person" includes an investee company, an investment manager, a shareholder of an investee company and, following consultation, an issuer or a holder of debt. "Relevant matters" will include the performance, strategy, risks, social and environmental impact and corporate governance of an investee company or issuer of debt.

The consultation response acknowledges that smaller schemes will have less direct influence over companies in which they invest, but it considers that a stewardship policy is still feasible, even if it is limited to the recruitment, retention or replacement of investment managers. It also comments that there does not seem to be any intrinsic or insurmountable reason preventing trustees from influencing or exercising votes in pooled funds.

Trustees of relevant schemes (broadly, money purchase schemes, with a few exceptions) will have to include their policy in relation to exercising rights and undertaking engagement activities in the SIP for their default arrangement.

Defined contribution schemes: implementation statement

This requirement will apply to the first annual report produced on or after 1 October 2020.

Where a scheme is a "relevant scheme" (broadly, a money purchase scheme, with limited exceptions), the trustees' annual report must include an implementation statement which:

  • sets out how, and the extent to which, the trustees consider that the SIP has been followed during the year;
  • describes any review of the SIP undertaken during the year;
  • explains any change to the SIP during the year and the reason for any change;
  • where no review of the SIP was taken in the year, gives the date of the most recent review.

Contents of annual report

Trustees of both defined benefit and defined contribution schemes will have to include the following in their annual report:

  • their policy on financially material considerations;
  • their policy on the extent (if at all) to which non-financial matters are taken into account;
  • their policy on engagement activities and exercising rights; and
  • where the scheme is a relevant scheme (broadly, money purchase schemes with limited exceptions), the trustees' implementation statement.

Defined contribution schemes: publication on a website and links in annual benefit statements

New provisions will require "relevant schemes" (broadly, money purchase schemes, with limited exceptions) to make the following publically available free of charge on a website:

  • the latest SIP, with a link to this in the members' annual benefit statement (applicable from 1 October 2019);
  • the implementation statement, with a link to this in the members' annual benefit statement (applicable from 1 October 2020).

In relation to hybrid schemes offering both defined benefit (DB) and money purchase (non-AVC) benefits, the consultation response confirms that the requirement to publish the SIP will apply in relation to both the DB and the money purchase benefits.

The consultation response explains that the requirement to include links in members' annual benefit statements may be satisfied by including a single link to a location where the SIP, the implementation statement and the costs and charges information may be found.

Social impact investing

In March 2018, the Prime Minister commissioned an industry-led taskforce to progress recommendations in the report "Growing a Culture of Social Impact Investing in the UK" issued in November 2017. The taskforce aims to generate a faster rate of innovation in the financial services industry to provide products which give savers and investors the opportunity to make a social impact.

In the consultation response, the government confirmed that it does not propose to require trustees to have a policy in relation to social impact investing.

Guidance

Alongside the consultation on draft regulations in June 2018, the DWP consulted on minor amendments to statutory guidance on reporting of costs, charges and other information, previously issued in February 2018. It has reissued the guidance, with some changes to make the policy intention clear and some minor corrections.

Respondents to consultation noted various areas on which further consultation would be welcome, including how to understand financial materiality and greater clarity of expectations for the implementation statement. The Pensions Regulator is expected to produce high level guidance on key changes by the end of November 2018.


Key dates

Consultation response and final regulations issued on 11 September 2018.

A consultation paper with draft regulations were issued on 18 June 2018.

The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018/988 in force as detailed in each section of the summary above.


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DC schemes: guidance on chair's statement


Summary

The Pensions Regulator (tPR) has reissued its quick guide to preparing the chair's statement which must be prepared by trustees of relevant schemes within seven months of the end of each scheme year. The guide was originally issued in June 2018, alongside a Technical Appendix. The guide includes the new requirements in force on 6 April 2018 to provide costs and charges information in the statement and for parts of the statement to be published online.

The guide is intended to be read alongside tPR's Code of Practice 13 (Governance and administration of money purchase occupational pension schemes) and the accompanying "how-to" guides.

Points to note include the following:

  • The statement should be written clearly enough for members to understand.
  • Where an explanation is required, it should be meaningful and not simply state the trustees' conclusion. For example, where the scheme's default arrangement has been reviewed during the year, details of the review and a full explanation of any changes made as a result of the review should be included.
  • Where trustees have not been able to comply with a requirement, they should state the information which has been omitted and why.


Key dates

Quick guide reissued in September 2018 (original guide issued in June 2018).

Technical appendix issued in June 2018.


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Law Commission Proposals on the Electronic Execution of Documents – impact on the execution of deeds


Summary

The Law Commission has issued a consultation paper which reports that some businesses still do not use electronic signatures because of concerns over the legal validity, practical issues over security and reliability, questions of trust and identity, the interoperability of systems and archiving of information.

Unlike for electronic signatures, there are no legislative provisions that currently deal with the electronic execution of deeds.  Deeds however, bring about more onerous formalities for valid execution.

Some deeds are required by statute, for example, the appointment or discharge of a trustee, conveyances of land and for powers of attorney.  Deeds may also be used for practical purposes where the parties want to secure longer limitation periods or for agreements without consideration.

The Law Commission provided provisional conclusions as to the use of electronic signatures under the current law as well as suggested potential areas for reform in the future.

Formalities for deeds

A deed must be a deed "on the face of it" and it must be validly executed.  The formalities for execution are different depending on whether the signatory is an individual or a company.

Individuals

The deed must be signed in the presence of a witness who attests the signature and the document is delivered as a deed.

Companies under the Companies Act 2006

A deed may be executed by either:

  • affixing the common seal; or
  • by the signatures of:
    • two authorised signatories (two directors or a director and a secretary); or
    • a director attested by a witness.

Signature

The Law Commission considers that the combination of EU regulations, domestic law and case authority means electronic signatures are capable of meeting a statutory requirement for signatures, provided an authenticating intention can be demonstrated. In other words, the Law Commission considers that the current law accommodates electronic signatures in the same way as handwritten signatures.

Witnessing and attestation

Witnessing is the observation of the execution of a document, whereas attestation is the actual recording on the document that the witness did indeed observe the execution.  This is important for individuals as well as companies executing by a director and a witness.

The paper observes that businesses complain that witnessing documents inherently causes delays to transactions. It is argued that there are limited benefits to having a witness; there are no requirements as to who can be a witness (subject to limited exceptions) and the witness does not need to be able to identify the signatory.  This raises the question as to how much protection, realistically, a witness can provide to the execution of documents.  The Law Commission does however reiterate the important evidential function performed by a witness.

As the Law Commission concluded that e-signatures are capable of fulfilling a statutory requirement for documents to be "signed", it is also satisfied that the physical presence of a witness, who observes a signatory applying their electronic signature to the document, satisfies the requirement for witnessing. Furthermore, the witness can attest this by affixing their own electronic signature to the document.  The Law Commission commented that a number of stakeholders already use this method.

The Law Commission's provisional proposals

Video-link

The Law Commission considered the use of video-links as an option for reform.  Under this proposal, rather than requiring the physical presence of a witness, an individual could witness the execution of a document through a live video link.  The Commission did however concede that there could be practical issues as to the timing of the attestation and asked for consultees' views.

It is perhaps questionable how much time would actually be saved through the provision of a video-link.  A third party witness would be still required, a link would need to be established (which would need to be of sufficient picture quality to enable the witness to actually observe what was happening) and there would be timing issues as to the attestation; would the witness have access to the document at the same time and be able to see the electronic signature being applied or would the document be emailed afterwards?

Signing platform

The Commission proposed using a signing platform whereby both the signatory and witness are logged into a system, through the use of a password, PIN etc.  The witness could then see, in real time, the signatory's signature being applied to the document. The witness would then apply their own signature to the same document to attest the signature.

Of course, the witness would not actually see the signatory sign the document, so the witness would not be able to attest this. Instead, the witness would need to be reasonably satisfied that the signature was applied by the signatory, given the login procedure/requirements.

Whilst a third party witness would still need to be found, and a signing platform set-up, a signing platform is likely to be administratively more convenient than a video link.

Acknowledgement concept

The Commission also considered doing away with witnessing and attestation altogether and replacing it with a legal concept of "acknowledgement".   This would involve a witness stating that a signatory has "acknowledged" their electronic signature to the witness.  The witness would need to see the signatory's signature on the document and would need to receive an explicit acknowledgment (in writing, in person or otherwise) from the signatory.  The Commission envisages the acknowledgment taking place within 24 hours of signing and that a record of the acknowledgment would appear on the document itself, along with the witness's signature.

Delivery

The Law Commission conceded that the term "delivery" is outdated, but concluded that there are practical reasons for the concept of delivery. It suggests that the concept is still useful because parties require a way of knowing when a deed will take effect and does not consider legislative reform is necessary.

Conclusion

English law is inherently flexible in its approach to forming contracts. The execution of deeds however, is currently impractical and unsuitable for global transactions or transactions that require speedy completions. 

The Commission will consider responses from the consultations and plans to publish a subsequent report with its final recommendations, although no date has yet been set for this publication.


Key dates

Consultation paper issued by Law Commission on 21 August 2018.

Consultation ends on 23 November 2018.


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Hampshire v Board of the Pension Protection Fund


Summary

The Court of Justice of the European Union (CJEU) has upheld the opinion of the Advocate General that EU law requires Member States to ensure that, on an employer's insolvency, each employee and former employee receives at least 50% of the value of the benefits which would have been due from his/her occupational pension scheme.

Background

Mr Hampshire was employed by his employer between 1971 and 1998 and was a member of his employer's occupational pension scheme throughout. He was made redundant in 1998, aged 51, and took an early retirement pension of £48,700 per year, with annual increases of at least 3%.

Following the insolvency of the employer's US parent company, the Pension Protection Fund (PPF) began an assessment of the employer's pension scheme in July 2006, when Mr Hampshire was aged 58. In 2011, the PPF approved a valuation of the scheme's assets and liabilities which showed that, as at July 2006, the scheme's assets exceeded the value of its PPF liabilities. Accordingly, the scheme did not enter the PPF but was to be wound up by its trustees, with priority given to securing members' PPF liabilities.

Mr Hampshire was subject to the PPF compensation cap, which was reduced to reflect his early retirement. As most of his accrual was before 6 April 1997, he also lost most of his rights to pension increases. After adjusting for his tax free lump sum taken on retirement, Mr Hampshire's pension was set at £19,800 per year, approximately 67% less than the £60,200 pension he would have then been entitled to under the scheme rules.

Claims

The case concerned the interpretation of Article 8 of Directive 2008/94/EC on the protection of employees in the event of their employer's insolvency. Article 8 requires protection of pension rights for employees and survivors under occupational pension schemes.

Mr Hampshire and 15 other employees of his employer initially complained to the PPF Ombudsman, challenging the valuation as at July 2006 which was approved by the PPF. The complaint was rejected.

Mr Hampshire's appeal to the High Court was dismissed, and he then appealed to the Court of Appeal. The PPF contended that Article 8 merely required that employees should receive at least 50% of the value of their accrued entitlement on average. The Court of Appeal stayed the proceedings and made a reference to the CJEU on this point and on whether Article 8 had direct effect.

The DWP was an interested party in the reference for a preliminary ruling. The CJEU dismissed the UK government's submission that the reference was inadmissible on account of the hypothetical nature of the questions referred, since Mr Hampshire's scheme had not entered the PPF. The CJEU's interpretation of Article 8 could result in a new valuation of the PPF liabilities and, therefore, of Mr Hampshire's pension entitlement – meaning that there was a sufficient link between the disputed issue in the main proceedings and the questions referred for a preliminary ruling.

CJEU's decisions

The CJEU ruled as follows.

Minimum level of guaranteed compensation

  • The CJEU's previous judgments (Hogan and Robins) that Article 8 required protection of at least 50% of the value of the pension entitlement, and that this was required for each and every employee (Webb-Samann) were not limited to certain insolvent employers belonging to specific sectors or to certain employees within a particular economic and social context, but were of general application.
  • The protection in the directive would be seriously undermined if Member States could comply with Article 8 without providing minimum protection for each individual worker.
  • It followed that Article 8 requires Member States to ensure that each individual employee receives at least 50% of the value of his/her accrued pension entitlement. This minimum must be calculated taking into account envisaged pension increases throughout the period of drawing pension.

Direct effect of Article 8

  • Provisions of a directive may only be relied on by individuals if they are unconditional and sufficiently precise. In this case, there were three points to consider:
    • The identity of the persons entitled to protection;
    • The content of the protection; and
    • The identity of the person liable to provide the protection.
  • The directive satisfied all three points: it was intended to protect employees affected by their employer's insolvency; and, following CJEU caselaw, those employees should receive at least 50% of their pension entitlement. On the third point, Member States enjoyed broad discretion as to the means of providing protection but, once the discretion has been fully used, it could no longer prevent an individual relying on the protection under Article 8.
  • The Pensions Act 2004 made clear that, in the UK, the PPF was responsible for ensuring the minimum level of protection. The PPF was required to perform its task in the public interest and had special powers to enable it to do so. It followed that the PPF could be treated as comparable to the State and Mr Hampshire could invoke Article 8 against it.
  • The dispute in the main proceedings did not concern whether or not Mr Hampshire could demand that his employer or the scheme trustees pay compensation of at least 50% of his entitlement. Rather, the dispute concerned the lawfulness of the PPF's approval of the valuation of the protected liabilities under his scheme and whether the PPF may be required to revalue those liabilities.

Key dates

Judgment (C-17/17) given on 6 September 2018.


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Mr R: member should have been told that deferred benefits had to come into payment during his lifetime


Summary

The Pensions Ombudsman has upheld a complaint that the administrator, who knew that the deferred member was terminally ill, should have told the member that his early retirement benefits and associated widow's pension were only available if put in payment during his lifetime.  The trustees were directed to make good the tax free lump sum and widow's pension as if the member had started to draw benefits before his death.

Background

Mr R was diagnosed with terminal cancer in November 2012 and died in August 2016.  In April 2016, he telephoned the then administrator of his pension scheme to discuss his options under the scheme.  The administrator accepted that during this conversation Mr R informed it that he was terminally ill.

A few days after the conversation, the administrator sent Mr R a letter outlining two options for early retirement from deferment: both options included a cash lump sum, a pension for Mr R and a widow's pension of £7,000 per year.  Option 2 would have provided a greater lump sum and a reduced pension for Mr R but the same widow's pension.  The letter also mentioned that if Mr R's life expectancy was less than 12 months then the benefits could potentially be paid entirely as a lump sum.

Mr R died without exercising either option to take his deferred benefit.  Mrs R was informed of the benefits payable on death in deferment: a widow's pension of £5,500 and no lump sum.

Mrs R's complaint through the scheme's internal dispute resolution procedure was rejected and she complained to the Pensions Ombudsman.

Ombudsman's determination

The Ombudsman held the following.

The administrator, on behalf of the trustees, was on notice that Mr R's condition was terminal and they had an obligation to take this into account when providing information.  The Ombudsman could not conclude (as argued by the trustees) that Mr had only asked about his early retirement options in the telephone call.

  • By reason of this knowledge, the trustees were obliged to send a letter stating not only what Mr R's benefits would be in his lifetime but also that these would be invalid if he died before taking them. 
  • The disclosure regulations provide that the conditions on which benefits are payable is information which must be given on request.  The administrator's failure to mention, either during the telephone call or in the letter, that the benefits set out were dependent on Mr R living, when they knew that his condition was terminal, was inadequate and amounted to an administrative error.
  • In addition, the trustees should have satisfied themselves that Mr R had actually received the letter and that he had understood the significance of the information it contained.  It was reasonable to expect that a member without specific pension knowledge would not fully understand the implications of the options outlined.
  • The case was concerned with the provision of relevant information to enable Mr R to reach a fully informed decision, not with any duty to act in the best financial interests of members.
  • If the letter had indicated that the deferred benefits could only be put into payment in Mr R's lifetime, it was more likely than not that he would have applied, and been accepted, for option 2.

Directions

The trustees were directed to:

  • pay Mr R's estate the lump sum he would have received had he started to draw benefits while alive;
  • increase Mrs R's pension to the level of the widow's pension on death in retirement; and
  • pay Mrs R a lump sum to make good the previous underpayments of widow's pension, plus interest.

Key dates

Determination issued on 29 June 2018.


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R (Elmes) v Essex CC: requirement for nomination form incompatible with European Convention on Human Rights (ECHR)


Summary

The High Court has given a declaration that a requirement in the regulations governing the Local Government Pension Scheme (LGPS) that a survivor's pension could only be paid to a cohabiting unmarried partner where the deceased member had completed a nomination form nominating the partner, was incompatible with the European Convention on Human Rights (ECHR) and should be disapplied

Details

Ms Elmes' partner of 21 years died unexpectedly in 2011.  He had been a member of the LGPS but Ms Elmes was refused a survivor's pension as he had not completed a form nominating her for benefit.  The case was stayed pending a decision of the Supreme Court in Brewster v Northern Ireland Local Government Officers' Superannuation Committee, which also concerned the eligibility of an unmarried partner to a survivor's benefit where the deceased had not completed a nomination form.

In February 2017, the Supreme Court held in Brewster that the requirement for nomination was in breach of article 14 and Protocol 1 article 1 of the ECHR and declared that the requirement should be disapplied.

In Ms Elmes' case, the High Court followed Brewster and granted the application.  The Human Rights Act 1998 not only imposed an obligation to "read down where possible" but also disapplied provisions in subordinate legislation where these could not be read in a manner compatible with the ECHR.  The local authority's concern that payment of a survivor's pension to Ms Elmes might be unauthorised for tax purposes, and so subject to HMRC penalties, was dismissed. The decision in Brewster was binding, meaning that the payments of pension were authorised and HMRC could not treat them otherwise.


Key dates

Judgment given on 31 July 2018.


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Pension costs and transparency: inquiry


Summary

The House of Commons Work and Pensions Select Committee has launched an inquiry into pension costs and transparency.  Evidence is invited on the following questions: 

  • Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
  • Is the Government doing enough to ensure that workplace pension savers get value for money?
  • What is the relative importance of empowering consumers or regulating providers?
  • How can savers be encouraged to engage with their savings?
  • How important is investment transparency to savers?
  • If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?
  • Are Independent Governance Committees effective in driving value for money?
  • Do pension customers get value for money from financial advisers?

Key dates

Inquiry launched on 3 August 2018.

Deadline for submissions is 3 September 2018.


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Master trusts: supervision and enforcement policy


Summary

The Pensions Regulator has issued a draft policy on the supervision and enforcement of the requirements applicable to master trusts.  The consultation  explains that routine supervisory activity will be carried out in relation to all master trusts, with additional supervisory activity determined by a range of factors set out in the policy.  In particular, in the first year of the authorisation regime additional supervision will be primarily driven by the impact of the master trust on the market, including the number of scheme members.  Subsequently, the Regulator expects increasingly to factor in the likelihood of risks when determining the appropriate level of supervision.  In addition, new master trusts can expect a higher level of supervision than established trusts.


Key dates

Consultation and draft policy issued 26 July 2018.

Consultation ends on 23 August 2018.

Regulations concerning master trusts intended to be laid before Parliament in autumn 2018.


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Mr N: no maladministration in reducing CETVs


Summary

The Pensions Ombudsman has dismissed  a complaint about the reduction applied to a member's cash equivalent transfer value (CETV).

The scheme was underfunded and the trustees, acting on advice from the scheme actuary, decided to reduce transfer values using a PPF priority approach, so that all members would receive the value of the same proportion of their PPF benefits (if the scheme were to enter the PPF).  The member asserted that as the scheme was not in a PPF assessment period, and was not in danger of entering the PPF, the trustees should not use this approach to reducing CETVs. 

The Ombudsman agreed with his adjudicator's findings, including that:

  • the trustees had not taken irrelevant considerations into account or failed to consider relevant considerations, nor had they committed some other procedural impropriety or acted in a way that no reasonable body of trustees could act;
  • a finding of maladministration could not be made regarding decisions taken in the best long-term interests of all scheme members, albeit on a modest risk basis, with a long-term recovery plan;
  • the trustees did not have to negotiate the terms of CETVs provided to individual members, nor did the Ombudsman have power to compel them to do so;
  • the Ombudsman could not make a direction which would have an adverse impact on other members of the scheme;
  • Mr N was not being treated differently to any other deferred members.

Key dates

Determination issued 29 June 2018.


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Pension scams: prohibition of cold calling – draft regulations


Summary

The government is consulting  on regulations  which will prohibit cold calling in relation to pensions unless the caller is regulated by the Financial Conduct Authority (FCA) or the Pensions Regulator and one of the following applies:

  • the recipient has previously consented to, or requested, calls being made on that telephone line; or
  • the recipient has an existing client relationship with the caller, and the relationship is such that the recipient anticipates receiving unsolicited calls in relation to marketing pensions, provided that the recipient is given a simple means of opting out of calls free of charge.

The Information Commissioner's Office (ICO) is to be responsible for enforcement of the ban of cold calling, using the powers it already has to enforce the requirements of the Privacy and Electronic Communications (EC Directive) Regulations 2003 (PECR), including to fine offenders up to £500,000.


Key dates

Consultation and draft regulations issued on 20 July 2018.

Consultation period ended on 17 August 2018.

The draft Privacy and Electronic Communications (Amendment) Regulations 2018 expected to be laid before Parliament in autumn 2018.


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Mr R: nominated partner's pension was not discriminatory


Summary

The Pensions Ombudsman has rejected a complaint that payment of a nominated partner's pension, rather than a (higher) widower's pension, constituted unlawful discrimination.

Background

Mr R was the male partner of Dr K, a female member of the Teachers' Pension Scheme. They cohabited for many years but never married.

The Scheme introduced widowers' pensions from 1988 and nominated partners' pensions from 1 January 2007. Nominated partners' pensions were calculated by reference to service from 2007, with members having the option to purchase cover for their previous service back to 1988. Dr K nominated Mr R but did not purchase backdated cover.

Dr K died in 2011 and Mr R was awarded a nominated partner's pension, calculated by reference to Dr K's reckonable service since 2007. Had Mr R been Dr K's widower, he would have received a widower's pension calculated on 38 years of reckonable service.

Complaints to the Ombudsman

The then Ombudsman rejected a complaint by Mr R in 2012, taking the view that Dr K had been given adequate information by Teachers' Pensions about the death benefits payable.

The Supreme Court gave judgment in Brewster on 8 February 2017, holding that the requirement for a cohabiting unmarried partner to complete a nomination form as a condition of eligibility for a survivor's pension amounted to unlawful discrimination, because there was no similar requirement for a married or registered civil partner, and the discriminatory effect could not be objectively justified.

The Ombudsman accepted a further complaint by Mr R as a new complaint, because the judgment in Brewster had not been handed down at the time of his previous complaint.

Ombudsman's determination

The Ombudsman rejected Mr R's complaint.

  • Neither the Human Rights Act 1998 nor Brewster supported Mr R's contention that non-married couples are entitled to receive the same pension benefits as married couples.
  • Brewster does not prevent schemes from introducing and enforcing criteria that properly distinguish between different categories of beneficiary: such criteria are not discriminatory and fall outside the scope of Brewster.
  • Mr R had been awarded the nominated partner's pension to which he was entitled under the Scheme.
  • The requirement for Dr K to pay additional contributions if she wished to include her pre-2007 service in the calculation of a survivor's pension was not discriminatory under Brewster or the Human Rights Act 1998.


Key dates

Determination given on 16 August 2018.


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Dr G: reasons needed for death benefit decision


Summary

The Pensions Ombudsman has upheld Dr G's complaint about the decision of the manager of her late partner's self-invested personal pension (SIPP) not to award her any benefits on his death.  He directed the manager to reconsider the distribution of the lump sum death benefit and to fully document the rationale for its decision.

Background

  • In 2009, Dr G purchased a property with her partner, Mr T, a solicitor.  Dr G held a 90% share in the property and Mr T 10%.  Dr G stated that Mr T paid the majority of the household bills.
  • In 2010, Mr T made a will leaving Dr G all domestic and associated assets, plus the right to live rent free in the joint property for the rest of her life.  The residual estate was left to Mr T's children in equal shares.
  • In 2012, Mr T died.
  • The manager of Mr T's SIPP refused to award Dr G a death benefit lump sum or dependant's pension.  Dr G twice complained to the Pensions Ombudsman and both complaints were upheld.  The manager was directed to seek evidence of Dr G's dependency on Mr T and to reconsider the distribution of the lump sum death benefit.  The manager subsequently decided not to secure a dependant's pension for Dr G and to pay the lump sum death benefit to Mr T's estate.  

Complaint

Dr G complained again to the Pensions Ombudsman. 

The minutes of the manager's meeting outlined factors which had been considered in making its decision, including that Dr G was within the category of "Dependant" and "Eligible Recipient"; that Dr G and Mr T had been partners for at least five years prior to his death; and that Dr G had produced evidence of joint home ownership and domestic expenditure and had made reference to joint pension planning around pension death benefits.  The minutes then stated:

"After considering the above factors, the meeting determined that there would not be a dependant's pension for Dr G, and Mr T's pension fund would be paid as a lump sum to his estate."

Ombudsman's conclusions

The Ombudsman agreed with his adjudicator's finding that, although the manager had acted within its discretion, it had not explained its reasons or rationale and there was no causative link between the circumstances and conclusion.   The manager also appeared to be led by considerations of what Mr T would wish for it to do when, having decided that Dr G was an Eligible Recipient, it should have considered whether there was reason to distribute benefits to her. 

The Ombudsman acknowledged that payment of death benefits was at the manager's discretion.  However, in this case the basis for the manager's decision was not clear and this omission was problematic.  In particular:

  • he considered that the absence of any documented reasons to support a decision as indicating that there were in fact no supportable reasons for the decision;
  • documented reasons need not be lengthy but should be sufficient to convey to the reader an understanding of the factors which have been given some weight;
  • it may also be appropriate to record why some factors have been discounted;
  • the reasons should be sufficient to enable an aggrieved party to know whether there are grounds to challenge the decision;
  • by not providing reasons to support its conclusions, the manager had failed to carry out a complete exercise, meaning that it was not possible to establish whether it had exercised its discretion appropriately.

The manager was directed to reconsider the distribution of the death benefit lump sum and to fully document the rationale for its decision and to communicate this with Dr G.  


Key dates

Determination dated 29 June 2018.


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McLarry v Pensions Regulator: burden of proof


Summary

The Upper Tribunal has ruled that in references of decisions made by the Pensions Regulator under section 3 Pensions Act 1995 to prohibit an individual from being a pension scheme trustee, the correct burden of proof was the ordinary civil standard (that is, proof on the balance of probabilities).  The two individuals concerned had argued that the criminal burden of proof (beyond all reasonable doubt) should apply.


Key dates

Decision issued on 16 July 2018.


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Mr Y: terminal diagnosis – retirement date should have been brought forward


Summary

The Deputy Pensions Ombudsman (DPO) has upheld a complaint from the administrator of Mr Y's estate that his employer had reason to bring forward his retirement date and, had it done so, he would have died in retirement and greater death benefits would have been payable.

Background

Mr Y was a member of the Local Government Pension Scheme for Northern Ireland. In late 2012, he was diagnosed with an aggressive form of cancer. In January 2013, he met Dr Black, a counsellor appointed by Belfast City Council. A follow up email from Dr Black confirmed that he had explained the difference between death in service and death in retirement for pension purposes and the financial implications. He reported he had explained that, if Mr Y's health took a turn for the worse, the Scheme and the Council would "pull out the stops" to provide the best financial option for Mr Y and his family.

On 24 May 2013, Mr Y was recommended by the Council for ill health early retirement, with his 12 week notice period ending on 17 August 2013. Dr Black and Mrs Y spoke at the end of the meeting and Mrs Y was told that if Mr Y died having retired she would be entitled to significantly more than if he died in service. Dr Black said that if Mr Y's condition deteriorated she should inform the Council and request his retirement date to be brought forward.

On 24 July 2013, Mr and Mrs Y were informed that his cancer had spread and was terminal. Later that day Mrs Y telephoned the Council. There were no notes or recording of the call but the DPO found that during the call:

  • Mrs Y had enquired about some or all of Mr Y's pension benefits being brought forward; and
  • she mentioned having family time away before he began further treatment; and
  • she was told it would not be possible to provide what Mr Y had requested.

Mr Y died on 14 August 2013, three days before his retirement date. Mrs Y received a death in service grant of £51,540 plus a spouse's pension of £4,139 per year. Had Mr Y retired before his death he would have received a retirement grant of £45,557 and a pension of £6,833. On his death as a pensioner Mrs Y would have received a death grant of £68,092 plus a spouse's pension of £4,139.

Complaint to Ombudsman

Mrs Y complained that the Council should have brought forward Mr Y's retirement so that he would have died as a pensioner.

The DPO found that:

  • during Mrs Y's phone call with the Council, she had conveyed the deterioration of Mr Y's condition and that his condition was terminal;
  • although Mrs Y did not specifically refer to waiving Mr Y's remaining notice period, enough had been said for the Council to decide whether to waive the notice period and bring the pension into payment sooner. If the individual Mrs Y spoke to could not make that decision, he should have escalated it to someone who could;
  • Mrs Y was not at fault for not using the correct technical terms when asking for Mr Y's benefits to be paid earlier;
  • under normal circumstances, on the basis of what Dr Black had previously explained about the distinction between death in service and death in retirement benefits, Mrs Y could have been expected to challenge what she was told on the phone. However, these were not normal circumstances – the call was made very soon after Mr and Mrs Y had learned of the terminal diagnosis. It would be hard to envisage her challenging the stance of someone in a position of knowledge and authority. Mrs Y could not be expected to take into consideration that the individual she was referred to was relatively junior – Mrs Y was reasonably entitled to rely on the information she was provided with, even if this contradicted what she had previously been told;
  • the Council employee ought reasonably to have enquired whether Mr and Mrs Y wished to waive the remaining notice period in order to access some money, even if Mrs Y had not specifically worded her request in these terms;
  • if the option of bringing forward Mr Y's retirement date had been offered to Mr and Mrs Y, it was more likely than not that they would have chosen to do this, even if this meant loss of pay for the remainder of the notice period. Given the urgency of the situation, there was no reason why the paperwork to bring forward Mr Y's retirement need have taken more than 48 hours.

Ombudsman's determination

  • The Council was directed to pay the difference between the death benefits received and the benefits payable if Mr Y had retired on 26 July 2013, offsetting the income received by Mr Y between this date and his death.
  • The Council was recommended to pay Mrs Y £500 compensation for her personal distress.


Key dates

26 July 2018


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Mr N: pension liberation fraud – member to be reinstated in original scheme


Summary

The Pensions Ombudsman has directed Northumbria Police Authority to reinstate a former member's benefits in the Police Pension Scheme (at an estimated cost of £124,000), or to provide him with equivalent benefits from another provider.  When processing the member's transfer out request, the Authority had failed to conduct adequate checks and enquiries in relation to the proposed receiving scheme; send the member the Pension Regulator's scorpion warning leaflet; or engage directly with the member regarding the concerns it should have had. 

Background

Mr N applied in late 2012 to cease his active membership of the Police Pension Scheme (the Scheme), because he was considering reducing his working hours and taking a greater role in childcare.  He was concerned that he would not be able to access his pension from the Scheme from age 55 and, in August 2013, he contacted a company called Pension Transfer UK. He was subsequently contacted by an unregulated introducer and then by a firm of financial advisers.  He was recommended to join the London Quantum Retirement Benefit Scheme (Quantum), a defined contribution occupational pension scheme, and his benefits from the Scheme were transferred in August 2014.  In 2015, Mr N noticed that he had signed up to a high risk investment as a sophisticated investor.  In June 2015, the Pensions Regulator (tPR) appointed an independent trustee to London Quantum.  The independent trustee believed that actions taken by the previous trustee may have been in breach of trust and that members may have suffered loss as a result.

Mr N's complaint to the Financial Ombudsman Service about the financial adviser was rejected on the grounds that the adviser had not carried out any regulated activity.  His complaint under the Scheme's internal dispute resolution procedure (IDRP) was also rejected.  He then complained to the Pensions Ombudsman who, after issuing a preliminary decision, decided to hold an oral hearing.

Consideration by Pensions Ombudsman

The Ombudsman reviewed the development of the pensions industry's knowledge and understanding of pension liberation fraud.  He noted the following in particular.

  • The publication of tPR's guidance in February 2013 marked a point of considerable change in level of due diligence expected of (and carried out by) trustees, managers and administrators when considering transfer requests. 
  • Putting a link to tPR's scorpion warning on the Authority's employee newsfeed in February 2013 was not sufficient.  The Authority could not say how long the link remained on the front page, nor could it show that employees had been sent an alert to the story.
  • The scorpion warnings were designed to be sent individually to scheme members.  Even if the Authority had considered in February 2013 that it did not need to send the warning automatically to all potential transferees, subsequent public concerns about pension liberation should have caused it to change its approach – certainly before Mr N's transfer out was made in August 2014.
  • Given that the Authority received very few transfer enquiries compared to the number of its members, it would have been both straightforward and appropriate to focus on the few transfer requests and to ensure that appropriate warnings were given.
  • Even if the Authority had sent the scorpion warning to Mr N, this would not have been sufficient and it should have done more.
  • While Quantum had been established in 2012 and so was not a "new" scheme, the Authority ignored features of Quantum which other pension schemes had identified as potential "red flags" and had accordingly refused transfer requests to that arrangement.
  • The Authority was fully aware that Mr N was still employed as a police officer in Northumberland and was still living there.  The Authority should therefore have enquired why he was requesting a transfer to an occupational pension scheme sponsored by a company he did not work for and based in London.   The case of Hughes v Royal London (which clarified that a member did not necessarily have to be employed by a sponsoring employer of a receiving scheme in order to have a statutory transfer right) had not yet been decided. 
  • Previous Ombudsman determinations had made clear that transferring schemes were expected to go through tPR's action pack for pension professionals.  This would include asking the member why he wished to transfer to a scheme sponsored by a company which was not his employer and how he had become aware of the receiving scheme.
  • If the Authority had sought further information, it was likely this would have shown the involvement of an unregulated introducer, plus the names of other parties whose names had already been publically linked to pension liberation. 
  • Where there was cause for concern, as in this case, the Authority should have obtained a copy of Quantum's trust deed and rules to satisfy itself that Quantum was an occupational pension scheme which could accept Mr N's transfer in and provide him with benefits.
  • The fact that several financial organisations were involved with Mr N's transfer should not be taken to mean that he was taking a considered approach and was not being pressured to transfer.  It was a common feature of pension fraud cases that there are several companies involved, potentially each trying to limit its involvement to fall short of regulated activity or committing a criminal offence.
  • The Authority could not rely on the statutory discharge in section 99(1) Pension Schemes Act 1993, which applies where a member has exercised his/her right to a transfer value and the trustees or managers have "done what is needed to carry out what the member requires".  What is needed would include appropriate review of the transfer request, taking into account the law and regulatory guidance, which had not been done.
  • The significant cost to the Authority of reinstating Mr N's benefits in the Scheme (or elsewhere) was not a reason for the Ombudsman to dismiss his complaint.

Pensions Ombudsman's directions

The Ombudsman upheld the complaint of maladministration against the Authority and found that had it acted more diligently then, on the balance of probabilities, Mr N would not have proceeded with the transfer to Quantum.  He made the following directions.

  • The Authority should reinstate Mr N's accrued benefits in the Scheme, adjusting for any revaluation since the transfer was made.  If this could not be legally done then the Authority should provide Mr N with benefits equivalent to the Scheme benefits he had lost.
  • The Authority should also pay Mr N £1,000 compensation for the materially significant distress and inconvenience he had suffered.  However, the Ombudsman declined to award Mr N his legal costs, as it had been his decision to instruct lawyers and he could have complained to the Ombudsman without legal representation.
  • If the trustees of Quantum manage to retrieve some or all of Mr N's pension fund for his benefit then the Authority could recover this amount from Mr N.

Key dates

Determination issued 11 July 2018.


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Money laundering: extension of Trust Registration Service (TRS) requirements


Summary

In minutes of a meeting about the Trust Registration Service (TRS), HMRC provided an update about the implementation of the Fifth Money Laundering Directive (5MLD).  It comments that 5MLD would extend the TRS to all UK express trusts and non-EU trusts that own UK real estate or had a business relationship with a UK "Obliged Entity" (broadly, an entity subject to money laundering requirements).  5MLD would require HMRC to share trust data with Obliged Entities and anyone with a "legitimate interest" (to be defined in due course).


Key dates

Minutes of meeting on 23 May 2018.

Policy consultation expected in winter 2018/19.

Consultation on draft legislation expected in spring 2019.

Deadline for transposition into national law expected to be around January 2020.

Deadline for implementation in national law expected to be around March 2020.


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Finance Bill: employer contributions to life assurance and overseas pension schemes


Summary

HMRC has issued a short policy paper and draft clause intended to amend the tax exemption for the provision by an employer of death benefits under a registered pension scheme (including non-UK registered schemes).  At present, no income tax liability arises where the employer provides for payment of a death benefit to a member of the employee's family or household.  As amended, the exemption will apply to death benefits paid in respect of the employee to any other individual or to a charity.


Key dates

Policy paper and draft clause issued on 6 July 2018.

Legislative changes expected to have effect from 6 April 2019.


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EMIR: requirement on pension schemes to clear trades


Summary

The European Securities and Markets Authority (ESMA) has issued a communication acknowledging the challenges some pension schemes will face when the requirement for them to clear their over-the-counter (OTC) derivatives trades comes into effect on 17 August 2018.  It recognises that a suitable technical solution for the transfer of non-cash collateral as variation margins has not yet been developed. 

ESMA points out that the temporary exemption from the clearance requirement for pension schemes has been extended twice and that EMIR does not currently permit further extension.  However, a proposal from the European Commission to amend EMIR, published on 4 May 2017, includes a further extension of the exemption.

The communication recognises that there is likely to be a timing gap between the expiry of the current exemption and the coming into effect of any further exemption under an amended EMIR.  It points out that neither ESMA nor national regulators have formal power to disapply or postpone the provisions of EMIR, which are directly applicable in Member States.  However, ESMA expects national authorities to enforce applicable legislation in a proportionate manner and not to prioritise their supervisory actions towards entities which are expected to become exempt from the clearing requirements again in a relatively short period.

Background

A new European regulation on over the counter (OTC) derivatives, commonly known as the European Market Infrastructure Regulation (EMIR), has introduced new requirements including an obligation to clear trades through a central counterparty (CPP). A CCP acts as an intermediary between the two parties to the trade, so that each party has a separate contract directly with the CCP. By guaranteeing the performance of both parties' obligations, clearing trades through a CCP reduces credit and counterparty risk.

Currently, to comply with the central clearing obligations pension schemes would have to source cash. The Commission has recognised that pension schemes often do not hold significant amounts of cash or liquid assets, so compliance could be costly and have a negative impact on pensioners' income.


Key dates

European Commission published a legislative proposal for a Regulation to amend EMIR, plus a factsheet with Q&As on the proposal on 4 May 2017. 

ESMA statement published on 3 July 2018.


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Pensions Regulator: consultation on stronger powers


Summary

The DWP has issued its first consultation  concerned with protecting defined benefit (DB) schemes, following on from the March 2018 White Paper.  The consultation sets out proposals to improve the powers of the Pensions Regulator (tPR) to enable it to:

  • be more proactive and become involved earlier when employers make changes which could impact a scheme;
  • obtain information about a scheme and its sponsoring employer; and
  • gain redress when things go wrong, including sanctioning individuals and companies.

Notifiable events framework: additional notifiable events

The range of notifiable employer-related events will be extended to include the following (potentially, only where transactions exceed a certain risk threshold – such as where the scheme is underfunded on a prescribed basis):

  • sale of a material proportion of the business or assets of a sponsoring employer which has funding responsibility for at least 20% of the scheme's liabilities;
  • granting security on a debt to give it priority over debt to the pension trustees (this would not include security granted for specific chattels financing, such as hire purchase of company vehicles);
  • the appointment of a chief restructuring officer, chief transformation officer and/or an equivalent to the board of directors or to a senior management role;
  • appointments made to the board or to a senior management role by third parties (for example if a lender or other key financial stakeholder appoints someone to the board, or to an oversight role, to protect its own interests);
  • changes to two of the chairman, chief executive officer or chief financial officer (or equivalents) within the previous six months;
  • a sponsoring employer taking independent pre-appointment insolvency or restructuring advice (such as an independent business review).

The current notifiable event of breach of a banking covenant will be extended to include covenant deferral, amendment or waiver.

Wrongful trading of the sponsoring employer will cease to be a notifiable event, since experience has shown that wrongful trading is highly unlikely to be made public, regardless of any notification duty.

The DWP acknowledges that there have been calls for dividend payments to be considered within the notifiable events framework but points out that the Department for Business, Energy and Industrial Strategy (BEIS) is currently considering responses to a consultation on corporate governance and will consider dividend payments as part of its consultation response.

Notifiable events: timing of notification

Currently, tPR must be told of notifiable events as soon as reasonably practicable after they have occurred.  The timing for notification will be brought forward and the reporting obligation will be extended to other parties (for example to directors of a sponsoring employer's parent company who are planning a transaction).

Under the proposals, the following events should be notified to tPR when a heads of terms agreement is first put in place ( although, the expectation is that pension trustees will be involved earlier in the negotiations):

  • sale of a controlling interest in a sponsoring employer;
  • sale of a sponsoring employer's business or assets; and
  • granting of security which has priority over debt to the pension trustees.

Declaration of intent

The above transactions may also trigger a requirement for the employer to issue a "declaration of intent", if risk-based criteria (such as the funding level of the pension scheme) are met.

A declaration of intent will need to be addressed to the trustees from the transaction's corporate planners (usually the board of directors) and shared with tPR.  The declaration should:

  • explain the nature of the planned transaction;
  • confirm that the corporate planner has consulted on its terms with the trustees and confirm the trustees' agreement (or otherwise) to the transaction; and
  • explain any detriment to the scheme and how this is to be mitigated.

The declaration should be issued after the parties have completed due diligence and the financing of the transaction is finalised but before sale and purchase contract signature. 

Voluntary clearance

tPR is expected to review its clearance guidance and to clarify or expand certain areas, including:

  • the "material detriment" test;
  • the circumstances in which clearance is given in relation to financial support directions (FSDs); and
  • how the clearance process works and that applications for clearance should be made as early as possible.

Sanctions

The DWP intends to use primary legislation to widen the circumstances in which fines and criminal proceedings may be used, so that tPR or the courts will be able to impose the most appropriate penalty, ranging from:

  • existing civil penalties (up to £5,000 for an individual or up to £50,000 in any other case) for low level non-compliance;
  • a new power to impose a civil penalty of up to £1m for more serious breaches, including:
    • non-compliance with information requests;
    • deliberately providing false information or failing to provide information to tPR or to the trustees;
    • non-compliance with elements of the DB funding code; or
    • failure to provide a declaration of intent; and
  • criminal sanctions (potentially unlimited fines or custodial sentences) for new criminal offences of:
    • wilful or grossly reckless behaviour in relation to a DB pension scheme;
    • non-compliance with a contribution notice; or
    • failure to comply with the notifiable events framework.

Potential targets would include all those with responsibility for a pension scheme, including directors, sponsoring employers, associated and connected persons and (in some circumstances) trustees.

Moral hazard powers

Proposals to strengthen the contribution notice (CN) regime include the following.

  • Amending the "reasonableness" test so that, when determining the amount to demand under a CN, there is a greater focus on the loss or risk caused to a scheme by the act or omission rather than on the relationship between the target and the sponsoring employer, or the benefit the target has received from the employer.
  • Allowing delays in payment to be reflected in the amount of the sum payable under a CN, potentially by reference to the increase (if any) in a prescribed notional asset allocation.
  • The date for calculating the cap on the level of a CN will be changed from the date of the act or omission to a date closer to the final determination.
  • Creating an additional limb to the "material detriment" test, by reference to the weakening of the employer, rather than likelihood of accrued scheme benefits being paid in the future.  

Proposals to strengthen the financial support direction (FSD) regime include the following

  • Creating a single-stage process under which an FSD would create a specific and enforceable obligation on the target.
  • Tightening the forms of financial support required, so that an FSD will either require a cash payment or will impose a form of statutory guarantee of some or all of the sponsoring employer's liabilities to the scheme.  Trustees would be able to enforce obligations under the statutory guarantee without further action by tPR.
  • Reviewing whether the condition that a scheme must be "insufficiently resourced" should be amended or replaced, to give greater certainty about the criteria for imposing an FSD.
  • Allowing FSDs to be imposed on a wider range of individuals who are associated or connected with a sponsoring employer, to mirror the scope of CNs.
  • Amending the reasonableness test to clarify that a target's actions in creating or increasing risk are a relevant (but not a necessary) factor, in line with the regime for CNs.
  • Giving tPR power to impose a CN on any person associated or connected with the recipient of an FSD.
  • Exploring whether the "lookback" period could be extended beyond two years, and what protection should be put in place for businesses which would be brought within scope of the FSD regime by a longer lookback period.
  • Giving tPR power to issue an FSD after a scheme has entered the Pension Protection Fund (PPF) and to enforce the FSD in the form of a cash payment.

Key dates

Consultation issued on 26 June 2018.

Consultation period ends on 21 August 2018.

White Paper, "Protecting Defined Benefit Pension Schemes", issued on 19 March 2018.


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Pension funds and social investment: draft regulations


Summary

The DWP and the Department for Digital, Culture, Media & Sport have issued a joint final response to the Law Commission's report on pension funds and social investment. The government intends to take the Commission's recommendations forward in relation to occupational pension schemes. It welcomes the fact that the Financial Conduct Authority (FCA) is also taking forward the recommendations, by consulting on a range of rule changes in relation to independent governance committees (IGCs).

Key changes taken forward in draft regulations include the following.

Statement of investment principles (SIP): members' views

  • Before preparing or revising their SIP, trustees will have to prepare a statement explaining the extent to which they will take into account the views which, in the trustees' reasonable opinion, members of the scheme hold (including their views on non-financial matters). The consultation paper comments that trustees may decide to address any specific matter through their stewardship activities rather than by disinvesting entirely from the relevant company or sector.
  • For this purpose, "non-financial matters" includes (but is not limited to) ethical matters, social impact matters and matters concerning members' present and future quality of life.
  • The consultation paper makes clear that trustees are not required to invest in line with members' wishes, or in accordance with government policy objectives. Following the Law Commission's approach, the government considers that the ability to take account of members' wishes is permissive and may only be done when a two stage test is met:
    • the trustees should have good reason to think the members hold the concern; and
    • the decision should not involve a significant financial detriment.
  • The government notes the Law Commission's view that it is not necessary for trustees to survey members before making an investment decision, but instead trustees should be able to make assumptions bases on information already known about the scheme membership or the population as a whole. 

SIP: policy in relation to financially material considerations

  • The SIP must cover the trustees' policy in relation to financially material considerations, including how those considerations are taken into account in the selection, retention and realisation of investments. This follows from the Law Commission's conclusions that, where environmental, social or governance risks or opportunities are financially material, trustees should take account of them.
  • This will replace the current requirement for the SIP to cover the extent (if at all) to which social, environmental or ethical considerations are taken into account.
  • "Financially material considerations" will include environmental, social and governance considerations (specifically including climate change), although this is not limited to these factors.
  • The government expects that trustees will take financially material considerations into account in all but a limited range of circumstances, for example where the winding up of the scheme is imminent.
  • Trustees of relevant schemes (broadly, defined contribution schemes, with a few exceptions) will have to cover their policy in relation to financially material considerations in their statement about their default strategy. 

SIP: stewardship and engagement

  • The SIP will have to cover the trustees' policy on undertaking engagement activities in respect of their investments, including how and when the trustees would monitor and engage with "relevant persons" about "relevant matters".
  • For this purpose, a "relevant person" will mean an investee company, an investment manager and a shareholder of an investee company. "Relevant matters" will include an investee company's performance, strategy, risks, social and environmental impact and corporate governance.

Defined contribution schemes: implementation statement

  • Where a scheme is a "relevant scheme" (broadly, a money purchase scheme), the trustees' annual report must include an implementation statement which:
    • sets out how, and the extent to which, the trustees consider that the SIP has been followed during the year;
    • describes any review of the SIP undertaken during the year;
    • explains any change to the SIP during the year and the reason for any change;
    • where no review of the SIP was taken in the year, gives the date of the most recent review.
  • This requirement is expected to apply to the first annual report produced on or after 1 October 2020.

Contents of annual report

Trustees of both defined benefit and defined contribution schemes will have to include the following in their annual report:

  • their policy on financially material considerations;
  • their policy on engagement activities and exercising rights;
  • their statement on members' views; and
  • where the scheme is a relevant scheme (broadly, defined contribution schemes), the trustees' implementation statement.

Defined contribution schemes: publication on a website

New provisions will require "relevant schemes" (broadly, defined contribution schemes) to make the following publically available free of charge on a website:

  • the latest SIP;
  • the trustees' statement on members' views; and
  • the implementation statement.

Investment in property and infrastructure

The Pensions Regulator is expected to consider further guidance to make clear how trustees should promptly realise investments from funds with longer dealing cycles.

Social impact investing

In March 2018, the Prime Minister commissioned an industry-led taskforce to progress recommendations in the report "Growing a Culture of Social Impact Investing in the UK" issued in November 2017. The taskforce aims to generate a faster rate of innovation in the financial services industry to provide products which give savers and investors the opportunity to make a social impact.

In the June 2018 consultation paper on draft regulations, the government commented that it does not propose to require trustees to have a policy in relation to social impact investing at the present time.


Key dates

Government's final response and consultation paper with draft regulations and draft guidance  issued on 18 June 2018. The consultation period ends on 16 July 2018.

Government's interim response issued on 18 December 2017.

Law Commission's report issued on 23 June 2017.

Draft Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2018 expected in force on 1 October 2019 (if draft regulations are laid before Parliament in autumn 2018; if the regulations are not laid until early 2019, most provisions will come into force on 6 April 2020).

Consultation on a legislative framework and authorisation regime for all forms of commercial DB scheme consolidation is expected towards the end of 2018.

Consultation by the Financial Conduct Authority (FCA) expected in the first half of 2019.

The Pensions Regulator is expected to update its existing codes of practice and guidance for DB and DC schemes.

Social impact investing

Social impact investing in the UK: taskforce was commissioned on 9 March 2018.

A report on progress is expected at the end of 2018.

Report "Growing a Culture of Social Impact Investing in the UK" was issued in November 2017.


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Pimlico Plumbers: self-employed plumber was a worker


Summary

The Supreme Court has confirmed in Pimlico Plumbers Ltd v Smith that a plumber engaged on the basis that he was self-employed was really a worker and as such entitled to annual leave and protection against unauthorised deductions from pay and discrimination.  The Court held Mr Smith was a "worker" for the purposes (among other things) of section 230(3) of the Employment Rights Act 1996.  It did not consider whether he was a "worker" for auto-enrolment purposes but the relevant definition (in section 88 of the Pensions Act 1988) is substantially the same as the definition in section 230(3).

To be a worker, an individual has to be engaged under a contract under which he has to provide personal service, in circumstances where he is not running a business on his own account. At an earlier stage, both the Employment Appeal Tribunal (EAT) and Court of Appeal decided that Mr Smith satisfied that test while working for Pimlico Plumbers (Pimlico). There were two issues for the Supreme Court to consider. First, whether Mr Smith was under an obligation to provide personal service in circumstances where he had a limited right to send a substitute to work and second whether he was running his own business.

On the substitution point, the Supreme Court found that the contractual arrangements did not include an unfettered right to appoint a substitute. Instead Mr Smith had a limited right to substitute his own performance with that of another plumber working for Pimlico. The dominant feature of the contract between Mr Smith and Pimlico remained personal performance by him, as indicated by the terms of the contract. The tribunal was entitled to find that the requirement for personal service was satisfied.

The tribunal was also entitled to find that Mr Smith was not operating a business on his own account. Under the terms of the contract, Pimlico was obliged to offer available work to him, which meant an umbrella contract existed between them. It was particularly relevant that Mr Smith was working as an integral part of the Pimlico operation and that it had tight control over him in terms of his uniform, his vehicle, the requirement to carry an identity card, how, when and how much he was paid and the administrative instructions given to him.


Key dates

Judgment given on 13 June 2018.


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PPF publishes new guidance on its approach to CVAs


Summary

The Pension Protection Fund (PPF) has issued new guidance on company voluntary arrangements (CVAs).  It comments that it has seen a marked increase in the use of CVAs, with the majority aimed exclusively at addressing issues with the employer's property portfolio and intended to leave other creditors, including pension scheme trustees, untouched.  The PPF is concerned, however, that issues facing the employer are often not addressed and the employer goes on to fail.

The guidance sets out the approach employers and their advisors should take when presenting a CVA proposal to the PPF.  Points to note include the following.

  • When an employer (or all employers in a last man standing scheme) lodge a CVA proposal in Court, a PPF assessment period will begin. The PPF will acquire the trustees' voting rights and it comments that it will usually vote for or against a CVA proposal rather than abstain.
  • The proposals must clearly demonstrate that the employer is insolvent and that the return proposed would be significantly better than on the employer's administration or liquidation.
  • The scheme should receive equity in the employer as an "anti-embarrassment" measure.  The trustees' share should be at least 33% or, potentially, a higher percentage depending on the circumstances.
  • The PPF will discuss all CVA requests with the Pensions Regulator, whether or not Regulator clearance is sought.
  • The PPF is mindful that during the period of a CVA the pension deficit may grow and potential PPF liabilities may increase as members reach normal retirement age and pension increases are awarded ("PPF drift").
  • Factors employers and their advisors are expected to consider include: risks to the schedule of pension deficit repair contributions posed by the CVA; mitigation of those risks; whether the trustees should carry out a new actuarial valuation of the scheme and agree a new schedule of contributions; plus any dividends forecast to be paid in the foreseeable future and proposals to ensure the scheme receives comparable amounts
  • Consideration should be given to the investment risk in the pension scheme and steps should be taken to de-risk to reflect the additional risk to the scheme of the CVA.
  • Where the scheme is expected to continue following the completion of the CVA, deficit repair contributions due should continue to be paid whether or not the CVA proposals are approved.  The PPF has documentation to facilitate this.

Key dates

Guidance issued on 13 June 2018.


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Members with final salary link were not active members


Summary

In an unreported case, the High Court has held that members in a scheme closed to future accrual but who retained a final salary link while in service with the employer were not active members.  The scheme had ceased to have active members (defined as a member in pensionable service) and was therefore frozen.

There were two elements to the statutory definition of "pensionable service":

  • service in any description or category of employment to which the scheme related; and
  • that the service qualified the member for pension or other benefits under the scheme.

The final salary link was a means of quantifying the benefit which had already accrued under the scheme up to the closure date – and could be distinguished from the accrual of benefits giving rise to a prospective entitlement to pension.  


Key dates

Judgment given on 12 June 2018 (unreported).


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HMRC newsletter 99: genuine errors – actions of IFAs


Summary

HMRC Newsletter 99 contains clarification that its guidance on genuine errors (Pensions Tax Manual 146000) may be applied to the actions of an independent financial adviser (IFA) or other agent where all of the following apply:

  • the IFA or agent has clear authority to act on behalf of the member;
  • the member has given a clear instruction as to the form the transaction should take;
  • as a result of a clerical error, the form of the transaction is not what the member intended;
  • the error is spotted and reported to the scheme immediately;
  • had the error been made by the member, the scheme administrator would have applied the genuine error guidance; and
  • the member's position has been restored to as it was before the error was made and then the transaction has been undertaken as originally intended.

The genuine errors guidance may not be applied where:

  • the member has changed his/her mind;
  • the error is more than clerical; or
  • the IFA or agent has given advice which they now regret and wish to reverse the transaction.


Key dates

Newsletter issued on 30 May 2018.


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Mr E: pension liberation – no maladministration in making transfer


Summary

The Pensions Ombudsman has dismissed a complaint  that a stakeholder pension provider had negligently transferred Mr E's funds to the Bardwell Heights Ltd Pension Scheme (the "Bardwell Scheme").  The provider had followed relevant good practice at the time and there had been no maladministration.

Facts

Mr E was contacted by text message with an offer of an investment opportunity for frozen pension funds.  He signed various documents, including a letter of authority in relation to the Wicker Shine Limited Pension Scheme.  Soon after this the Wicker Shine Scheme was placed on the provider's "list B", meaning that transfers to it would be subject to additional due diligence checks.

Mr E then submitted a transfer request from the Bardwell Scheme, which gave the same address for administration as Wicker Shine Scheme.  As the Bardwell Scheme had been registered with HMRC less than 12 months earlier, the provider referred the transfer request to its internal financial crime team.  It subsequently also referred the transfer to the Serious Organised Crime Agency (SOCA), citing in addition that the Bardwell Scheme and the Wicker Shine Scheme shared a director.  SOCA confirmed that it consented to the transfer but that this did not oblige or mandate the transfer to be made, nor should it imply SOCA approval.

The provider also wrote to Mr E, referring to the Scorpion leaflet produced by the Pensions Regulator on possible risks of transferring his pension, which the letter said was enclosed.  Mr E confirmed that he wished to transfer to the Bardwell Scheme as soon as possible and the provider made the transfer in May 2013.  In August 2014, the Regulator issued a final notice in relation to the Bardwell Scheme and appointed an independent trustee because of concerns about pension liberation and fraud.  Mr E complained that the provider should not have made the transfer.

Ombudsman's determination

The Ombudsman dismissed the complaint.  

  • The provider had identified and considered the links between the Wicker Shine Scheme and the Bardwell Scheme and, by referring the issue to SOCA, had taken an appropriate step to investigate the links.
  • The provider had received evidence of the Bardwell Scheme's registration with HMRC and that Mr E was employed.  In the current legal framework, these circumstances would have entitled Mr E to a statutory right to transfer, which the provider could not have blocked.
  • In sending the Scorpion leaflet to Mr E the provider had acted appropriately and proportionately.  Mr E denied receiving the leaflet but the Ombudsman found on the balance of probabilities that he had.  The covering letter to Mr E referred to the leaflet and, even if it had in error not been enclosed, he could have requested a copy. 
  • While the provider could have spoken with Mr E directly to discuss the risks, this was not established good or normal practice at the time.


Key dates

Determination issued on 26 April 2018.


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Burgess and others v BIC UK Limited: no limitation period for recovering overpayments


Summary

The case  concerned the validity of increases ("Pre-1997 Increases") on pensions in payment in excess of guaranteed minimum pensions (GMPs) paid from April 1992 on pensions accrued prior to April 1997 (when statutory pension increases were introduced).  The validity of the Pre-1997 Increases had been challenged by the employer since 2011 and their payment was suspended from March 2013.

The High Court found that the Pre-1997 Increases had been validly paid.  Even though the correct formalities for amending the scheme rules had not been observed at the time, the increases had subsequently been validly introduced with retrospective effect, pursuant to a later trust deed and rules.  Obiter, the Court made various findings in relation to recovery of overpayments of pension (if the increases had been invalid), including that the six year limitation period does not apply to equitable recoupment (set off) against future payments of pension.

Facts

The scheme had a large surplus in the early 1990s, which the trustees were obliged to reduce under the applicable tax regime. 

Minutes of a trustees' meeting held on 18 February 1991 (the "1991 Minutes") recorded proposals to increase pensions in payment in line with inflation and to increase future payments by the lower of the retail prices index (RPI) or 5%.  The minutes stated "It was RESOLVED that the proposed action be carried out as soon as possible".

The trustees issued an announcement to members dated 19 March 1992 stating that for all pensions commencing after 6 April 1992 the excess over GMP would be increased by the lower of RPI or 5%.  With effect from 6 April 1992, the increases were applied to all pensions in payment, whenever they commenced.

A new definitive deed and rules was executed on 29 May 1993 (the "1993 Deed").  The 1993 Deed was expressed to have retrospective effect from 6 August 1990 and to have replaced the provisions of the previous definitive deed and rules (the "Fourth Edition") with effect from that date.

Issues

The High Court (Mr Justice Arnold) was asked to decide:

  1. Were the Pre-1997 Increases properly paid?
  2. If the Pre-1997 Increases had been properly paid, could they now be stopped?
  3. If the Pre-1997 Increases had not been properly paid, could the overpayments made since 1992 be recovered?

Issue 1: were the Pre-1997 Increases properly made?

The trustees relied on several different bases for their contention that the Pre-1997 Increases had been properly made. 

Could rule 36 of the Fourth Edition be relied on?

Rule 36 of the Fourth Edition gave the trustees power, with the consent of the principal employer, "by any writing under hand by the Trustees and the Principal Company" to "alter or modify all or any of the provisions of the Scheme".  It was common ground that that "effected under hand" meant that the document must be signed.  However, provided that the document was signed, no other formality was required.

Mr Justice Arnold accepted that, if the 1991 Minutes had been signed by the trustees and on behalf of the principal employer, the decision to pay the Pre-97 Increases would have constituted a valid exercise of the Rule 36 power.  The trustees claimed that the failure to comply with the formality of signing on behalf of the principal employer could be cured by the equitable maxim that equity looks as done on that which ought to be done.

The judge disagreed, and distinguished an imperative power (whose exercise the court might compel in certain circumstances) from a discretionary power.  He found that the power conferred by rule 36 was purely discretionary.  It followed that the court would not have compelled the trustees (or the principal employer) to exercise the power with the requisite formality merely on the ground that they had in fact decided how it should be exercised.

Was the introduction of the Pre-1997 Increases valid under the 1993 Deed?

The trustees could only rely on powers under the 1993 Deed and Rules to validate payment of the Pre-1997 Increases if the 1993 Deed and Rules had retrospective effect from 6 August 1990, as provided by clause 1(a) of the 1993 Deed. 

Mr Justice Arnold considered case law concerning retrospective amendments, and noted that while back-dated amendments will often involve an element of re-writing history, the question was whether this amounted to impermissible re-writing.  He referred to the High Court decision in Shannan v Viavi Solutions UK Ltd, where it was held that exercising a power retrospectively would be impermissible if this:

  • adversely affected accrued rights;
  • falsified something that was true and/or effective when done; or
  • validated something which when done was a breach of trust.

The Judge held that the amendment to introduce the Pre-1997 Increases could have been made under the amendment power in the Fourth Edition, and the only reason why it was not validly made was due to the failure to observe the correct formalities.  He accepted that the 1993 Deed and Rules did not themselves provide for payment of the Pre-1997 Increases, but considered that this would not prevent effect being given to the decision which had been, as a matter of historical record in the 1991 Minutes, in fact decided and done.

Mr Justice Arnold then considered whether amendment powers in either clause 4 or clause 9 of the 1993 Deed would validate the introduction of the Pre-1997 Increases.

Clause 4 of 1993 Deed

Clause 4 of the 1993 Deed provided that the trustees with the consent of the principal employer could amend the provisions of the trust (including retrospectively):

(i) "by deed executed by the principal employer and the trustees in the case of the definitive deed or the Rules; or

(ii) by resolution (in writing) of the trustees in the case of the Rules only".

  • On the question of whether the principal employer had agreed to the amendment to benefits:
    • it was common ground that there was no Board minute to record a decision by the principal employer's directors to approve the grant of the Pre-1997 Increases;
    • however, then-executive directors of the principal employer had given oral evidence that the principal employer had agreed to the increases.  They had also clearly been content for the proposal to pay the Pre-1997 Increases to be adopted by themselves in their capacity as (then) trustees; and
    • while no doubt the principal employer's agreement should have been minuted, there was no requirement for this and the principal employer did not have a consistent practice in relation to Board minutes.
  • The court considered the formalities required by clause 4 in relation to an amendment to the Rules alone.  Mr Justice Arnold rejected the argument that the principal employer's consent must always be given by deed.  While it was desirable to have some formal record of the consent, this was not required by clause 4. 
  • A further issue was what was meant by "a resolution (in writing)".  Mr Justice Arnold agreed with the trustees that the 1991 minutes qualified as a resolution in writing for this purpose.  Provided that the resolution was sufficiently clear in its effect, it was not required to set out the text of the amendment to the 1993 Rules.

Clause 9 of the 1993 Deed

The court held that the decision to pay the Pre-1997 Increases was also validly made under clause 9 of the 1993 Deed.  Clause 9 empowered the trustees, on the principal employer's direction, to:

"grant any new and additional Relevant Benefits to any person, or augment any of the Relevant Benefits (including pensions in payment) which any person may be entitled to".

In reaching this conclusion, Mr Justice Arnold held that:

  • although clause 9 enabled the provision of augmented benefits for individual members, it was wide enough to encompass across the board increases for all members, since "any person" could include a group of persons; and
  • "any person" was also wide enough to extend to new joiners.  

Issue 2: if the Pre-1997 Increases were properly paid, could they now be stopped?

It was not in dispute that, if the 1991 Minutes recorded a valid decision by the trustees and the principal employer to pay the Pre-1997 Increases, then that decision was irrevocable without limit of time.  It followed that, if Mr Justice Arnold was right that the Pre-1997 Increases had been properly paid, then payment could not now be stopped.

Issue 3: if the Pre-1997 Increases were not properly paid, could the trustees now recover the payments made since 1992?

In view of the conclusion that the Pre-1997 Increases had been properly paid, the question in Issue 3 did not arise.  Mr Justice Arnold nevertheless made some (obiter) comments, in case he was wrong on Issue 1.

Section 91 Pensions Act 1995: meaning of “competent court”

It was common ground that the equitable right of recoupment is subject to s 91 Pensions Act 1995. 

  • Section 91(5)(f) provides that the general prohibition on set-off against an individual’s pension rights under an occupational pension scheme does not apply where the set off arises in respect of a payment made in error.
  • Section 91(6) provides that where there is a dispute as to the amount of a set off under subsection (5), the set off must not be exercised unless the obligation has become enforceable under an order of a “competent court”.
  • Mr Justice Arnold held that, for this purpose, a determination by the Pensions Ombudsman would not constitute “an order of a competent court”, as the Ombudsman is not a court. However, an order by the County Court pursuant to s 150(5)(a) Pension Schemes Act 1993 would satisfy the requirement.

Limitation

The question arose of whether recovery of overpayments would be subject to the six year limitation period under s 5 Limitation Act 1980.

  • Mr Justice Arnold declined to follow previous decisions in Webber v Dept for Education and D v BIC UK Pension Scheme.  He accepted arguments that equitable recoupment was not a form of restitutionary claim for unjust enrichment but, instead, was an equitable self-help remedy which was not a claim for repayment of monies already paid but was an adjustment of accounts in the future.
  • In addition, s 36 Limitation Act provides that s 5 does not apply to certain claims, including claims “for any other equitable relief”.  

It followed that the equitable right of recoupment was not subject to the six year limitation period.

Laches

It was common ground that if there was no limitation period then, in principle, the doctrine of laches (which can bar a claim for equitable relief where the claimant has delayed) would apply.

  • Mr Justice Arnold held that the starting point was that it would be the trustees’ duty (and not inequitable) to seek to recover the payments and thereby increase the assets available for paying benefits to all members.
  • The trustees’ argument that their recovery of the overpayments should be barred by laches was rejected.  The Court agreed with the principal employer that the question of whether laches applied should not be determined on a group basis but instead should be left for determination on an individual basis between the trustees and individual members.  This would depend, in particular, on whether there had been detrimental reliance by the individual in question in their particular circumstances.
  • In reaching this conclusion, Mr Justice Arnold relied on the decision of the House of Lords in Fischer v Brooker, in which Lord Neuberger said:

“… laches is an equitable doctrine, under which delay can bar a claim to equitable relief….some sort of detrimental reliance is usually an essential ingredient of laches…”.

Estoppel

Mr Justice Arnold rejected the trustees’ argument that estoppel by convention (or, alternatively, estoppel by representation) should bar recovery of any overpayments.  He agreed with the principal employer that the availability of a defence of estoppel should be determined between the trustees and individual members on a case by case basis.


Key dates

Judgement issued on 18 April 2018.


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The Pensions Regulator: Corporate Plan 2018-2021


Summary

The Pensions Regulator has issued its Corporate Plan for 2018-21.  Its priorities for the next three years include:

  • Enhancing and executing effective regulatory approaches across all schemes: it intends to intervene more widely and to continue to conduct more visits and inspections;
  • Promoting good trusteeship through improving governance and administration;
  • Effective regulation of DB schemes;
  • Effective regulation of master trusts;
  • Ensuring employers meet their ongoing automatic enrolment duties;
  • Preparing for the impact of Brexit, including providing specific guidance where appropriate;
  • Developing its regulatory approach to focus on more proactive and targeted work, using a wider range of regulatory interventions.

Key dates

Corporate Plan issued on 10 May 2018.


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GDPR: consent guidance


Summary

The Information Commissioner's Office (ICO) has issued guidance on consent as a lawful basis for processing personal data under the General Data Protection Regulation (GDPR).  The guidance follows revised guidelines on consent adopted by the European Article 29 Working Party on 10 April 2018. 

Points to note from the ICO guidance include the following.

  • Where consent is relied on as the lawful basis for processing personal data, the controller must clearly tell the individual what it will do with the consent and whether it does any other processing on a different lawful basis.  If the controller knows that it will need to retain the data after consent is withdrawn for a particular purpose under another lawful basis, the individual must be told this from the start.
  • Individuals who are asked to consent to processing personal data must be given the name of the controller and of any third party controllers who will be relying on the consent.
  • Previous consents under the Data Protection Act 1998 do not need to be refreshed if they already meet the standards required under GDPR. 
  • Where special category data is being processed, there must be both a lawful basis for the processing under Article 6 and one of the lawful conditions under Article 9 must be met.  "Explicit consent" may be relied on as the lawful condition for the processing of special category data under Article 9, even where a different lawful basis for processing under Article 6 is used.

Key dates

Guidance issued by the ICO on 9 May 2018.

Guidance adopted by the Article 29 Working Party on 10 April 2018.


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Money laundering: Trust Registration Service


Summary

Under new money laundering requirements in force on 26 June 2017, pension scheme trustees (as trustees of an express trust) have to register with the Trust Registration Scheme (TRS) if the pension scheme incurs liability in the relevant tax year for one or more of the following taxes:

  • income tax;
  • capital gains tax (CGT);
  • inheritance tax (IHT);
  • Stamp Duty Land Tax (SDLT) or Stamp Duty Reserve Tax (SDRT); or
  • Scottish land and buildings transaction tax. 

Part 8 of HMRC Pensions Newsletter 98 explains that where a pension scheme is set up as an express trust and is already registered with HMRC then the trustees do not need to register separately on TRS but can instead update their details by contacting Pension Schemes Services

Whether or not the trustees have incurred liability for one of the taxes above, they must maintain accurate records of information required under the regulations and must provide it to HMRC if requested.  


Key dates

HMRC Newsletter 98 issued on 3 May 2018.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017/692 in force on 26 June 2017.


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Court of Appeal: principal employer had been substituted


Summary

The case concerned whether there had been a valid substitution of the principal employer of an occupational pension scheme. If the "new principal employer" had not been substituted for the "old principal employer" then a 1999 deed would not have been validly executed and benefit changes made by the deed would have had no effect. 

The provision of the scheme's trust deed and rules which allowed the substitution of a new principal employer did not require this to be done by any particular means. The High Court had held that for the purposes of this rule no formality was necessary and so it was not required to have a written agreement to substitute the principal employer.  It had also found on the facts that the terms of the relevant rule had been complied with on the execution of the 1999 deed and that it was therefore valid.

The Court of Appeal dismissed the appeal of the old principal employer.  It found on the facts that the conduct of the parties in the months prior to the execution of the 1999 deed was sufficient evidence from which to infer that the required agreement and consent for the substitution of the principal employer had been reached and given by the date of execution of the 1999 deed at the latest.

In reaching its conclusions, the Court of Appeal rejected the old principal employer's arguments that the parties had (mistakenly) all believed that the new principal employer had been substituted in 1994 and that, therefore, they could not have consented and agreed to the substitution taking place in 1999.  In relation to a recital to the 1999 deed which stated that the substitution had taken place in 1994, it must be inferred that the parties to the deed were either aware that the recital was not accurate if read literally, or that they did not consider it in any detail.  


Key dates

Judgement issued on 28 March 2018.


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DC to DC bulk transfers without consent: guidance


Summary

The DWP has issued guidance for trustees who seek to rely on the new provisions allowing a bulk transfer of defined contribution (DC) benefits without consent where:

  • the  receiving scheme is an authorised master trust;
  • the transfer is between schemes where the controlling or principal employers of both schemes are within the same corporate group; or
  • the trustees of the transferring scheme have considered written advice from an appropriate adviser who is independent of the proposed receiving scheme.

Points to note include the following.

  • Even where trustees are not required to take advice, the DWP expects that they will often do so, to ensure compliance with their fiduciary duties.  It comments that trustees should not assume that their fiduciary duties are automatically satisfied by transferring members without consent to an authorised master trust.
  • The exemption from the consent requirement where employers are within the same corporate group does not apply if the members to be transferred include "orphan" members (former employees of employers who are no longer part of the corporate group).
  • Trustees may decide to use an adviser who has provided services to the receiving scheme within the previous 12 months, provided that they consider the adviser to be independent.  The factors taken into account when reaching their conclusion, the weight attached to each factor and the trustees' reasons should be recorded.
  • Advice for trustees on a proposed transfer should cover (among other factors):
    • wider investment options under the receiving scheme, not just the default option;
    • decumulation options available in the receiving scheme;
    • member-borne charges and services provided to members in the receiving scheme;
    • security of assets in the receiving scheme, for example on winding up;
    • use of technology in the receiving scheme, including investment platforms and member-facing technology. 
  • Trustees should also seek to understand:
    • the impact of the transfer on different cohorts of members, including any members who are not being transferred;
    • legal powers in the receiving scheme which may put members at a disadvantage;
    • the receiving scheme's ability to support relief at source (RAS) tax relief, especially where the transferring scheme supports this. 
  • It is not necessary for members' pots to be moved into identical funds in the receiving arrangement, although trustees should consider whether the level of risk and return is broadly appropriate.
  • The DWP intends that, where current workers who are not protected by the charges cap are transferred without consent into an arrangement in a scheme used by their employer for auto-enrolment, that arrangement will become a default arrangement (and so subject to the cap on charges).

Key dates

 Guidance issued on 30 April 2018.

Amendments to the Occupational Pension Schemes (Preservation of Benefits) Regulations 1991 in force on 6 April 2018 (please see separate entry).


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Pension Protection Fund: level of compensation incompatible with EU requirements


Summary

The Advocate General has given an opinion concerning the interpretation of Article 8 of Directive 2008/94, which requires EU Member States to protect employees' rights to old age benefits in the event of their employer's insolvency.  In previous judgments (Robins and Hogan), the Court of Justice of the EU had decided that employees must retain at least 50% of their entitlement to old age benefits.

The Advocate General has answered the questions referred as follows.

·         Article 8 requires Member States to ensure that each individual employee receives at least 50% of his/her benefits.

·         It was not enough for employees usually to receive at least 50% of benefits but for some individuals to receive less than 50% because of the operation of a compensation cap or limits in annual increases.

·         The relevant provisions of the directive were unconditional and sufficiently precise.  It followed that Article 8 was directly effective in the circumstances of the present case and could be relied on directly by an individual against a body such as the Pension Protection Fund (PPF).

The Advocate General commented that it would be possible to structure compensation with different levels, so that those with higher previous incomes would be more significantly affected by any reduction – but subject to them receiving a minimum of 50% of their entitlement.


Key dates

Opinion of the Advocate General issued on 26 April 2018.

Grenville Hampshire v The Board of the Pension Protection Fund (Case C-17/17) EU:C:2018:287


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Public sector outsourcing: Fair Deal and LGPS


Summary

The Ministry of Housing, Communities & Local Government (previously the Department for Communities and Local Government) has issued a response to consultation on proposed amendments to the Local Government Pension Scheme (LGPS). 

Fair Deal

The government has decided not to proceed with proposed amendments to introduce the Fair Deal policy in the LGPS.  It comments that a number of issues raised in consultation will require detailed policy consideration to ensure that Fair Deal in the LGPS works in a fair, cost effective and administratively efficient manner.

The government remains committed to introducing Fair Deal into the LGPS and indents to consult on new proposals by the end of 2018. 


Key dates

Consultation response issued on 19 April 2018.

Consultation on proposed amendments to the Local Government Pension Scheme (LGPS) Regulations 2013 and the LGPS (Transitional Provisions, Savings and Amendment) Regulations 2014 issued on 27 May 2016.


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Pensions Regulator: cyber security for trustees


Summary

The Pensions Regulator has issued guidance for pension schemes on cyber security principles. Key points include the following.

Governance

  • Trustees and managers are responsible for the security of scheme information and assets, even where functions are delegated or outsourced. Schemes should take steps to build their cyber resilience (their ability to assess and minimise the risk of a cyber incident occurring, and to recover should an incident take place.
  • Roles and responsibilities in respect of cyber resilience, including those of third parties such as providers or employers, should be clearly defined and documented.
  • Trustees and managers should have sufficient understanding of:
    • the scheme's key functions, systems and assets;
    • the potential impact of a cyber incident on the scheme and sponsoring employers;
    • the likelihood of different types of breaches occurring in relation to their scheme;
    • the scheme's "cyber footprint": the extent of the digital presence of all the parties involved with the scheme and the risks they pose.
  • Cyber risk should be included on the trustees' risk register and should be reviewed at least annually, or where there are substantial changes to scheme operations.
  • Trustees and managers should understand the extent of any insurance coverage they may have in relation to cyber risk.

Third parties

  • Trustees and managers should assure themselves that all third party suppliers have sufficient controls in place to protect their member data and scheme assets. In particular:
    • suppliers should have, or adhere to, cyber security standards or good practice guides and their performance should be monitored; and
    • contracts with third parties should include provisions on cyber security, and it should be a factor for active consideration when selecting suppliers.

Controls

  • Multiple layers of security should be put in place, in line with guidance from the Information Commissioner's Office (ICO).
  • Critical information and systems should be regularly backed up.
  • A range of policies and processes should be adopted, including in relation to:
    • use of devices, internet, email and social media;
    • passwords and other authentication;
    • home and mobile working; and
    • data access and protection.
  • All staff and trustees should receive regular training appropriate to their role.

Responding to cyber incidents

Schemes should have an incident report plan in place, which should include:

  • roles and responsibilities of the incident response team;
  • critical functions, such as payment of benefits;
  • communications at the time of a crisis, including reporting to the trustees;
  • details of when and how authorities, third parties and members should be notified; and
  • a range of scenarios appropriate for the scheme.

Key dates

Guidance issued on 12 April 2018 


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GDPR: Data Protection Fee


Summary

Trustees and other data controllers still need to pay a "data protection fee" once the General Data Protection Regulation (GDPR) comes into force on 25 May, even though they will no longer need to register with the Information Commissioner's Office (ICO) and will not have to provide details of the types of processing they do.

New regulations and guidance set out how the new fee regime will work.

  • All data controllers must pay the fee, unless they are exempt.
  • There are three different tiers of annual fee: Tier 1 - £40; Tier 2 - £60; and Tier 3 -- £2,900.
  • Pension scheme trustees will fall within Tier 1 if one of the following conditions applies.

o    The trustee has no more than 10 staff (individual trustees or directors of a corporate trustee will count for this purpose).

o    The trustee's turnover is less than £632,000 in its relevant financial year.  Most pension trustee bodies do not trade and so will fall within this condition. 

o    The scheme is a small self-administered scheme with fewer than 12 members, all of whom are trustees (or trustee directors) and which meets specified conditions.

  • Failure to pay the fee when it is due may result in a fine of up to £4,350.

Next steps

  • Trustees who are currently registered with the ICO do not need to pay the fee until their existing registration has expired.  The ICO will write to affected trustees before this happens to explain what to do next.  Existing controllers will be placed in a Tier based on the information the ICO already holds – trustees who disagree with the ICO's assessment should let it know.
  • Trustees whose registration has expired and not been renewed should supply information to the ICO, otherwise they will be placed by default into Tier 3.
  • New data controllers should register online or by speaking to the ICO on 0303 123 1113. 

Key dates

The Data Protection (Charges and Information) Regulations 2018/480 in force on 25 May 2018.


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Transfers: statutory right to transfer not overridden by scheme rule imposing ten-year lock-in


Summary

The Pensions Ombudsman has determined that a scheme rule which purported to require the trustees' consent to a transfer out within an initial 10 year investment period did not override a member's statutory right to transfer. 

  • The statutory right to a cash equivalent transfer value (CETV) could not be defeated by any wording on consent forms previously signed by the member.  In principle, a member cannot contract out of rights that have been conferred on him/her by statute unless legislation specifically permits.
  • However, the legislation does not provide that a CETV must be paid in cash.  It was open to the trustee to decide whether to pay the CETV in cash, as an in specie transfer, or a combination of the two.
  • The calculation and payment of the member's CETV would be subject to any early exit penalty in accordance with the agreement the member had signed on joining the scheme.

The trustee was directed to comply with any CETV request from the member and, if the member wished to proceed and found a provider willing to accept the transfer in the form offered by the trustee, to make the transfer to the new provider within 28 working days. 

The trustee was also directed to pay the member £2,000 for significant distress and inconvenience.


Key dates

Determination issued 8 March 2018 (PO 18431).


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Pensions Regulator: annual funding statement 2018


Summary

The Pensions Regulator (tPR) has issued its annual funding statement aimed, in particular, at schemes whose valuations have effective dates between 22 September 2017 and 21 September 2018 (Tranche 13).  Points to note include the following.

  • Tranche 13 schemes are expected to have marginally better funding levels than at their previous valuations, although schemes which did not hedge interest rate and inflation risks are likely to be in a worse position than those which did.
  • tPR is concerned at an increasing disparity between dividend growth and deficit repair contributions.  It expects trustees to assess the impact of dividends on the employer's covenant and whether the scheme is being treated fairly. 
  • Trustees should also be aware of forms of "covenant leakage" other than dividends, such as inter-company loans or transfers of assets at less than market value.
  • Where a scheme has a strong employer:

o    trustees should consider strengthening the technical provisions, increasing contributions or shortening the recovery plan. 

o    if dividends and other forms of "covenant leakage" are disproportionate to contributions, tPR expects a short recovery plan; and

o    strengthening short term security should be considered, such as through contingent assets and guarantees.

  • Where a scheme has a weak employer:

 o    scheme liabilities should be prioritised over shareholder returns;

o    cash should be retained within the employer to fund sustainable growth and to address the pension deficit;

o    an appropriate reward for employer growth should be secured and / or other forms of support (such as contingent assets and guarantees) should be maximised; and

o    where there is limited affordability of additional contributions, trustees should seek opportunities to reduce risks.

  •  Trustees are expected to prioritise risks according to the likely effect on the scheme's long-term funding target and the employer's ability to provide support.  Trustees should also consider short-term risks, such as a sudden downturn in the employer's business.
  • Trustees are expected to have workable contingency plans with, where possible, legally enforceable rights of recourse (such as rights over secured assets).  In other cases, trustees and employers should agree actions to support the scheme if specific risks materialise.
  • Where employers seek to retain cash because of uncertainty surrounding Brexit, tPR expects that shareholders should share the burden proportionately.
  • Trustees should consider carefully before making allowance for expected future transfers out in their valuation.  Transfer activity should be monitored and recorded, and should take into account the impact on the scheme's investment strategy and cash flow.
  • Trustees are warned not to agree to an inappropriate valuation and recovery plan just because the statutory deadline is approaching.  

Key dates

Annual funding statement 2018 issued on 5 April 2018.


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Auto-enrolment: fixed penalty notice confirmed


Summary

The Upper Tribunal has upheld a fixed penalty notice which had been issued by the Pensions Regulator to an employer for failure to provide a declaration of compliance with the auto-enrolment requirements within five months of its staging date.  The fixed penalty notice had been set aside by the First-tier Tribunal and the Regulator had appealed to the Upper Tribunal.

Facts

Strathmore Medical Practice had auto-enrolled its employees within the required time period under auto-enrolment legislation but had failed to file a declaration of compliance with the Regulator by the due date of 28 February 2017.  The Regulator sent the Practice a compliance notice on 8 March 2017, requiring the declaration to be completed by 18 April 2017 and stating that, if this was not done, "we may issue you with a £400 penalty".  The Regulator issued a penalty for this amount on 20 April 2017 and the Practice completed the necessary declaration on the following day.  The Practice exercised its right to seek review of the penalty notice. 

The Regulator confirmed the penalty.  In response to a statement from the Practice manager that she was new in the post and still learning the auto-enrolment process, the Regulator stated that reliance on a single employee was not sufficient to mitigate the compliance failure.

The Practice appealed to the First-tier Tribunal, which quashed the decision to issue a fixed penalty notice and remitted the matter to the Regulator for further review.  The Regulator appealed to the Upper Tribunal.

Upper Tribunal

The Upper Tribunal set aside the decision of the First-tier Tribunal and upheld the fixed penalty notice.  In reaching this decision, Levenson J found the following.

·         The Regulator had been aware that it had discretion to revoke the penalty notice and had not closed its eyes to that possibility (contrary to observations of the First-tier Tribunal).

·         The legislation is permissive, enabling the Regulator to issue a compliance notice and fixed penalty notice.  Although the legislation says nothing about "reasonable excuse", it does not prevent the Regulator having regard to it.  There might be a case where it would not be appropriate to have regard to reasonable excuse but it is proper to take it into account.

·         The Regulator had argued that there was an important public interest in enforcing compliance with auto-enrolment duties and that the deterrent effect would be greatly diminished if the practice were to revoke penalty notices in all cases where compliance was achieved at some point.  The Regulator was entitled to take that approach as part of its general policy, but it must consider each individual case on its own merits.


Key dates

Judgement in Pensions Regulator v Strathmore Medical Practice issued on 29 March 2018.


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Work and Pensions Select Committee: Pension freedoms


Summary

The House of Commons Work and Pensions Committee has issued a report on pension freedoms.  The Committee's recommendations include the following.

Use of pension freedoms

  • The government should set out the long-term objectives of the pension freedoms and how it will monitor and report on how far those objectives are being met.

Decumulation

  • With effect from 2019:
    • the government should take forward proposals from the Financial Conduct Authority (FCA) to introduce default decumulation pathways and to require any provider offering drawdown to offer a default decumulation solution aimed at its core customer group;
    • the auto-enrolment charge cap of 0.75% should apply to default drawdown products; and
    • the remit of independent governance committees (IGCs) to scrutinise value for money should be extended to default decumulation products.
  • NEST should be permitted to provide decumulation products, including a default drawdown pathway, from 2019 provided that the government remains assured of its ability to repay its initial loan.

Pension information and advice

  • The Financial Conduct Authority (FCA) and the Pensions Regulator should require all pension providers to issue a one-page pension passport as part of their pre-retirement communications.  The Regulator and the FCA should produce a best practice template of a passport by June 2018.
  • A single pensions dashboard should be introduced by April 2019, hosted by the new single financial guidance body and funded by an industry levy.
  • All pension providers should be required to provide information to the pensions dashboard, to ensure that at least 80% of defined benefit (DB) pensions are visible on the dashboard by April 2019.
  • The FCA should compare customer outcomes from automated and face to face advice and should publish its findings.

Key dates

Select Committee report issued 28 March 2018.


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Defined contribution: disclosure of costs and charges


Summary

The DWP has issued a response to consultation and final regulations, covering disclosure of costs and charges and information about investments.  It has also issued statutory guidance on how to report costs and charges information.

The DWP comments that the Financial Conduct Authority (FCA) has made broadly similar rules in relation to workplace personal pension arrangements and stakeholder schemes.

Clarification of "publically available free of charge on a website"

The DWP has clarified that information which is to be provided "publically available free of charge on a website" (see below) must be made available to the world at large on the internet.  This contrasts with other information which must be communicated to individual members - with permitted communication methods including: by post or (subject to conditions) by email or by making the information "available on a website" -  in this case, access to online information may be restricted, for example by requiring the user to register and to have a log-in id with a password (although imposing a charge for the information is not permitted).

Scope

The new disclosure requirements will apply to "relevant schemes", that is occupational schemes which provide money purchase benefits, including schemes providing both money purchase and non-money purchase benefits, irrespective of whether the member is in the accumulation or decumulation phase.

Some categories of scheme will be exempt from the requirements, including:

  • schemes whose only money purchase benefits arise from additional voluntary contributions (AVCs);
  • death benefit only schemes;
  •  executive pension schemes;
  • small self-administered schemes; and
  • public service schemes.

Where a scheme provides both money purchase and non-money purchase benefits, the disclosure requirements will apply in relation to the money purchase benefits.

The DWP intends to consider at a future time whether to extend the requirements to cover defined benefit arrangements.

Chair's statement

The content of the chair's statement which must be produced in relation to relevant schemes will be extended to include:

  • the level of charges and transaction costs for each default arrangement (where there is more than one) and for each alternative fund option which the member can select and in which members' assets are invested during the scheme year, irrespective of the number of funds available; and
  • an illustration of the compounding effect of the costs and charges borne by members of the scheme.

This and other specified information must be made publically available free of charge on a website. Members who are entitled to receive an annual benefit statement must be told that cost and charge information is available on the internet, with the specific web address included in the statement.

Guidance

When complying with the requirements above, regard must be had to guidance from the Secretary of State.  The guidance provides in particular that:

  • when preparing an illustration, trustees should use a realistic and representative range of combinations of pot size, contribution rates, real terms investment returns, time and rate of charges and costs;
  • trustees are not expected to prepare an illustration for every combination;
  • where the scheme levies a charge of any kind on contributions, at least one illustration including contributions should be given;
  • the effect of charges should be shown by an adjustment which includes all charges and transaction costs which will have been taken from a member's pot.

Statement about pooled funds

  • The regulations also include a requirement for trustees to disclose certain information about pooled funds on request to members and recognised trade unions.
  • Information will have to be given only about the highest level of pooled funds for which public information is available and in which the member is invested.

Members must be told via their annual benefit statement that this information is available on request.


Key dates

Clarification of meaning of "publically available free of charge on a website" given on 27 March 2018 (written response from the DWP).

Response to consultation and final regulations issued on 27 February 2018.

Consultation paper, draft guidance and draft regulations issued on 26 October 2017.  The consultation period ended on 6 December 2017.

The FCA published rules in Policy Statement (PS 17/20) requiring those managing investments to provide information about transaction costs and charges in response to a request from a relevant pension scheme, in force on 3 January 2018.

The Occupational Pension Schemes (Administration and Disclosure) (Amendment) Regulations 2018/233 in force on 6 April 2018 (subject to exceptions – see below).

The disclosure of costs and charges requirements will not apply to schemes whose most recent scheme year ends before 6 April 2018 until the last day of the first scheme year to end on or after 6 April 2018.  The consultation response explains that this means a scheme with a year end of 5 April 2018 will not be required to publish the new information until 5 November 2019 (seven months after the end of the first scheme year to end on or after 6 April 2018).

Requirements in relation to pooled funds come into force on 6 April 2019.


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GDPR: Data Protection Impact Assessments – draft guidance


Summary

The Information Commissioner has issued draft guidance for consultation on data protection impact assessments (DPIAs).  The guidance contains a reminder that GDPR requires a DPIA to be carried out if the data controller plans to:

  • use systematic and extensive profiling with significant effects;
  • process special category or criminal offence data on a large scale; or
  • systematically monitor publically accessible places on a large scale.

The ICO also expects a DPIA to be obtained in other specified circumstances, including where a controller plans to:

  • use new technologies;
  • use special category data to decide on access to services;
  • process biometric or genetic data;
  • match data or combine datasets from different sources;
  • collect personal data from a source other than the individual without providing them with a privacy notice;
  • process data which might endanger the individual's physical health or safety in the event of a security breach.

In addition, the ICO considers that it is good practice to carry out a DPIA in respect of any major new project involving the use of personal data.

A DPIA will not be required where a controller has already done a substantially similar DPIA, provided that it can demonstrate that the nature, scope, context and purposes of the processing are all similar.


Key dates

Guidance on legitimate interests (see separate entry) and draft guidance for consultation on data protection impact assessments issued on 22 March 2018.

The consultation period in relation to DPIAs closes on 13 April 2018. 


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GDPR: legitimate interests – guidance from ICO


Summary

The Information Commissioner's Office (ICO) has issued guidance on legitimate interests and draft guidance on data protection impact assessments (DPIAs).  Points to note in relation to legitimate interests include the following.

Background

  • As a reminder, under Article 6 GDPR one of the possible justifications for processing personal data is if the processing is necessary for the purposes of legitimate interests pursued by the data controller or a third party, except where the legitimate interests are overridden by the interests or fundamental rights and freedoms of the data subject.

Choice of lawful basis for processing

  • Legitimate interests is the most flexible basis for lawful processing but it may not be the most appropriate where another lawful basis is available.
  • Controllers should not rely on legitimate interests as a default basis for processing.
  • If a controller realises at a later date that the legitimate interests basis was inappropriate, it is difficult to switch to another lawful basis for processing which was not initially identified.
  • The legitimate interests basis may be used in some cases for transfers of personal data between members of the same corporate group, although the three-part test (see below) must still be considered. Any international transfers must comply with additional requirements.
  • Individuals must be told what the legitimate interests relied on are.

Test for using legitimate interests justification

  • A three-part test should be considered when deciding whether the legitimate interests basis is available:

o    Purpose test: is there a legitimate purpose behind the processing?

o    Necessity test: is the processing necessary for that purpose?

o    Balancing test: is the legitimate interest overridden by the individual's interests, rights or freedoms?

  • The outcome of the test should be documented, along with the relevant factors considered and whether or not they support the controller's decision.
  • The ICO considers that it is best practice to conduct a legitimate interests assessment (LIA) and includes a standard template with the guidance.  It comments that, although an LIA is not specifically required by GDPR, it will be difficult for a controller to meet its obligations under the accountability principle without an LIA.
  • An LIA should reviewed regularly and if any significant changes occur to the nature, purpose or context of the processing.

Purpose test

  • The controller (or a third party) must have a clear and specific benefit or outcome in mind.  Vague or generic references to business interests are not sufficient.
  •  Factors which should be considered include: the expected benefit of the processing; the impact if the processing could not be carried out; the intended outcome for individuals; and compliance with any industry guidelines or codes of practice.
  • Processing employee data is likely to be a legitimate basis, although the three-part test should also be applied.

Necessity test

  • The processing need not be absolutely essential for achieving the legitimate purpose.  However, the controller should decide on the facts of each case whether the processing is a targeted and proportionate means of achieving that purpose, or whether there is a less intrusive alternative.
  • It is important to distinguish between processing which is necessary to achieve the legitimate purpose from processing which is necessary only because of the controller's chosen means of achieving that purpose.

Balancing test

  • As a minimum, the following should be considered:

o    the nature of the personal data to be processed;

o    the reasonable expectations of the individual; and

o    the likely impact of the processing on the individual and whether any safeguards can be adopted.  

  • If, on an objective basis, the individual would not reasonably expect the processing, their rights may override the controller's legitimate interests. 
  • If the processing is inherently likely to result in a high risk to individuals' rights and freedoms, a data protection impact assessment (DPIA) should be carried out.
  • If an individual objects to processing his/her data, the processing may only continue if the controller can demonstrate compelling legitimate grounds.  A stronger test must be applied than merely repeating the balancing test.

Key dates

Guidance on legitimate interests and draft guidance for consultation on data protection impact assessments (see separate entry) issued on 22 March 2018.

Consultation period in relation to DPIAs closes on 13 April 2018.  


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Master Trusts: draft Code of Practice and consultation response on draft regulations


Summary

The DWP has issued a response to consultation on regulations concerning the authorisation of Master Trusts.  At the same time, the Pensions Regulator has issued a draft Code of Practice on the authorisation and supervision of Master Trusts.

Key points from the consultation and  consultation response include the following.

Scope

The regulations seek to restrict the authorisation regime to schemes which face the risks associated with being a Master Trust scheme at present or in the future.  According to the consultation response, a number of representation were made that various categories of scheme should not fall within the authorisation regime.  However, following consultation the government does not intend to introduce any new complete disapplications.

Provisions set out in the draft regulations included the following.

  • The definition of a Master Trust in the Pension Schemes Act 2017 ("PSA17") excludes schemes which are intended to be used only by connected employers.  The draft regulations will extend the meaning of "connected employers" to cover situations arising from various sorts of corporate activity, including where:

o    active members have been transferred to an employer outside the corporate group (within the previous six months if the transfer was not a TUPE transfer); or

o    an employer holds or controls (or has held or controlled within the previous six months) at least 33% of the voting power in another employer.

  • The authorisation requirement will be disapplied entirely in relation to the following categories of schemes:

o    industry-wide schemes which on 20 October 2016 were providing defined (DB) benefits (whether or not alongside defined contribution (DC) benefits), provided that the scheme is closed to new members no later than six months after the authorisation requirement comes into force.  Following consultation, the government has rejected calls to allow such schemes to continue to introduce new DB members without having to become authorised, where the new members are accepted so that the scheme continues to have a statutory employer for the purposes of section 318 of the Pension Schemes Act 2004;

o    DB schemes in which the only DC benefits are additional voluntary contributions being accrued by active DB members or result from transfers in by active DB members.

  • The authorisation requirement will also be disapplied in relation to:

o    small self-administered schemes (SSASs), provided that the majority of the trustees are scheme members; and

o    single member schemes where more than one employer is contributing on a member's behalf (which could otherwise fall within the definition of a Master Trust).   

  • The authorisation requirement will however be extended to cover:

o    "cluster schemes": in which multiple schemes have only a single employer, or connected employers, but are in practice subject to common rules or controlled in a common way; and

o    parallel accumulation and decumulation schemes: where a schemes is set up to provide retirement options for members of a Master Trust scheme with which it shares common rules or is under common control. 

Requirements for scheme funder where all scheme funders are participating employers

  • The requirements for each scheme funder to: meet the fit and proper criteria; submit accounts; and approve the scheme's business plan and continuity strategy (plus any revisions) will be disapplied in relation to existing schemes providing both DB and DC benefits where the only scheme funders are participating employers.  The government has rejected calls in consultation for these disapplications to be extended to existing DC only schemes where the only scheme funders are participating employers.
  • The consultation response clarifies that, where section 10 (scheme funder) of the Pension Schemes Act 2017 is disapplied, the requirement that scheme funders must be corporate bodies is also disapplied.
  • In relation to schemes where the scheme funders are participating employers, the government has rejected calls to disapply the provisions creating a triggering event and requiring it to be notified on a scheme funder leaving the scheme because of insolvency or a decision to withdraw.
  • However, the government has decided to disapply the requirements for an implementation strategy, freeze on charges and a prohibition on new employers where a triggering event occurs because an employer (scheme funder) leaves the scheme because of insolvency or a decision to withdraw and the scheme can readily resolve the event.

Authorisation process and criteria

  • The regulations give details of matters the Regulator must take into account when assessing:

o    whether a person involved with a Master Trust is fit and proper;

o    the financial sustainability of a Master Trust;

o    the contents of a Master Trust's business plan (including that it must comply with any requirements in a Code of Practice from the Regulator);

o    whether a Master Trust's systems and processes are sufficient; and

o    the adequacy of a Master Trust's continuity strategy.

  • The consultation response explains that the government intends that the definition of a scheme strategist should be interpreted broadly, so that it may apply also to not-for-profit schemes.
  • In response to the consultation, the government makes clear that, in its view, it is not appropriate for DC schemes to rely solely on the employers to meet the future wind up costs.
  • Following consultation, the government has decided that detailed requirements for a Master Trust's business plan should be set out in the Code of Practice, rather than in legislation.
  • In consultation, upper levels for authorisation fees were proposed as £67,000 for an existing scheme; and £24,000 for a new scheme.  Following consultation, the proposed fee levels have been revised and will be:

o    a flat fee for new Master Trust schemes of £23,000; and

o    a flat fee for transitional Master Trust schemes of £41,000.

  • The consultation response states that existing schemes may submit a draft application for authorisation to the Regulator and may receive feedback on whether sufficient evidence has been provided in support of the application.

Scheme funder: exemption from prohibition on other activities

  • The PSA17 requires that, subject to prescribed exceptions, a scheme funder must only carry out activities which directly relate to the Master Trust of which it is a scheme funder. 
  • The draft regulations set out information which a scheme funder must provide to the Regulator, including details of legally enforceable financial support which the scheme funder will supply to the scheme, if it wishes to be exempt from the requirement.  The Regulator must also be satisfied that the Master Trust is financially sustainable (draft regulation 8).

Ongoing controls and monitoring

  • The regulations set out the information the Regulator may require Master Trusts to provide in a supervisory return.  The DWP expects that the return will be standardised, with all Master Trusts required to provide the same information.
  • The regulations also set out the "significant events" which must be notified to the Regulator.   These include a change in a trustee, scheme strategist or scheme funder; a significant change to the statement of investment principles (SIP); a significant change which requires revision of the business plan; or a change in any person delivering key services to the Master Trust.
  • The consultation response confirms that the time periods for notifying the Regulator will be as follows:

o    Triggering events: notification to the Regulator within seven days; notification to employers within 14 days of the event occurring (or, if later, of the notifier becoming aware of the triggering event);

o    Resolving a triggering event: notification to the Regulator within 14 days of the date on which the trustees consider the triggering event was resolved.


  • The level of fixed penalty the Regulator may issue is set at £500.  The regulations prescribe the daily rate for escalating penalties, with a daily maximum of £10,000.

Key dates

Consultation response on draft regulations issued on 19 March 2018.

Consultation paper and draft regulations issued on 30 November 2017. 

Draft Code of Practice issued by the Pensions Regulator on 27 March 2018.  Consultation closes on 8 May 2018.

The Occupational Pension Schemes (Master Trusts) Regulations 2018 expected in force on 1 October 2018.


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White Paper: Protecting Defined Benefit Pension Schemes


Summary

The DWP has issued its long-awaited White Paper on protecting defined benefit (DB) pensions. Key points include the following.

General

  • The government believes the system is working well for the majority of DB schemes, trustees and sponsoring employers and it expects most DB members to have their pension paid in full.
  • However, in some cases employers misuse the flexibility in the current system, to the detriment of scheme members.
  • The Work and Pensions Select Committee is considering the potential benefits of collective defined contribution (CDC) arrangements and further recommendations are expected later in 2018. The DWP is exploring how developing CDC arrangements might be possible through a more modest change to legislation than implementing changes contained in the Pension Schemes Act 2015.
  • Many proposals will require primary legislation.

Scheme funding

  • A revised Code of Practice on scheme funding will be adopted (following consultation) which will focus on:
    • how prudence is demonstrated when assessing scheme liabilities;
    • what factors are appropriate when considering recovery plans;
    • ensuring that a long-term view is considered when setting the statutory funding objective;
    • trustees should then use the triennial valuation process to report on how they have used the long-term objective to inform the setting of the scheme's technical provisions and recovery plan.
  • The government intends to legislate at the earliest opportunity to require trustees and employers to comply with some or all of the clearer funding standards and to give the Pensions Regulator (tPR) power to enforce the new requirements.

Chair's statement

  • Trustees of DB schemes will be required to appoint a Chair, who will have to submit a Chair's Statement to tPR.
  • The Chair's Statement will have to cover:
    • key funding decisions in relation to the scheme;
    • the trustees' approach to managing risks; and
    • the scheme's long-term financial destination and a description of its strategic plan for reaching the scheme funding objective.
  • The statement must be submitted with the scheme's triennial valuation, but tPR may request an out of cycle statement at other times if it has concerns.

Strengthening the Pensions Regulator

  • tPR will be given power to issue punitive fines against anyone who deliberately puts their pension scheme at risk.
  • tPR will be given an express power to penalise the targets of a contribution notice, including individual directors.
  • The parameters of the new approach will be set out in primary legislation. The government will consider applying the penalty regime from a date before the new legislation is in force (for example, from 19 March 2018 when the White Paper was published).
  • A new criminal offence will be created to punish those who commit wilful or grossly reckless behaviour in relation to a pension scheme.
  • The existing process of disqualifying company directors will be strengthened.
  • The exiting notifiable events framework will be strengthened by:
    • widening its scope to cover any relevant transactions which are currently excluded; and
    • clarifying when tPR must be informed of a notifiable event so that it becomes aware at an earlier stage (at present, tPR must be notified as soon as reasonably practical).
  • The clearance regime will be strengthened by requiring sponsoring employers or parent companies to make a statement of intent, in consultation with trustees, before relevant business transactions take place that they have appropriately considered the impact on any DB scheme affected and how any detrimental impact will be mitigated. "Relevant business transactions" will be limited to ones which post the highest potential risk to the DB scheme, such as the sale or takeover of a sponsoring employer.
  • The government will legislate to give tPR some of the information gathering powers already in place in relation to auto-enrolment and Master Trusts to its DB and defined contribution (DC) functions, including power to:
    • compel a person to submit to an interview under s72 Pensions Act 2004;
    • issue civil sanctions for non-compliance in relation to a s72 notice; and
    • inspect premises in a wider range of circumstances.
  • Strengthening tPR's information gathering powers will require primary legislation.

Consolidation

  • The government will consult in 2018 on proposals for a legislative framework and authorisation regime within which new forms of consolidation vehicle could operate.
  • There will also be consultation this year on a new accreditation regime intended to build confidence and encourage existing forms of consolidation.
  • The government and tPR will work to raise awareness of the benefits of consolidation among trustees and sponsoring employers.
  • Minor changes to GMP conversion legislation will be considered, to reduce complexities in existing benefit structures.

Other issues

  • The government will work with stakeholders to consider whether the existing regulated apportionment arrangement process could be improved without increasing risk to scheme members.
  • The government has currently ruled out changes to legislation which would enable trustees or employers to override scheme rules to amend the measure of inflation used for calculating annual increases.
  • Following consultation, the government has concluded that there is insufficient justification to warrant amending the method of calculating section 75 debts.

Implementation

  • Actions which can be undertaken without further legislation include:
    • tPR setting clearer expectations for schemes and using the full range of its existing powers;
    • working with the Insolvency Service to strengthen the regime for disqualification of directors;
    • increasing awareness of consolidation options;
    • consultation and research in preparation for a revised Code of Practice on scheme funding;
    • consultation (towards the end of 2018) on the design of a legislative framework and authorisation regime for new forms of consolidation vehicles; and
    • consultation on proposals on a new accreditation regime for existing forms of consolidation.
  • During 2018 and into 2019, the government intends to consult on proposals before moving to legislation when Parliamentary time allows. These policies include:
    • introducing punitive penalties;
    • strengthening the current clearance regime;
    • introducing a criminal offence to punish reckless behaviour;
    • widening tPR's powers to interview and inspect premises;
    • requiring a Chair's Statement in relation to DB schemes and making expectations in relation to scheme funding mandatory; and
    • introducing a framework and authorisation regime for new forms of consolidation vehicle.
  • The government comments that where primary legislation is required, this is unlikely to be before the 2019-20 Parliamentary session at the earliest.

Key dates

White Paper issued on 19 March 2018.


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Finance Act 2018: provisions to tackle pension liberation


Summary

The Finance Act 2018 contains provisions intended to combat pension scams.  

The new provisions will enable HMRC to refuse to register, or allow it to de-register:

  • an occupational pension scheme which has a sponsoring employer which has been dormant for at least a month during the previous year; or
  • a pension scheme which is an unauthorised master trust.


Key dates

The Finance Act 2018 received Royal Assent on 15 March 2018. 

The Bill followed draft legislation published for consultation on 13 September 2017. 

Provisions relating to dormant companies are expected to have effect on 6 April 2018.

Provisions relating to master trusts are expected to have effect, at the earliest, from the time the authorisation regime for master trusts comes into force.


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Auto-enrolment: qualifying earnings band for 2018/19


Summary

The auto-enrolment qualifying earnings band for 2018/19 will be £6,032 to £46,350, increased from the previous band of £5,876 to £45,000.


Key dates

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2018/367)in force on 6 April 2018.


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Ill-health early retirement: improper reliance on medical certificate


Summary

In a complaint concerning eligibility for an ill health pension, the Pensions Ombudsman has directed the employer Council to obtain a certificate from an independent registered medical practitioner (IRMP) not previously involved in the case.  The Council should then consider all the relevant evidence and reach a decision.

The Ombudsman agreed with the Adjudicator's findings that the Council had previously failed to reach its own decision on the level of ill health pension to be awarded but had simply relied on the opinion of its IRMP.  Under the regulations governing the scheme, the Council (as employer) was required to take advice on the member's capability and then decide itself which level of benefits should be paid. 


Key dates

Determination Ms R (PO-13645) issued on 13 March 2018


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Pension liberation: banning cold calling


Summary

The government has issued a new clause for inclusion in the Financial Guidance and Claims Bill, which will require the Secretary of State to make regulations to ban cold calling in relation to pensions by June, or otherwise to explain to Parliament why regulations have not been made and setting a timetable for making the regulations.

Background

In August 2017, HM Treasury and the DWP issued a response to consultation on various measures intended to reduce the risk to members of the public from pension scams. Points to note in relation to cold calling include the following.

·         The government intends to proceed with its proposed ban on cold calling in relation to pensions and will extend the ban to include all electronic communications about pensions.  However, the ban will not cover cold calls about other investment products as the government considers the risks in relation to pensions to be uniquely high.

·         There will be no exceptions to the ban for particular sorts of offers about pensions, and the prohibition will be drafted widely enough to include offers to "trace lost pension pots" or to "consolidate pension pots".

·         Calls to individuals with whom the provider has an existing relationship, or in response to a request for a call, will be permitted.  

·         The Information Commissioners' Office (ICO) will be responsible for enforcing the ban.


Key dates

Consultation response issued on 21 August 2017.

New clause 3 in Notice of Amendments issued on 7 March 2018.


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Age discrimination: minimum age for benefits under long term incentive plan was lawful


Summary

Under the rules of the employer's long term incentive plan (LTIP), employees who left the business on or after the customary retirement age in the employee's location with an entitlement to an immediate pension were treated as retiring. As such they were entitled to retain unvested LTIP awards which other employees leaving the business would forfeit.

In the UK, although the customary retirement age had historically been 50, in 2010 it was increased to 55. This reflected the earliest age at which most employees could draw a pension under the defined contribution scheme which had replaced the defined benefit scheme originally offered to staff. An employee who resigned aged 50, who was still entitled to an immediate pension under the defined benefit pension scheme, challenged the provision as unlawful direct age discrimination. The tribunal originally found that the rule was justified direct discrimination, but this was overturned by the EAT.

The Court of Appeal has now reinstated the tribunal's decision that the LTIP retirement rule was justified. The employer had legitimate aims for adopting the rule. One such aim was intergenerational fairness – the employee had more advantageous pension benefits than employees who were members of the more recent defined contribution scheme and the employer did not want to increase unfairness between the two groups by giving individuals with defined benefit pensions more advantageous treatment of LTIP benefits as well. This was a legitimate social policy aspect of intergenerational fairness. The scheme was also designed to reward experience and loyalty and to ensure a mix of generations of staff. Both of these were legitimate aims.

The tribunal had accepted that the retirement age rule was a proportionate means of achieving those aims. Applying the same rule to all employees regardless of which pension scheme they were in achieved intergenerational fairness. Adopting age 55 as the minimum age for retirement struck a balance between rewarding experience and loyalty and encouraging retention. It tied in with pension age so there was a rational reason for choosing it. Further, the rule was triggered by the employee's decision to leave, not by any action by the employer, and he was entitled to retain his vested benefits.

The tribunal had given a properly reasoned judgment that contained no error of law. It was entitled to conclude that the employer had legitimate interests for introducing the rule and that it was proportionate in the circumstances and the EAT should not have interfered with that decision. The age discrimination complaint was dismissed.


Key dates

Judgment issued 2 March 2018.


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Pensions Regulator: managing service providers


Summary

The Pensions Regulator has issued a statement summarising its expectations of good practice by trustees and managers in relation to managing service providers. The statement includes a reminder that trustees and managers remain ultimately accountable for the running of their schemes.

Expectations of trustees and managers include that they should:

  • fully understand the role and scope of responsibilities delegated to third parties;
  • carefully review the quality and suitability of service providers before they are appointed, including considering providers' business continuity arrangements and any relevant independent frameworks which may provide evidence of suitability;
  • be familiar with the terms and conditions of contracts with service providers, including in relation to the scope of services provided, charges, limits on liability and arrangements if the service provider is changed;
  • monitor service providers' delivery of their services and address areas of poor performance;
  • demonstrate that they can effectively manage commercial relationships; and
  • have a business continuity plan in place which covers failure of a third party provider.

Key dates

Statement issued February 2018. 


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Employer debts: new deferred debt arrangement and technical changes


Summary

The DWP has issued a consultation response and final regulations to introduce a new option for dealing with section 75 debts where an employer in a multi-employer scheme undergoes an employment cessation event.

As a reminder, an employment cessation event will occur in relation to an employer in a multi-employer scheme if the employer ceases to employ an active member at a time when another employer (other than a defined contribution employer) continues to employ at least one active member. A debt under section 75 Pensions Act 1995 becomes due from the employer which underwent the employment cessation event.

Under the new option, to be known as a "deferred debt arrangement", payment of the section 75 debt arising on an employment cessation event may be deferred. Instead, the employer will continue to be treated as if it employed an active member, including remaining liable for to pay contributions under the scheme specific funding regime and retaining responsibility for its share of any orphan liabilities.

The deferred debt arrangement will sit alongside existing options to manage employer debts which arise when an employer in a multi-employer ceases to employ an active member.

Trustees must give notice of a decision to enter a deferred debt arrangement, and of any event which terminates such an arrangement, to the Pensions Regulator.

Conditions for a deferred debt arrangement

A deferred debt arrangement can take effect where an employment cessation event has occurred in relation to an employer (or would have occurred if the employer had not immediately entered a period of grace) and the following conditions are met.

  • The trustees' have given their written consent.
  • The trustees are satisfied that the deferred employer's covenant with the scheme is not likely to weaken materially within the 12 months of the deferred debt arrangement having effect.  A requirement in the draft regulations for the funding test under the OPS (Employer Debt) Regulations 2005 (applicable in relation to scheme apportionment arrangements, flexible apportionment arrangements and withdrawal arrangements) to be met has been removed, following consultation.
  • The scheme is not in a PPF assessment period or being wound up and the trustees are satisfied that the scheme is unlikely to enter a PPF assessment period in the 12 months after the deferred debt arrangement takes effect.

Ending a deferred debt arrangement

Following concerns raised in consultation, the regulations relating to the termination of a deferred debt arrangement have been amended. 

A deferred debt arrangement will be terminated if:

  • the deferred employer employs an active member of the scheme (the deferred employer will revert to being an employer under the scheme);
  • the scheme commences winding up (no employment cessation event will occur but the calculation of the section 75 debt may be triggered at any time during the winding up process); or
  • the scheme ceases to employ any active members (and so undergoes a "freezing event") (the deferred employer will become a former employer and no section 75 debt will be triggered).

A deferred debt will also terminate in the following circumstances, in which case the employer will be treated as having undergone an employment cessation event (meaning that an employer debt will become due if the scheme is underfunded):

  • the deferred employer and the trustees agree that an employment cessation event will be treated as having occurred for the purposes of bringing the deferred debt arrangement to an end;
  • the deferred employer undergoes an insolvency event (or commences voluntary winding up);
  • all employers in the scheme undergo an insolvency event (or commence voluntary winding up) or become deferred employers;
  • the deferred employer restructures, unless the restructuring falls within the restructuring exemption in the employer debt regulations and certain conditions are met; or
  • the trustees give notice of termination to the employer, being reasonably satisfied that:
    • the employer has failed to comply materially with its obligations under the scheme funding regulations;
    • the deferred employer's covenant with the scheme is likely to weaken materially in the next 12 months; or
    • the deferred employer has failed to comply materially with its duties to disclose information under the scheme administration regulations.

Other technical amendments

The draft regulations also make certain other technical amendments to the employer debt legislation, including the following:

  • Change of employer's legal status: reg 2(3A) of the OPS (Employer Debt) Regulations 2005 will be amended to clarify that where, for example, an employer which is an unincorporated charity changes status to become an incorporated company without any other changes, no employer debt arises.
  • Period of grace: an employer which has temporarily ceased to employ an active member but which intends to employ an active member in the future must currently notify the trustees within two months of the cessation. This period will be extended to three months.
  • Former employers: regulation 9 of the OPS (Employer Debt) Regulations 2005 will be amended to clarify that a "former employer" includes an employer who ceased to employ active members as a result of the "freezing event".

Key dates

Consultation paper and draft regulations issued on 21 April 2107.

Consultation response and final regulations issued on 26 February 2018.

The Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017/237 in force on 6 April 2018.


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DC to DC bulk transfers without consent: final regulations


Summary

The DWP has issued a consultation response and final regulations, following consultation in the autumn of 2017.

The changes made by the new regulations will apply only to "relevant money purchase rights" and will not be applicable to money purchase benefits with guarantees (including guarantees under assets held for the purpose of providing the benefits).

Actuarial certificate (scheme quality requirement)

  • The requirement for trustees to obtain an actuarial certificate before a transfer may take place will be removed, provided that the transfer is of "pure DC" benefits and that there are no potentially valuable guarantees or options to be assessed. Following consultation, the option of using the actuarial certificate route will be removed from 1 October 2019 for schemes within the scope of the new regulations.
  • Where the transfer is to an authorised master trust scheme, transferring trustees will be expected to exercise their fiduciary duties to act in the best interests of members.
  • Where receiving scheme is not an authorised master trust scheme and the transfer does not come within the "connected schemes" exemption (see below), the transferring trustees will be expected to:
    • review the receiving scheme, with the assistance of guidance from the DWP or the Pensions Regulator; and
    • take advice from an "appropriate adviser" who is independent from the receiving scheme.
  • In response to consultation, a further exception to the requirement to take advice from an appropriate adviser (see above) will apply where:
    • the principal employer or controlling employer of the transferring scheme is a group undertaking in relation to the principal or controlling employer of the receiving scheme; and
    • the transferring members are current or former employees of a group undertaking in relation to one of those employers.
  • Following concerns raised in consultation that the conditions for being "independent" were too stringent, the DWP has amended the requirements so that:
    • the restriction applies only in relation to advisory, administration or investment services provided to the receiving scheme; and
    • the adviser must not have provided such services in the previous year (rather than within the previous five years).
  • The consultation response clarifies that the DWP expects trustees to have discretion to use advisers who may not fully satisfy the independence tests in regulations (although trustees should consider these matters carefully). It gives the example of an adviser being paid a small amount for work 11 months previously by a participating employer of a master trust which is intended to be the receiving scheme in a bulk transfer.
  • Where the employer has sole power to effect the transfer, it must comply with the requirement to take advice and must confirm to the trustees of the transferring scheme that it has done so.

Scheme relationship condition

  • The requirement for the transferring and receiving schemes to be related will not apply in relation to transfers without consent of relevant money purchase rights.

Member protections

  • Protections under the statutory charges cap will continue to apply where members are transferred without consent:
    • from a scheme in which their investments are protected by the charges cap to a scheme in which the cap would not apply to them;
    • from an investment fund or arrangement in which their investments are protected by the charges cap to a fund in which the cap would not apply; or
    • on subsequent switches between arrangements in the new scheme.
  • Following consultation, the regulations have been amended to allow a transfer without active member consent from a non-default arrangement to a new non-default arrangement without triggering the cap restrictions, where the member has expressed a choice as to where his/her contributions were allocated within the five years ending with the transfer date. The consultation response comments that trustees should nevertheless make all reasonable attempts to contact such members before the transfer and to confirm whether the member wishes to remain in an uncapped arrangement.

Follow up

The DWP issued guidance for trustees on 30 April 2018.


Key dates

Consultation and draft regulations issued on 26 October 2017.

Consultation response and final regulations issued on 26 February 2018.

The Occupational Pension Schemes (Preservation of Benefits and Charges and Governance) (Amendment) Regulations 2018/240 in force on 6 April 2018. Regulation 2(2) in force on 6 April 2018 (except for the provision removing the actuarial certificate option for DC to DC bulk transfers, which will come into force on 1 October 2019.

The DWP issued guidance for trustees on 30 April 2018.


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Contracting-out: transfers without consent – Final regulations


Summary

The DWP has issued a consultation response and final regulations, which will allow guaranteed minimum pensions (GMPs) and section 9(2B) rights (including rights to pensions in payment) to be transferred without consent to an occupational pension scheme that has never been contracted-out, under specified conditions.

The regulations have been issued in response to industry concern at the current restriction that GMPs and section 9(2B) rights can only be transferred without consent to a scheme which was previously contracted-out on a salary-related basis. Since the abolition of defined benefit (DB) contracting-out from 6 April 2016 it has not been possible to set up new contracted-out schemes, meaning that GMPs and section 9(2B) rights cannot be transferred without consent to any scheme established on or after 6 April 2016.

The proposed regulations introduce the concept of a "salary-related scheme", defined as a scheme which is not one which may only provide money purchase benefits and which does not fall within a prescribed class.

The regulations will allow transfers of GMPs and section 9(2B) rights (including rights to pensions in payment) without consent to a salary-related scheme which has never been contracted-out provided that the transfer is a connected employer transfer and various safeguards apply, including that:

  • for GMPs: GMPs must be payable from the receiving scheme at the rate no lower than they would have been payable from the transferring scheme; and
  • for section 9(2B) rights: the benefits in the receiving scheme which derive from the member's section 9(2B) rights (including rights to pension in payment) must meet the reference scheme test as it applied immediately before the abolition of defined benefit contracting-out on 6 April 2016.

Contracted-out rights transferred under the new provisions will continue to be treated as GMPs or section 9(2B) rights under the receiving scheme (and on further onward transfers). Following consultation, the regulations were amended to permit a scheme which has never been contracted-out and which receives a transfer of GMPs to convert the GMPs into scheme benefits in accordance with sections24A-H Pension Schemes Act 1993.


Key dates

Consultation paper and draft regulations issued on 21 December 2017.

Consultation response and final regulations issued on 26 February 2018.

The Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2018/234 in force on 6 April 2018.


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Pension Protection Fund: bridging pensions


Summary

The DWP has issued final regulations to amend entitlement to compensation from the Pension Protection Fund (PPF) for members who, at the time their scheme enters an assessment period, are receiving a bridging pension or have an accrued right to a bridging pension. The regulations provide for a member's PPF compensation to decrease at a future date to reflect the decrease which would occur if the scheme did not enter the PPF.

In consultation in August 2017, in which the government indicated that its preference was to smooth entitlement to PPF compensation over the lifetime of a member with rights to a bridging pension. However, a significant proportion of respondents to the consultation preferred the alternative approach of seeking to mirror the bridging pension provisions under the particular scheme's rules.  Draft regulations to implement the approach of mirroring scheme benefits were issued for consultation in November 2017.

The final regulations provide for:

  • a member's PPF compensation to be split into a "basic element" which is payable for life and a "bridging element", with the PPF having power to determine the amount of each element where this is not otherwise possible to decide; and
  • the member's PPF compensation to decrease on the "PPF bridging end date", determined broadly by reference to the scheme rules or, where this is not possible, by the PPF.

The regulations come into force on 24 February 218 and to apply where a scheme enters an assessment period on or after this date.

Guaranteed minimum pensions (GMPs)

The DWP states in the consultation response that it will consider "step up" pensions (pensions which, if the scheme remained out of the PPF, would increase at the member's GMP pension age) at a later stage.


Key dates

Response to consultation and final regulations issued on 29 January 2018.

The Pension Protection Fund (Compensation) (Amendment) Regulations 2018/95 in force on 24 February 2018.


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Financial Assistance Scheme: increased cap for long service


Summary

The DWP has issued final regulations, following a consultation response issued in December 2017, to increase the annual cap on support from the Financial Assistance Scheme (FAS) in respect of members with more than 20 years' pensionable service in the same scheme.

  • The FAS cap applicable when FAS compensation first becomes payable will be increased by 3% for each full year of pensionable service over 20 years, subject to a maximum of double the standard cap.
  • The increase will not be backdated and will apply from the first pay day after the amending regulations come into force.
  • A member whose FAS compensation is increased by the long service cap will not be able to take an additional pension commencement lump sum (tax free cash) in respect of the increased pension.

Background

  • Broadly, the FAS offers support to pension scheme members whose scheme:
    • commenced winding up between 1 January 1997 and 5 April 2005 and which does not have sufficient funding to pay members' benefits in full; or
    • commenced winding up after 5 April 2005 but is ineligible for the Pension Protection Fund (PPF) because the employer became insolvent before this date.
  • Assistance from the FAS is subject to a cap (£34,339 per year for individuals whose entitlement commences between 1 April 2017 and 31 March 2018).
  • A similar increased long service cap was introduced for PPF compensation in April 2017.


Key dates

Consultation paper and draft regulations issued on 18 September 2017.

Consultation response issued on 18 December 2017. Final regulations issued on 20 February 2018.

Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018/207 in force on 21 February 2018.


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Mr D: transfers: scheme trustees acted in accordance with regulations when offering reduced CETV (PO-17096)


Summary

Mr D applied for a cash equivalent transfer value (CETV) of his defined benefit pension in September 2016.  The pension scheme was in deficit and trustees subsequently asked the scheme actuary to prepare an insufficiency report to assist them in deciding whether to continue paying full CETVs in future.  The actuary reported to the trustees that: the scheme was 84.9% funded on the CETV basis agreed with the trustees; if large transfer values were paid in full, the funding level would be significantly reduced for remaining members; the trustees should consider the covenant of the employer and whether it would be willing to pay additional contributions so that unreduced CETVs could be paid; and whether any savings to the scheme arising from paying reduced CETVs justified the costs involved.

The trustees sent Mr D a statement showing that his CETV was £967,935 and that this was £223,044 less than the full CETV.  This represented a 45% reduction to Mr D's CETV in excess of PPF compensation.

Mr D complained about the reduction through the scheme's internal dispute resolution procedure.  His concerns included that: the trustees had been grossly negligent to have continued paying full CETVs when they were aware of falling gilt and bond yields; if the trustees had acted sooner the reduction to his CETV would not have been so severe; it was inconceivable that the employer had insufficient assets to meet its obligations to the scheme and it should increase its deficit contributions so that full CETVs could be paid.  Mr D claimed that his financial situation left him with "little choice" but to accept the reduced CETV.

Mr D complaint was considered by an Adjudicator from the Pensions Ombudsman's office, who took into account the following.

·         the CETV had been calculated using a prescribed method and underlying assumptions which were regularly reviewed;

·         The trustees had a duty to act in the interests of all scheme members – it followed that they must balance the interests of both members wishing to transfer out and those remaining in the scheme;

·         The Occupational Pension Schemes (Transfer Values) Regulations 1996 allow trustees to reduce CETVs provided prescribed conditions are met.

·         The Pensions Regulator recommends that trustees should not rely solely on an insufficiency report as a reason to reduce CETVs but should take other factors, such as employer covenant and any recovery plan, into account.  The actuary's report had covered these factors and there was no reason to doubt that the trustees had given the report serious consideration; and

·         It was clear that the trustees had complied with their responsibilities under legislation governing investment and scheme funding, including the requirements to adopt a statement of investment principles and to agree a recovery plan and schedule of contributions with the employer.

The Deputy Pensions Ombudsman concluded that the trustees had fully complied with criteria set in the Transfer Regulations before reducing CETVs and there had been no maladministration.  The funding and investment issues raised by Mr D were a matter for the Pensions Regulator, not the Ombudsman.


Key dates

Determination issued 7 February 2018.


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Transfers: safeguarded-flexible benefits and personalised risk warnings


Summary

The DWP has updated its non-statutory guidance (first issued in November 2017) to help explain the information requirements in relation to members with safeguarded-flexible benefits and to suggest best practice.

Pension credit rights and enhanced transfer values

The existing Appropriate Independent Advice Regulations will be amended to clarify that, when considering whether the £30,000 advice threshold is met, all a member's safeguarded benefits under the scheme must be considered, including any safeguarded benefits derived from pension credit rights. 

The regulations will also be amended to clarify that any enhancement under the transfer value regulations must be excluded when comparing the value of a member's safeguarded benefits with the £30,000 threshold.  Trustees who may currently calculate transfer values using an approach that is higher than best estimate are recommended to consult their scheme actuary.

"Safeguarded-flexible benefits"

The regulations introduce a new category of "safeguarded-flexible benefits", meaning benefits which are both safeguarded for the purpose of the independent advice requirement and are also flexible benefits.  The September 2017 consultation paper explained that a large proportion of safeguarded-flexible benefits, such as defined contribution (DC) pots with a GAR, exist within personal pensions and other contract-based arrangements. 

Application to occupational pension schemes

As a reminder, GARs under occupational schemes are almost always part of the terms and conditions of an insurance policy held by the trustees on behalf of the member.  Such benefits are classed as money purchase benefits and so are not subject to the advice requirement.  Only in cases where the GAR is included in the scheme rules does the advice requirement apply.

Money purchase benefits will not fall within the definition of the new "safeguarded-flexible benefits".  The changes to the valuation of benefits and the introduction of a requirement to send a risk warning (please see below) will not therefore apply in relation to GAR benefits under an occupational pension scheme, unless the GAR is set out in the scheme rules (which is rare).

Valuation of benefits with a guaranteed annuity rate (GAR)

Concerns have arisen that, where a member wants to transfer a DC pot with a GAR attached, providers are currently required to value the GAR using methodology applicable to final salary benefits for the purposes of determining whether the value of the benefits exceeds £30,000 and, therefore, whether the member has to take appropriate independent advice before making the transfer.

The final regulations will make clear that, for the purposes of the advice requirement threshold, the value of the member's benefits is equal to the transfer value which s/he could transfer to a new scheme.  In the case of GAR benefits, this will be the value of the member's DC pot.

Commencement and transitional arrangements in relation to advice requirement

The draft regulations were to have come into force on either 6 April or 1 October 2017.  The commencement date has been pushed back to 6 April 2018.  Transitional arrangements will apply to members who are told on or after 1 October 2017 that the advice requirement applies to them but who will fall outside the requirement when the new regulations are in force on 6 April 2018.

Risk warnings in relation to safeguarded-flexible benefits

Occupational and personal pension schemes will be required to send risk warnings to members (or survivors) with GARs in certain circumstances (but only where the GAR benefits are not "money purchase benefits" – please see the explanation above).  Points to note include the following.

  • A risk warning must explain that the individual has a valuable guarantee, along with any terms or conditions which apply to taking the guarantee.
  • The warning must include an illustration of the annual income the member would be entitled to if they take their guarantee, alongside a comparison of the estimated income the same sized pension pot would purchase on the open market.
  • A risk warning must be sent in various circumstances, including where the member or survivor applies for a statement of entitlement or cash equivalent valuation; or the scheme sends a statement of entitlement or agreement in principle to carry out a relevant transaction.                
  • The requirement to send a risk warning will apply in relation to all relevant members, whether or not they would subsequently be required to take independent advice before transferring or converting their GAR benefits.
  • Schemes will not be required to send a risk warning within 12 months of sending a risk warning to the same member in respect of the same benefits.

Key dates

Non-statutory guidance updated 6 February 2018.

Guidance originally issued by the DWP on 13 November 2017 and updated in February 2018.

The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment) Regulations 2017/717 in force on 6 April 2018.

The Pension Schemes Act 2105 (Transitional Provisions and Appropriate Independent Advice) (Amendment No 2) Regulations 2017/1272 in force on 6 April 2018.


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Financial Guidance and Claims Bill: requirement to recommend guidance or advice


Summary

Trustees will be required to ask members with flexible benefits whether they have taken appropriate independent financial advice or accessed guidance from the new single financial guidance body, before the member accesses his/her benefits or transfers the benefits to another scheme.  The new requirement will be contained in regulations made under a new section 113B of the Pension Schemes Act 1993.


Key dates

Notice of amendments issued on 25 January 2018.


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Mrs Y: compensation for wrong which could not be put right


Summary

Mrs Y wished to transfer her benefits from the Principal Civil Service Scheme to a qualifying recognised overseas pension scheme (QROPS) in Australia.

Legislation affecting transfers from UK registered pension schemes changed on 6 April 2015:

  • going forward, members of unfunded schemes (such as the Scheme) are only permitted to transfer to another defined benefits arrangement; and
  • QROPS are required to confirm to HMRC by 17 June 2015 that benefits would not be payable to members before age 55, except in cases of ill health.

Australian legislation allows benefit to be taken from pension schemes for purposes other than ill health before age 55 and the majority of Australian schemes on HMRC's QROPS list prior to 17 June 2015 ceased to be recognised as QROPS after this date.

Mrs Y and her independent financial adviser (IFA) were in regular contact with the Scheme administrator throughout November and December 2014 requesting a cash equivalent transfer value and providing letters of authority. Various delays occurred and the transfer was not processed by 17 June 2015. Mrs Y was told in November 2015 that the transfer could not proceed.

The administrator accepted that the transfer request had been mishandled and offered £300 compensation. Mrs Y complained to the Pensions Ombudsman.

The Deputy Pensions Ombudsman (DPO) found that, but for the administrator's delays, there would probably have been time to process the transfer before Mrs Y's chosen scheme in Australia ceased to be a QROPS. There was no doubt that Mrs Y had suffered an injustice: the issue was what could be done to put the matter right. The DPO made the following comments.

  • The DPO did not have authority to ignore the Pension Schemes Act 1993 or the Finance Act 2004, nor did she have authority to override scheme rules prohibiting unauthorised payments.
  • Section 241(2) Finance Act 2004, which provides that an unauthorised payment is exempt from being scheme chargeable if it is made to comply with a court order or an order from a person with power to order the payment, did not help. While it would save the scheme from exposure to a tax charge it would not make the payment authorised, meaning that it would still be caught by the prohibition on unauthorised payments in the scheme rules.
  • Mrs Y would still receive her benefits from the Scheme, although she had wanted to receive these in a different form allowed under Australian tax law. She was therefore unable to demonstrate a direct financial loss, although she had sustained a serious loss of expectation which she claimed would mean that she could not pay off her mortgage and retire from age 60 as she had intended.
  • As a result of the administrator's maladministration, Mrs Y had suffered a loss which could not be righted.

In the circumstances, the distress and inconvenience caused had been unusually great and the administrator was directed to pay her £2,000 compensation to recognise this fact.


Key dates

Determination issued on 24 January 2018.


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Pension liberation fraud: over £13m to be repaid


Summary

The High Court (Pelling J) has held that four individuals who were responsible for a series of pension liberation scams should repay £13.7 million transferred out of their victims' pension schemes.

The Pensions Regulator (tPR) successfully applied for an order under section 16 Pensions Act 2004. Under section 16, where tPR demonstrates that a person has been involved in the misuse or misappropriation of assets of an occupational or personal pension scheme, the Court may order the person to restore parties to the position they were in before the misuse or misappropriation took place. The Court also found that the four individuals responsible for the pension liberation scams had been acting dishonestly.

Facts

The pension liberation fraud involved 245 members of the public being persuaded via cold calling and similar techniques to transfer their pension savings to one of 11 scam pension schemes operated through Friendly Pensions Limited. The scheme members were offered cash "rebates" on the transfer, which they were expressly told should remain confidential. The members' transferring schemes were provided with sham employment contracts purporting to demonstrate that the members were employed by a sponsoring employer of the receiving schemes.

The Court found that much of the money transferred to the receiving schemes was then moved through a complex arrangement of other entities, using bank accounts in the names of the principal perpetrator's family members, to benefit the principal perpetrator and the three other individual defendants. Some of the funds were invested without security in an off-plan hotel development in St Lucia, whose developer became insolvent. Pelling J held that no trustee acting reasonably would have invested significant funds in this project.

Finding of dishonesty

The Court accepted that it was not necessary to find that the defendants had acted dishonestly for tPR's application under section 16 to succeed. However, tPR chose to argue that the individual defendants had been dishonestly concerned in the misuse or misappropriation of scheme assets, to bring them within the scope of section 281(3) Insolvency Act 1986. Section 281 provides that discharge of a bankrupt does not apply in respect of any debt incurred through fraud or fraudulent breach of trust. The Court found that each of the four individual defendants had acted contrary to ordinary standards of honest behaviour in their involvement with the pension liberation arrangements.


Key dates

Judgment given on 23 January 2018.

The Pensions Regulator v Payae Limited and others heard on 5-6 and 8 December 2017.


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RPI/CPI: RPI was not inappropriate for purposes of scheme increase rule


Summary

Summary

The High Court (Zacaroli J) has decided that the retail prices index (RPI) had not become "inappropriate" for the purposes of the scheme rule determining pension increases.

The 2016 Rule

The relevant rule (the "2016 Rule") provided for pensions in payment of members in Section C of the Scheme to be increased annually in accordance with the "cost of living" (to a maximum of 5%). The cost of living was to be measured by RPI …

"or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides."

The 1993 Rule

The case also concerned the meaning of a further rule (the "1993 Rule") which provided for pensions in excess of the guaranteed minimum pension (GMP) to be increased by the lower of 5% and the annual increase in the "General Index". The General Index was defined as RPI. The 1993 Rule also provided that …

"If the General Index ceases to be published, or is so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases, the Principal Company shall substitute such other index or appropriate basis of comparison as it shall in consultation with the Trustees decide."

The High Court was asked to rule on various issues relating to the 2016 Rule and the 1993 Rule.

Conclusions

  • Conclusions reached by the High Court in relation to the 2016 Rule included the following.
  • As a matter of construction of the 2016 Rule, whether RPI had become inappropriate was an objective question (and was not for BT, with or without consulting or gaining the agreement of the trustees, to decide).
  • When determining whether or not RPI had become inappropriate for the purposes of the 2016 Rule, matters or events which had occurred before 5 April 2016 (the date the 2016 Rule was adopted) could be taken into account. 
  • The matters and events presented to the Court had not (either individually or in combination) caused RPI to become inappropriate for the purposes of the 2016 Rule.
  • If the 2016 Rule had conferred power on BT or the trustee to decide whether RPI had become inappropriate (rather than this being an objective test), then the failure to exercise this power within a reasonable time of the events presented to the Court would not have caused the power to lapse. In addition, the adoption of the 2016 Rule did not constitute an implied exercise of the power to determine that RPI had not become inappropriate.
  • As a matter of construction, pension increases on benefits relating to all Section C members who died or left service prior to 5 April 2016 (the date of adoption of the 2016 Rule) were governed by the 2016 Rule.

In relation to the 1993 Rule, the High Court held that:

  • the matters presented to the Court were not (individually or combined) sufficient to permit BT to form the view that RPI had been so amended as to invalidate it as a continuous basis for calculating pension increases for the purposes of the 1993 Rule; and
  • had RPI been so amended so as to invalidate it as a continuous basis for calculating pension increases in any one year, it was possible that (if BT did not determine to replace RPI in that year) that BT could not rely on the amendment to RPI to justify replacing it with another index in a future year. (This consideration was obiter, as the Court's earlier decisions made it unnecessary to decide this point for the purposes of the case before it.)

Had RPI become inappropriate?

In concluding that RPI had not become inappropriate for the purposes of the 2016 Rule, the judge's reasoning included the following.

  • "Inappropriate" means something more than "less appropriate" – the hurdle was therefore a high one and it was not sufficient that another index had become more appropriate.
  • Even if RPI was universally regarded as inappropriate for all other purposes, if it nevertheless remained appropriate for the purposes of measuring increases pursuant to the 2016 Rule then the gateway for BT to be able to substitute another index would not be passed.
  • While it might well be true that it would be inappropriate to use RPI if starting from scratch with a pension scheme created today, it did not necessarily follow that RPI had "become inappropriate" for the purposes of uprating pensions in the Scheme.
  • Two factors were particularly important to the question of whether RPI had become inappropriate:
    • the flaws with RPI which BT sought to rely on were present, and known to be present, in RPI in 2002, albeit that the perception of those flaws had hardened in recent years; and
    • the purpose of the 2016 Rule was to provide protection for pensioners against increases in the real cost of living to which they are likely to be subjected. It would be an important factor against concluding that RPI had become inappropriate if jettisoning RPI would introduce a material risk that increases in pensions would not keep pace with increases in the cost of living likely to be experienced by the relevant pensioners.

Key dates

British Telecommunications PLC v BT Pension Scheme Trustees Limited and another.

Judgment given on 19 January 2018.


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Mr E: commercial decision whether to provide confirmation on equalisation


Summary

Mr E sought to transfer his funds under a section 32 buy-out policy to another provider.  The transferring provider refused to confirm whether benefits accrued under the buy-out plan had been equalised between men and women and declined to provide an equalisation indemnity.

Mr E's advisers argued that, to fulfil their internal compliance requirements and regulatory obligations, they required confirmation of equalisation before the transfer could proceed. They explained that, in addition, Mr E's intended receiving provider would not accept a transfer from a section 32 buy-out policy without confirmation on equalisation. It was alleged that the transferring provider's refusal to provide the confirmation on equalisation prevented the advisers from giving advice on the transfer, which lead to financial loss.

The Deputy Pensions Ombudsman rejected the complaint.  The main obstacle to completing the transfer was the receiving provider's insistence on receiving evidence from the transferring provider that equalisation had taken place, and the transferring provider's refusal to provide this.  Mr E's advisers should have known that there was no legal obligation for pension providers to provide indemnities.  It was ultimately a commercial decision for the transferring provider whether or not to provide confirmation on equalisation, and a commercial decision for the receiving provider whether or not to accept the transfer.


Key dates

Determination issued on 11 January 2018.


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Contracting-out: transfers without consent - draft regulations


Summary

The DWP has issued draft regulations  for consultation, to allow guaranteed minimum pensions (GMPs) and section 9(2B) rights (including rights to pensions in payment) to be transferred without consent to an occupational pension scheme that has never been contracted-out, under specified conditions.

The regulations have been issued in response to industry concern at the current restriction that GMPs and section 9(2B) rights can only be transferred without consent to a scheme which was previously contracted-out on a salary-related basis. Since the abolition of defined benefit (DB) contracting-out from 6 April 2016 it has not been possible to set up new contracted-out schemes, meaning that GMPs and section 9(2B) rights cannot be transferred without consent to any scheme established on or after 6 April 2016.
The proposed regulations introduce the concept of a "salary-related scheme", defined as a scheme which is not one which may only provide money purchase benefits and which meets prescribed conditions.

The regulations will allow transfers of GMPs and section 9(2B) rights (including rights to pensions in payment) without consent to a salary-related scheme which has never been contracted-out provided that the transfer is a connected employer transfer and various safeguards apply, including that:

• for GMPs: pensions must be payable from the receiving scheme at the rates at which GMPs would have been payable from the transferring scheme and must be subject to the same conditions for commencement, continuation and (where applicable) commutation, suspension and forfeiture; and

• for section 9(2B) rights: the transfer must not adversely affect the rights being transferred and the requirement for an actuarial certificate under the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 must be met.

Contracted-out rights transferred under the new provisions will continue to be treated as GMPs or section 9(2B) rights under the receiving scheme (and on further onward transfers).


Key Dates

Consultation paper and draft regulations issued on 21 December 2017. The consultation period ends on 17 January 2018.

The draft Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2018 expected in force on 6 April 2018.


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Mrs K: treating a


Summary

The Deputy Pensions Ombudsman has upheld a complaint by a member against the pension administrator at her employer, Brighton and Sussex University Hospitals Trust (BSUH), for failure to investigate the member's complaint about an incorrect retirement benefits quotation.

Background

According to Mrs K, in October 2015 she had a meeting with Mrs Y, the BSUH pension administrator, who provided her with an estimated retirement quotation. The quotation incorrectly stated Mrs K's annual "pay" as nearly £65,000, when her correct salary was approximately £20,000. The standard benefits quoted were therefore incorrect. Mrs K queried the details as the quotations were higher than she had expected, but was reassured by Mrs Y that they were accurate. Based on this information, Mrs K decided to stop work and to claim her pension benefits.

Mrs K was alerted to the error when her paperwork from the scheme, NHS Pensions, arrived in January 2016, showing her pension to be more than three times less than shown on the earlier quotation. Over the next four months, Mrs K contacted NHS Pensions and BSUH, only for each organisation to refer her to the other party. Mrs K contacted TPAS when a letter sent to BSUH in May 2016 went unanswered. On TPAS' advice, Mrs K requested complaint forms from both NHS Pensions and BSUH, including "complaint" in the subject heading. BSUH failed to send its complaint forms to Mrs K and instead twice asked Mrs Y to respond to Mrs K's "query".

NHS Pensions responded to Mrs K's complaint brought through its internal dispute resolution (IDRP) procedure and rejected her claim.  Mrs K took her complaint to the Pensions Ombudsman, following which NHS Pensions provided evidence that the incorrect quotation had been initiated by Mrs Y.  Mrs K accepted this explanation and asked that the complaint against NHS Pensions be considered as resolved.

Complaint to Pensions Ombudsman about BSUH

The Pensions Ombudsman's office accepted a subsequent complaint by Mrs K about BSUH, on grounds that she had made a specific complaint to BSUH which had never been fully responded to.  In a later response, BSUH argued that its administrator was not required to check that any details provided in a quotation were correct and that it was solely Mrs K's responsibility to spot the error.  However, a NHS Pensions Online Guide confirmed that, when meeting an employee, employers are asked to check that pay details on an estimate quotation are correct before continuing.

An Ombudsman's Adjudicator found that Mrs K understood that the quotation was an estimate and accepted that she could not be compensated for financial loss.  Nevertheless, it was clear that she had suffered significant distress as a result of the original error.

Determination

The Deputy Pensions Ombudsman (DPO) upheld the complaint and the Adjudicator's findings.  BSUH had a responsibility to ensure that key data, which included "pay", was checked and its handling of Mrs K's complaint had caused her significant distress and inconvenience "which was completely avoidable".  While noting BSUH's limited staff capacity, it was "fundamental" that Mrs Y could not properly make a decision about a complaint that she personally had failed to administer BSUH's responsibilities properly.   Someone independent was needed to consider what had happened and to notify Mrs K of their decision on whether her claim was well founded.

The DPO directed the BSUH to pay £1,000 for distress and inconvenience for the failure to check the accuracy of the data and for mishandling Mrs K's complaint. 


Key dates

Determination issued on 19 October 2017 


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Pension funds and social investment: interim response


Summary

The government has issued an interim response to the report published by the Law Commission in June 2017 on pension funds and social investment.  A full response is expected in summer 2018.  Points to note include the following.

  • The government intends to consult on amendments to the Occupational Pension Schemes (Investment) Regulations 2005 to require trustees' statement of investment principles (SIP) to include:
    • the trustees' policy on evaluating long-term investment risks, including risks relating to sustainability arising from corporate governance or from environmental or social impact;
    • trustees' policy (if any) on considering members' non-financial concerns;
    • trustees' policy (if any) on stewardship (including exercise of voting rights and informal methods of engagement);
  • The government will determine whether it is appropriate to require trustees of defined contribution (DC) and hybrid schemes to state their policy on stewardship as part of the default strategy.
     

Key dates

Interim response issued on 18 December 2017.

Full response expected in summer 2018.

Consultation on draft regulations expected in 2018.

Law Commission report on pension funds and social investment published on 23 June 2017.


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Auto-enrolment review


Summary

The government has published its review of auto-enrolment, carried out by the DWP working with HM Treasury and an independent advisory group. The government's key proposals include:

  • reducing the lower age threshold for auto-enrolment from 22 to 18 (the upper age threshold will remain aligned with state pension age;
  • removing the lower earnings limit (LEL) from the calculation of contributions;
  • reviewing contribution levels after the 8% contribution rate is implemented in 2019;
  • to explore options in relation to active members of defined benefit (DB) schemes who opt for contribution levels which earn benefits below qualifying levels. There is concern that the current alternative qualifying tests for DB schemes do not make allowance for such members and could result in some schemes not meeting the cost of accrual test.

The earnings trigger will remain at £10,000 for 2018/19.


Key dates

Auto-enrolment review published by DWP on 18 December 2017.

Reforms expected in the "mid 2020s"


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Transfers: independent advice requirement


Summary

Following consultation, regulations have been made to simplify the test against the £30,000 threshold when determining whether the independent advice requirement applies on a transfer of safeguarded benefits. As amended, the test will apply to the transfer value of the safeguarded benefits (not the total value of the member's subsisting rights, as at present). The amended test is intended to simplify dealing with money purchase benefits with guaranteed annuity rates (or another form of guarantee) which are potentially subject to the independent advice requirement.


Key dates

The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No. 2) Regulations 2017/1272 in force on 6 April 2018. 


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Ms N: wrongly accepted transfer: investment loss must be compensated


Summary

Ms N transferred benefits in a personal pension plan (PPP) to the NHS Pension Scheme (the "Scheme").  It was later discovered that the transfer had been accepted in error as the benefits transferred had already crystallised under the PPP.

When the error was discovered two years after the transfer, the manager of the Scheme repaid the amount transferred but did not provide compensation for investment loss. Ms N complained to the Pensions Ombudsman.

The Ombudsman held that it was for the Scheme (as receiving scheme), not the transferring scheme, to ensure that the acceptance of a transfer in was done in accordance with the Scheme regulations and statute.  The Scheme manager was directed to compensate Ms N for the loss of investment return on her PPP funds, on the assumption that she would have kept them invested in the same funds with the PPP provider had the transfer not been made.

The Ombudsman declined to order compensation to cover fees Ms N had paid to a complaints management service.  Ms N had not needed to incur this cost since she had been aware that free assistance was available from TPAS.
 


Key dates

Determination dated 8 December 2017 (PO-10431).


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Mr E: employer bound by contract to pay unreduced benefits despite administrator's mistake


Summary

The Pensions Ombudsman has found that the member's employer was liable for the additional cost of granting unreduced early retirement to a member, where the administrator had wrongly told the employer that there would be no additional cost arising from payment of unreduced benefits. A contract was found to exist between the member and the employer which obliged the employer to ensure that unreduced benefits would be paid.

Facts

Mr E's employer was carrying out a restructuring exercise, including removing Mr E's post. Negotiations concerning severance or a future role for him at his employer had reached an impasse.

Mr E was a deferred member of the Local Government Pension Scheme (LGPS), though he remained employed by his LGPS employer. Under the LGPS rules, granting unreduced early retirement benefits for a deferred member would require his employer's consent and for the employer to meet any funding strain. The employer asked the administrator for indicative figures of the cost of providing unreduced benefits for Mr E (then aged 56). The administrator quoted the funding strain as £0.00.

Mr E's employer made him a new severance offer, which included payment of an unreduced pension on the basis of employer consent being granted. Mr E accepted the offer and the employer informed the administrator.

The administrator then noticed that a mistake had occurred and that a funding strain of £19,496 would arise. Both the administrator and the employer declined to meet the cost of the funding strain. Mr E claimed that he had only accepted the severance offer on the basis that he would receive unreduced payment of his pension. Had he not received this part of the offer he would have remained with his employer and sought other roles.

Ombudsman's determination

A contract was found to exist between Mr E and his employer which obliged the employer to ensure that unreduced benefits were paid to him. All the required features of a contract were present:

  • the employer's letter to Mr E setting out the level of his benefits and consenting to payment of unreduced pension constituted an offer. There was nothing in the letter referring to payment of benefits "under the scheme rules";
  • Mr E's acceptance of the offer was final, unqualified and corresponded exactly with the terms of the offer made to him;
  • Mr E's acceptance of redundancy was conditional on his pension payment and represented consideration by him. He had previously declined earlier severance offers and only accepted the later offer on the basis that the employer would consent to his early retirement; and
  • the employer subsequently notified the administrator that consent had been granted to payment of unreduced benefits so that it could pay Mr E's pension. All the parties agreed that Mr E would take early retirement, the basis on which he would do so and that the employer had consented. The requirements for intention to create legal relations and for certainty of terms were therefore satisfied.

The Ombudsman rejected arguments that the contract was void for mistake as none of the following applied:

  • common mistake: where the mistake is shared by both parties and is so fundamental that the contract would be robbed of all substance;
  • mutual mistake: where the parties are at cross-purposes with each other; or
  • unilateral mistake: where one party is mistaken in a way which relates to the fundamental nature of the offer and the other party knew or ought to have known of the mistake.

The Ombudsman found that the error did not form any part of the contract between Mr E and the employer; Mr E had no way of knowing that a funding strain would be payable by the employer, nor could he as a layman have known that a strain was payable; and Mr E had simply entered an agreement on the basis of the information provided by the employer.

In contrast the employer, having knowledge of pension matters and being reasonably diligent, should have ensured that the information on which it was basing its offer to consent to unreduced early retirement was correct. It was aware of Mr E's age and it should have been apparent to it that something had gone awry when a zero funding strain was quoted.

The Ombudsman commented that Mr E also had a claim in negligence against the employer: by not checking the retirement figures before passing them to him it had failed in its duty of care and had made a negligent misstatement on which he had relied to his detriment. However, it was not necessary to consider this as the Ombudsman found that a contract had been formed.

The Ombudsman dismissed Mr E's complaint against the administrator as there was no contract between them. He commented that the employer might choose to pursue the matter against the administrator separately but made no finding in this regard as the complaint before him was in relation to Mr E, not between the administrator and the employer.

The employer was directed to take the necessary action to have Mr E's unreduced pension put into payment.


Key dates

31 October 2017. 


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Master Trusts: draft regulations


Summary

The DWP has issued draft regulations for consultation concerning the authorisation of Master Trusts.  Key points include the following.

Scope

The regulations seek to restrict the authorisation regime to schemes which face the risks associated with being a Master Trust scheme at present or in the future.

  • The definition of a Master Trust in the Pension Schemes Act 2017 ("PSA17") excludes schemes which are intended to be used only by connected employers.  The draft regulations will extend the meaning of "connected employers" to cover situations arising from various sorts of corporate activity, including where:

o    active members have been transferred to an employer outside the corporate group (within the previous six months if the transfer was not a TUPE transfer); or

o    an employer holds or controls (or has held or controlled within the previous six months) at least 33% of the voting power in another employer.

  • The authorisation requirement will be disapplied entirely in relation to the following categories of schemes:

o    industry-wide schemes which on 20 October 2016 were providing defined (DB) benefits (whether or not alongside defined contribution (DC) benefits), provided that the scheme is closed to new members no later than six months after the authorisation requirement comes into force;

o    DB schemes in which the only DC benefits are additional voluntary contributions being accrued by active DB members or result from transfers in by active DB members.

  • The requirements for each scheme funder to: meet the fit and proper criteria; submit accounts; and approve the scheme's business plan and continuity strategy (plus any revisions) will be disapplied in relation to existing schemes providing both DB and DC benefits where the only scheme funders are participating employers.
  • The authorisation requirement will also be disapplied in relation to:

o    small self-administered schemes (SSASs), provided that the majority of the trustees are scheme members; and

o    single member schemes where more than one employer is contributing on a member's behalf (which could otherwise fall within the definition of a Master Trust).

  • The authorisation requirement will however be extended to cover:

o    "cluster schemes": in which multiple schemes have only a single employer, or connected employers, but are in practice subject to common rules or controlled in a common way; and

o    parallel accumulation and decumulation schemes: where a schemes is set up to provide retirement options for members of a Master Trust scheme with which it shares common rules or is under common control. 

Authorisation process and criteria

  • The regulations give details of matters the Regulator must take into account  when assessing:

o    whether a person involved with a Master Trust is fit and proper;

o    the financial sustainability of a Master Trust;

o    the contents of a Master Trust's business plan (including that it must comply with any requirements in a Code of Practice from the Regulator);

o    whether a Master Trust's systems and processes are sufficient; and

o     the adequacy of a Master Trust's continuity strategy.

  • Authorisation fees will be set by the Pensions Regulator, with an upper limit of:

o    £67,000 for an existing scheme; and

o    £24,000 for a new scheme.

Scheme funder: exemption from prohibition on other activities

  • The PSA17 requires that, subject to prescribed exceptions, a scheme funder must only carry out activities which directly relate to the Master Trust of which it is a scheme funder. 
  • The draft regulations set out information which a scheme funder must provide to the Regulator, including details of legally enforceable financial support which the scheme funder will supply to the scheme, if it wishes to be exempt from the requirement.  The Regulator must also be satisfied that the Master Trust is financially sustainable.

Ongoing controls and monitoring

  • The regulations set out the information the Regulator may require Master Trusts to provide in a supervisory return.  The DWP expects that the return will be standardised, with all Master Trusts required to provide the same information.
  • The regulations also set out the "significant events" which must be notified to the Regulator.   These include a change in a trustee, scheme strategist or scheme funder; a significant change to the statement of investment principles (SIP); a significant change which requires revision of the business plan; or a change in any person delivering key services to the Master Trust.
  • The level of fixed penalty the Regulator may issue is set at £500.  The regulations prescribe the daily rate for escalating penalties, with a daily maximum of £10,000.

Key dates

Consultation paper and draft regulations issued on 30 November 2017.  The consultation period ends on 12 January 2018.

The Pensions Regulator is expected to consult on a Code of Practice and to publish operational guidance "over the coming months".

The Occupational Pension Schemes (Master Trusts) Regulations 2018 expected in force on 1 October 2018.


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Tax: relief at source – reporting requirements


Summary

HMRC has issued draft regulations for technical consultation, following discussions with pension industry representatives. The amendments are being brought in to enable HMRC to advise scheme administrators of the correct rate of income tax to apply to members' pensions, following the introduction of Scottish income tax.

The regulations will require scheme administrators who reclaim tax relief using relief at source to submit the annual return of individual information within three months of the end of the year of assessment. The due date for submitting the annual claim is also being brought forward to 5 July each year.

In addition, HMRC is introducing a 30-day period for the reporting and repayment of excess relief claimed in an interim claim. The 30-day period starts when the administrator first discovers that it has made an excessive claim for relief.


Key dates

Draft regulations were issued for technical consultation on 30 November 2017.

The consultation closes on 31 December 2017.

The draft Registered Pension Schemes (Relief at Source) (Amendment) Regulations 2018 expected in force on 6 April 2018.


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HMRC Pension schemes newsletter 93: payments of bankrupts' pensions


Summary

HMRC newsletter 93 includes a reminder about payments in respect of members who have become bankrupt. HMRC comments that it is aware that some former bankrupts are being advised to tell HMRC that they are not in receipt of pension payments, when a scheme makes payments to certain third parties from the member's arrangement.

HMRC points out that members of registered schemes who have lost their pension rights through bankruptcy remain members of the scheme, regardless of whom a payment is made to. HMRC makes clear that if it is notified that a payment from a registered scheme is not a payment of pension or another form of authorised payment then the payment will be treated as unauthorised, with the consequence that an unauthorised payments charge and, potentially, an unauthorised payments surcharge and scheme sanction charge, will be payable.

HMRC comments that if the payment is a payment of pension, then normal income tax rules apply, including any requirement to pay higher rate tax.


Key dates

Pension schemes newsletter 93 issued on 30 November 2017. 


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Finance (No 2) Act 2017: employer-arranged pension advice and money purchase annual allowance


Summary

As expected, the Finance (No.2) Act 2017 contains provisions relating to pensions which were withdrawn from the Finance Bill which went through Parliament earlier this year, ahead of the general election.

The pension provisions in the new Act provide for:

  • allowing employers to fund pensions advice for employees and former employees worth up to £500 per year free of income tax, provided certain conditions are met; and
  • the reduction of the money purchase annual allowance from £10,000 to £4,000.

Both sets of pension provisions will have retrospective effect from the start of the 2017/18 tax year.


Key dates

The Finance (No. 2) Act 2017 received Royal assent on 16 November 2017.

Provisions relating to employer-arranged advice and the reduction in the money purchase annual allowance will apply from 6 April 2017.


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Autumn Budget 2017


Summary

The Autumn Budget was given on 22 November 217 and included the following items relevant to pensions. For tax changes announced in this Budget, the government intends to publish draft legislation and responses to consultation in July 2018.

Lifetime allowance

  • The lifetime allowance will increase in line with CPI to £1,030,000 for 2018/19.

Registration and deregistration of master trusts and pension schemes for dormant companies

  • The Finance Bill 2017-18 will include provisions enabling HMRC to register and deregister master trusts and to deregister pension schemes for dormant companies, with effect from 6 April 2018.

Life assurance and overseas pension schemes

  • From 6 April 2019, tax relief for employer premiums paid into life assurance products or certain overseas pension schemes will be modernised to cover policies. The existing exemption will be extended to cover policies when an employee nominates an individual or registered charity to be their beneficiary. Legislation will be included in Finance Bill 2018-19.

Investment by pension schemes

  • The government intends to give pension funds confidence that they can invest in assets supporting innovative firms as part of a diverse portfolio. The Pensions Regulator is expected to clarify guidance on investments with long-term investment horizons.

Increases to state pensions

  • The basic State Pension will increase by £3.65 per week, in line with the triple lock. The new single-tier state pension will also be increased in line with the triple lock, by £4.80 per week.


Key dates

The Autumn Budget 2017 was issued on 22 November 2017.

The Finance Bill 2017-18 is expected to be published on 1 December 2017.

Increase in the lifetime allowance to apply from 6 April 2018.

New registration and deregistration powers for HMRC to have effect from 6 April 2018.

Changes to tax relief for employer premiums to life assurance and certain overseas pension schemes to apply from 6 April 2019.


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PPF compensation: allowance for bridging pensions


Summary

The DWP is consulting on draft regulations to amend entitlement to compensation from the Pension Protection Fund (PPF) for members who, at the time their scheme enters an assessment period, are receiving a bridging pension or have an accrued right to a bridging pension. The draft regulations provide for a member's PPF compensation to decrease at a future date to reflect the decrease which would occur if the scheme did not enter the PPF.

The draft regulations follow consultation issued in August 2017, in which the government indicated that its preference was to smooth entitlement to PPF compensation over the lifetime of a member with rights to a bridging pension. However, a significant proportion of respondents to the consultation preferred the alternative approach of seeking to mirror the bridging pension provisions under the particular scheme's rules.

The draft regulations provide for:

  • a member's PPF compensation to be split into a "basic element" which is payable for life and a "bridging element", with the PPF having power to determine the amount of each element where this is not otherwise possible to decide; and
  • the member's PPF compensation to decrease on the "PPF decrease date", determined broadly by reference to the scheme rules or, where this is not possible, by the PPF.

The regulations are expected to come into force on 24 February 218 and to apply where a scheme enters an assessment period on or after this date.


Key dates

Draft regulations issued on 17 November 2017.

Consultation closes on 3 December 2017.

The draft Pension Protection Fund (Compensation) (Amendment) Regulations 2018 expected in force on 24 February 2018.


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Auto-enrolment: no change to AE charges cap


Summary

The government has issued a statement that it does not consider it is the right time to change the level or scope of the cap which applies to member-borne charges in default funds in defined contribution (DC) schemes used for auto-enrolment.

The government intends to review the level and scope of the charges cap, as well as permitted charging structures, in 2020 and it expects there to be a much clearer case for change at that time.


Key dates

Written statement by the Parliamentary Under Secretary of State for Pensions & Financial Inclusion made on 16 November 2017.


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Safeguarded-flexible benefits: simplified valuation and requirement for personalised risk warnings


Summary

The DWP has published a response to consultation paper and regulations, following consultation issued in September 2016 in response to industry concerns about how benefits should be valued for the purpose of checking whether the requirement to take appropriate independent advice applies.

The DWP subsequently issued non-statutory guidance to help explain the information requirements in relation to members with safeguarded-flexible benefits and to suggest best practice.

Pension credit rights and enhanced transfer values

The existing Appropriate Independent Advice Regulations will be amended to clarify that, when considering whether the £30,000 advice threshold is met, all a member's safeguarded benefits under the scheme must be considered, including any safeguarded benefits derived from pension credit rights.  

The regulations will also be amended to clarify that any enhancement under the transfer value reguations must be excluded whn comparing the value of a member's safeguarded benefits with the £30,000 threshold.

"Safeguarded-flexible benefits"

The regulations introduce a new category of "safeguarded-flexible benefits", meaning benefits which are both safeguarded for the purpose of the independent advice requirement and are also flexible benefits.  The September 2017 consultation paper explained that a large proportion of safeguarded-flexible benefits, such as defined contribution (DC) pots with a GAR, exist within personal pensions and other contract-based arrangements.  

Application to occupational pension schemes

As a reminder, GARs under occupational schemes are almost always part of the terms and conditions of an insurance policy held by the trustees on behalf of the member.  Such benefits are classed as money purchase benefits and so are not subject to the advice requirement.  Only in cases where the GAR is included in the scheme rules does the advice requirement apply.

Money purchase benefits will not fall within the definition of the new "safeguarded-flexible benefits".  The changes to the valuation of benefits and the introduction of a requirement to send a risk warning (please see below) will not therefore apply in relation to GAR benefits under an occupational pension scheme, unless the GAR is set out in the scheme rules (which is rare).

Valuation of benefits with a guaranteed annuity rate (GAR)

Concerns have arisen that, where a member wants to transfer a DC pot with a GAR attached, providers are currently required to value the GAR using methodology applicable to final salary benefits for the purposes of determining whether the value of the benefits exceeds £30,000 and, therefore, whether the member has to take appropriate independent advice before making the transfer.

The final regulations will make clear that, for the purposes of the advice requirement threshold, the value of the member's benefits is equal to the transfer value which s/he could transfer to a new scheme.  In the case of GAR benefits, this will be the value of the member's DC pot.

Commencement and transitional arrangements in relation to advice requirement

The draft regulations were to have come into force on either 6 April or 1 October 2017.  The commencement date has been pushed back to 6 April 2018.  Transitional arrangements will apply to members who are told on or after 1 October 2017 that the advice requirement applies to them but who will fall outside the requirement when the new regulations are in force on 6 April 2018.

Risk warnings in relation to safeguarded-flexible benefits

Occupational and personal pension schemes will be required to send risk warnings to members (or survivors) with GARs in certain circumstances (but only where the GAR benefits are not "money purchase benefits" – please see the explanation above).  Points to note include the following.

A risk warning must explain that the individual has a valuable guarantee, along with any terms or conditions which apply to taking the guarantee.

The warning must include an illustration of the annual income the member would be entitled to if they take their guarantee, alongside a comparison of the estimated income the same sized pension pot would purchase on the open market.

A risk warning must be sent in various circumstances, including where the member or survivor applies for a statement of entitlement or cash equivalent valuation; or the scheme sends a statement of entitlement or agreement in principle to carry out a relevant transaction.                                                                                         

The requirement to send a risk warning will apply in relation to all relevant members, whether or not they would subsequently be required to take independent advice before transferring or converting their GAR benefits.

Schemes will not be required to send a risk warning within 12 months of sending a risk warning to the same member in respect of the same benefits. 


Key dates

Consultation response and final regulations issued on 6 July 2017.

Non-statutory guidance was issued by the DWP on 13 November 2017.

The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment) Regulations 2017/717 in force on 6 April 2018.

The Pension Schemes Act 2105 (Transitional Provisions and Appropriate Independent Advice) (Amendment No 2) Regulations not yet issued in final form but expected in force on 6 April 2018. 


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Reconciliation of GMPs: no communications to individual members


Summary

HMRC has announced that it will not be sending communications to individuals about their entitlement to a guaranteed minimum pension (GMP), as had previously been intended. HMRC has agreed this change with DWP because of developments in the provision of pension information since the start of the process of abolishing contracting-out, in particular the development of the State Pension Forecast service which is now available to everyone.

HMRC also comments that the Pensions Dashboard will be available from 2019 and it encourages all schemes to participate in the Dashboard, to make as much information as possible available to members.

In addition, Countdown Bulletin 30 contains a reminder that the deadline for submitting membership queries to the Scheme Reconciliation Service (SRS) is 31 October 2018. HMRC expects to answer most queries by the end of 2018, although there will be resource available to complete work on any remaining queries in early 2019.


Key dates

HMRC Countdown Bulletin 30 updated on 10 November 2017.


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Smith v Sheffield Teaching Hospitals NHS Foundation Trust: High Court increases award for non-financial loss


Summary

The High Court overturned an award of £500 for non-financial loss for maladministration and awarded £2,750 instead. 

Background

Mrs Smith complained that in deciding to retire she had relied on the quotation informing her that she would receive a "special class status" pension from her 55th birthday. She argued that, had she been given the correct information, she would not have retired and would have stayed in employment.

Judgment

The Deputy Pensions Ombudsman had concluded that there was only one instance of maladministration when the evidence showed a chain of inaccurate pension estimates, each of which overlooked the need for five years' pensionable employment in an SCS post immediately before retirement.. The number of examples of maladministration was relevant to the likely level of distress and distress at discovering that the information provided over a six-year period had been inaccurate was likely to be greater than that caused by a single example.

The award should be above the top end of the normal band (£1,600, following the High Court's decision in the recent Baugniet case) because of the number of opportunities there were to correct the misinformation, the relative ease at which the true position could be ascertained and the period over which the maladministration lasted. The Court awarded £2,750.


Key dates

Judgment issued 16 October 2017


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Taxation of overseas pensions: consultation on draft regulations


Summary

HMRC is consulting on amendments to the Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) 2006/207, following changes made by the Finance Act 2017 (see below). Amendments made by the draft regulations include setting out how a member's "ring-fenced transfer fund" is to be calculated when assessing liability for the new overseas transfer charge.

Background: Finance Act 2017

The Finance Act 2017 made various amendments to the Finance Act 2004 and the Income Tax (Earnings and Pensions) Act 2003, including for:

  • foreign pensions and lump sums to be brought fully into tax for UK residents, to the same extent as benefits from domestic pension arrangements;
  • specialist pension arrangements (known as "section 615" schemes) for individuals employed abroad to be closed to new saving from 6 April 2017;
  • lump sums payable to former UK-residents from funds in overseas arrangements which have benefitted from UK tax relief to remain subject to UK tax for 10 years after leaving the UK (previously five years);
  • the eligibility criteria for a non-UK scheme to qualify as an overseas pension scheme for the purposes of UK tax to be updated; and
  • transfers from a registered UK scheme to a qualifying recognised overseas pension scheme (QROPS) requested on or after 9 March 2017 to be subject to a 25% tax on the transfer, known as an overseas transfer charge (OTC), except where certain exemptions apply (such as where the member is resident in the country where the QROPS is established; or where the QROPS is an occupational pension scheme and the member is an employee of a sponsoring employer).


Key dates

Draft regulations issued for consultation on 3 November 2017.

Consultation closed on 15 December 2017.

The draft Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) (Amendment) Regulations 2018 expected in force in 2018, with provisions relating to the overseas transfer charge to have retrospective effect from 9 March 2017.


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VAT guidance: existing arrangements may continue


Summary

HMRC has issued long-awaited guidance confirming that:

  • employers may continue to recover VAT on administration costs of running their scheme, even where the administration services are contracted and paid for by the trustee, for an indefinite period (the supplier must provide VAT invoices in the name of the employer);
  • the "70/30 split" will continue, meaning that employers may still recover 30% of the VAT in relation to trustees' combined administration/investment contracts; and 
  • other structures are available, which can also enable some recovery of VAT on investment services – tripartite contracts; paymaster arrangements; VAT grouping; or a combination of these.

The key message is that the 31 December 2017 deadline for putting alternative structures in place, or losing all VAT recovery on trustees' costs of running an occupational pension scheme, has fallen away. Employers and trustees may continue with previous arrangements for VAT recovery, including reliance on the "70/30 split".

For some schemes, especially those paying significant amounts of VAT on investment costs, it may be worth considering an alternative structure.


Key dates

Revised internal VAT guidance issued 1 and 7 November 2017.

Allowing recovery by employers of VAT on administration costs incurred by trustees (including the "70/30 split" for combined administration/investment contracts) was to have been withdrawn from 31 December 2017 but these arrangements may now continue indefinitely.


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Disclosure of DC costs and charges


Summary

The DWP has issued draft regulations for consultation, covering disclosure of costs and charges and information about investments.  It has also issued draft statutory guidance on how to report costs and charges information.

The DWP expects the Financial Conduct Authority (FCA) to make corresponding rules in relation to workplace personal pension arrangements and stakeholder schemes in due course.

Scope

·         The new disclosure requirements will apply to "relevant schemes", that is occupational schemes which provide money purchase benefits, including schemes providing both money purchase and non-money purchase benefits, irrespective of whether the member is in the accumulation or decumulation phase.

·         Some categories of scheme will be exempt from the requirements, including:

o    schemes whose only money purchase benefits arise from additional voluntary contributions (AVCs);

o    death benefit only schemes;

o    executive pension schemes;

o    small self-administered schemes; and

o    public service schemes.

  •  Where a scheme provides both money purchase and non-money purchase benefits, the disclosure requirements will apply in relation to the money purchase benefits.
  • ·he DWP intends to consider at a future time whether to extend the requirements to cover defined benefit arrangements.

Chair's statement

  • The content of the chair's statement which must be produced in relation to relevant schemes will be extended to include:

o    the costs and charges for each default arrangement (where there is more than one) and for each alternative fund option which the member can select and in which members' assets are invested during the scheme year, irrespective of the number of funds available; and

o    an illustration of the compounding effect of the costs and charges.

  • When complying with the requirements, regard must be had to guidance from the Secretary of State.

Availability on the internet

  • Members who are entitled to receive an annual benefit statement must be told that cost and charge information is available on the internet.

Statement about pooled funds

  • The draft regulations also include a requirement for trustees to disclose certain information about pooled funds on request to members and recognised trade unions.
  • Information will have to be given only about the highest level of pooled funds for which public information is available and in which the member is invested.
  • Members must be told via their annual benefit statement that this information is available on request.

 


Key Dates

Consultation paper, draft guidance and draft regulations issued on 26 October 2017.  The consultation period ends on 6 December 2017.

The FCA published rules in Policy Statement (PS 17/20) requiring those managing investments to provide information about transaction costs and charges in response to a request from a relevant pension scheme, in force on 3 January 2018.

The draft Occupational Pension Schemes (Administration and Disclosure) (Amendment) Regulations 2018 expected in force on 6 April 2018.


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DC to DC bulk transfers without consent: draft regulations


Summary

Following a call for evidence in December 2016, the DWP has issued draft regulations for consultation in relation to bulk transfers of DC benefits to another DC arrangement without consent.  The proposed changes will apply only to "pure DC" benefits and will not be applicable to money purchase benefits with guarantees.

Actuarial certificate (scheme quality requirement)

  • The requirement for trustees to obtain an actuarial certificate before a transfer may take place will be removed, provided that the transfer is of "pure DC" benefits and that there are no potentially valuable guarantees or options to be assessed.
  • Where the transfer is to an authorised master trust scheme, transferring trustees will be expected to exercise their fiduciary duties to act in the best interests of members.
  • Where receiving scheme is not an authorised master trust scheme, the transferring trustees will be expected to:

o    review the receiving scheme, with the assistance of guidance from the DWP or the Pensions Regulator; and

o    take advice from a suitably qualified investment professional who is independent from the receiving scheme.

Scheme relationship condition

  • The requirement for the transferring and receiving schemes to be related will not apply in relation to "pure DC" transfers.

Member protections

  • Protections under the statutory charges cap will continue to apply where members are transferred without consent from:

o    a scheme in which their investments are protected by the charges cap to a scheme in which the cap would not apply to them; or

o    an investment fund or arrangement in which their investments are protected by the charges cap to a fund in which the cap would not apply.


Key dates

Consultation and draft regulations issued on 26 October 2017.

The consultation period ends on 30 November 2017.

The draft Occupational Pension Schemes (Preservation of Benefits) (Amendment) Regulations 2018 expected in force on 6 April 2018.


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VAT: change in VAT treatment for insurers' pension fund management


Summary

HMRC has issued a brief (Brief 3 (2017)) to announce a change in the VAT treatment of pension fund management by regulated insurance companies. Up to now, HMRC policy has allowed all pension fund management services provided by regulated insurance companies to be exempt from VAT.

The Brief contains a reminder that, following the EU case of ATP Pension Services, defined contribution pension funds which have all the characteristics of a special investment fund (SIF) will fall within the EU VAT exemption for fund management. HMRC accepts that services of managing and administering these SIF funds are, and always have been, exempt from VAT.

HMRC points out that the SIF exemption is restricted to defined contribution funds and does not extend to defined benefit arrangements.

The Brief announces a change in UK policy so that, from 1 April 2019, insurers will no longer be allowed to treat their supplies of pension fund management services to non-SIF funds as VAT exempt insurance.  (An earlier version of Brief 3 (2017), issued in October 2017, announced that the change in policy would have effect from 1 January 2018 but this has been extended to 1 April 2019.)


Key Dates

Brief 3 (2017) issued on 5 October 2017 and subsequently updated on 20 November 2017.

Change in policy to have effect from 1 April 2019, (extended from 1 January 2018).


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PPF: consultation on contingent asset documents


Summary

The Pension Protection Fund (PPF) has issued a consultation paper and revised draft standard contingent assets forms for consultation. 

The PPF has explained that the revisions to the Type A and Type B contingent asset forms are intended to clarify that:

·         any deficit repair payments made by the employer, guarantor or another guarantor do not have the effect of reducing the level of the cap on the guarantee (the "Cap Interpretation" issue); and

·         payments made under a guarantee but outside an insolvency situation should not erode the value of any cap on the guarantee: instead, the  fixed cap must remain available in full in the event of the employer's insolvency (the "Cap Operation" issue).

The draft revised documents do not cover how the Cap Operation issue should work in relation to multi-employer schemes, as the PPF is seeking further input from the pension industry.

When must the revised standards be used?

The consultation document explains that:

·         new contingent asset agreements entered into after the date of publication of the new standards (expected to be in January 2018) must use the new documents;

·         existing contingent asset agreements executed before publication of the final revised documents may continue to be submitted for recognition in the 2018/19 levy year only;

·         existing Type A and Type B agreements will not need to be re-executed using the new standards for the purposes of the 2018/19 levy only; and

·         for existing Type A and Type B agreements (including agreements executed after the consultation was issued but before publication of final documents in 2018) it is likely that action to adopt the new standards will be required for the 2019/20 levy year.


Key Dates

Consultation paper and revised forms issued on 19 October 2017.  The consultation period ends on 21 November 2017.


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Safeway Ltd v Newton: Court of Appeal refers validity of retrospective equalisation to European Court


Summary

The Court of Appeal decided to refer to the European Court of Justice the question of whether there is a principle of EU law that prohibits retrospective levelling down in an exercise to equalise normal pension ages.

Background

Clause 19, the scheme amendment power, said that amendments had to be by deed and that retrospective amendments were permitted, to take effect from date of any prior written announcement or a date occurring at any reasonable time previous to the date of the amending deed.

An announcement and a letter in 1991 both announced the introduction of an equal normal pension age (NPA) of 65 for men and women with effect from 1 December 1991. Formal recognition in the scheme documentation of the common NPA was in a deed dated 2 May 1996.

The High Court rejected the employer's claim for a declaration confirming that normal pension age was equalised at age 65 with effect from 1 December 1991, the date it was announced to members. The 1991 notices did not amount to amendment within clause 19. Exercise of the amendment power required a deed, so an effective alteration was only made by the 1996 Deed.

Under the principle of EU law against retrospective levelling down to comply with the Barber decision, the NPA for men and women in relation to service between 1 December 1991 and 2 May 1996 was age 60.

Judgment

The Court of Appeal upheld the High Court's decision that the power of amendment could only be exercised by deed, and not by written announcement. The language of clause 19 was plain and defined the single mode of amendment by deed.

The Court of Appeal disagreed with the High Court that the question of EU law is clear. The question of whether Smith v Avdel established a principle that retrospective levelling down could not take place during the period when the Barber window remained open (from the date of the Barber decision – 17 May 1990 – to the date when effective measures were taken to level down), where there was a clear power for the employer and/or trustee under domestic law to level them down with effect on past pensionable service,  was referred to the European Court of Justice. 


Key dates

Judgment issued 5 October 2017


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PPF: 2018/19 Consultation and Third Levy Triennium


Summary

The Pension Protection Fund (PPF) has issued a policy statement on the third levy triennium (2018/19 to 2020/21), plus a draft levy determination for 2018/19 and associated documents.  The policy statement follows consultation in March 2017.  The PPF intends to implement the consultation proposals, with only limited change.

Contingent assets: standard form agreements

  • The PPF announced in previous consultation in March 2017 that it intended to clarify the drafting in the standard Type A and Type B standard contingent asset agreements, following concerns that payments to the scheme (otherwise than in reliance on the contingent asset) could be taken to erode the value of any cap.
  • The PPF plans to consult separately in October 2017 on draft revised Type A and Type B standard documents, and intends to publish final documents in December 2017.  The new forms must be used for any new contingent assets being certified for the 2018/19 levy year.
  • Following representations, the PPF will not require existing contingent assets to be re-executed using the new standards in order to be certified for 2018/19.  However, it is likely to require steps to be taken for the 2019/20 levy year.

Contingent assets: guarantor strength reports

  • In consultation, the PPF proposed requiring trustees to obtain a report from a professional adviser before certifying a Type A (guarantee) contingent asset where the realisable recovery is certified at £100 million or higher.  Following consultation, the threshold will be altered so that a report will be required where the levy benefit is £100,000 or more.
  • The report requirement will apply from the 2018/19 levy year, with reports to be provided to trustees prior to certification.
  • The PPF intends to review a significant proportion of Type A guarantees.  Where certification is based on a professional adviser's report, the PPF will test the existence of a compliant report containing the appropriate duty of care, rather than directly testing whether the guarantor could meet the realisable recovery.
  • Trustees with a Type A guarantee giving a levy benefit below the threshold may choose to base their certification on a report, to gain certainty as to the information the PPF will use when assessing the guarantor's financial position.
  • Draft guidance on the content of guarantor strength reports is included as part of the September 2017 consultation.
  • The PPF will expect a report to be prepared with each recertification.  However, the professional adviser may decide that an updated report is appropriate rather than a new report.
  • The PPF will have discretion to accept a report obtained after certification and to recognise the guarantee, where the trustees can demonstrate reasons for thinking that the levy benefit would not exceed the threshold.

Contingent assets: guarantor who is a scheme employer

  • The PPF has decided to change the way in which it recognises that a guarantor which is also a sponsoring employer will have both liability for underfunding as an employer and also liability under the guarantee.  Under the new approach, a Type A guarantor's share of the underfunding will be credited in the levy calculation, in addition to the realisable recovery certified.  The PPF expects that this will enable a lower level of realisable recovery to be certified, while retaining the same levy credit as under the current regime.
  • Where there are multiple guarantors to a Type A guarantee, the PPF will allow separate realisable recoveries to be certified in relation to each guarantor, rather than (as at present) requiring each guarantor to be certified individually for the full amount of the guarantee. 

PPF-specific model for assessing insolvency risk

  • The PPF-specific model was introduced for the second levy triennium, starting in 2015/16.
  • In March 2017, the PPF proposed rebuilding five of the eight existing scorecards for assessing insolvency risk, with the three scorecards for subsidiary companies filing full accounts remaining unaltered.  Following consultation, the PPF intends to proceed with the proposed changes, with limited changes to its initial proposals.

Alternative assessment of insolvency risk for rated entities / financial institutions

  • The PPF intends to proceed with using credit ratings for rated entities and Standard and Poor's (S&P) credit model for regulated financial institutions, which will override Experian model scores. 
  • The PPF will keep under review whether to extend the credit model to other regulated entities in future.

Special category employers

  • Recognition will be given to a small number of employers, related to government and which are not competing in competitive markets, whose insolvency risk could not be assessed by reference to financial data. 
  • The PPF has indicated that to meet the test for automatic entry to band 1 rating, before the start of the levy year employers would have to meet a three part test covering:
    • the nature of the body and its link to government;
    • evidence that the reduced levy would not amount to unlawful state aid; and
    • that, in the PPF's opinion, the entity's Experian score would be unlikely to reflect the risk, and that it is unlikely the scheme would need to enter the PPF in the foreseeable future.
  • Following consultation, the draft rule has been modified to clarify that entities related to a foreign government could fall within the special category.

Deficit reduction contributions

  • The PPF intends to proceed with both proposed options to simplify the certification of deficit reduction contributions:
    • all schemes will be able to certify on a simplified version of the current approach, without the requirement to account for investment management expenses when calculating the size of the reduction; or
    • for schemes with liabilities of less than £10 million and whose circumstances are straightforward (for example, with no ongoing accrual), certification may be based on information on recovery plan payments provided to the Pensions Regulator.

Good governance discount

  • The PPF has decided not to take forward its proposal to reflect good governance in the amount of a scheme's levy, but will keep this under review.

Asset-based contributions (ABCs) on real estate

  • The PPF has received representations that there can be practical difficulties in obtaining individual certificates of title for each property under an ABC arrangement where multiple properties are involved. 
  • From 2018/19, the PPF will allow trustees to provide alternative evidence of title to the valuer.  If the valuer has sufficient confidence that the properties are owned to offer a duty of care on the valuation, then the PPF will accept this.
  • Trustees may continue to certify an ABC using certificates of title. 

Levy on schemes following a restructuring

  • The PPF rules currently provide that a scheme which enters an assessment period and cannot be rescued will be charged no levy.
  • Following recent experiences with restructuring, the rules will be changed to allow the PPF to charge a levy where a scheme enters an assessment period, with the expectation that a successor scheme will be established.  The rule will allow flexibility in the way the amount of the levy is assessed.

Key Dates

Policy statement and draft determination published on 27 September 2017.

Consultation closes on 1 November 2017.

Further consultation on contingent assets standard forms expected in October 2017.

Final documents are expected in December 2017.

Guarantor strength report requirement to apply from the 2018/19 levy year.

Individual certification of multiple guarantors to be allowed from the 2018/19 levy year.


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FCA: disclosure of transaction costs in workplace pensions


Summary

The Financial Conduct Authority (FCA) has issued a Policy Statement (PS17/20) on its approach to requiring firms managing money on behalf of defined contribution (DC) workplace pension schemes to disclose administration charges and transaction costs to the governance bodies of those schemes (Independent Governance Committees (IGCs) for workplace personal pensions and trustees for occupational pension schemes).

From 3 January 2018, a firm must provide a pension scheme's governance body, on request, with:

  • Information about transaction costs, calculated according to the "slippage cost" methodology;
  • Information about administration charges; and
  • Appropriate contextual information.

Where a firm does not have the information required, it must seek it from other firms which, if they are FCA-authorised, must provide the information.

 


Key Dates

Policy Statement PS17/20 issued on 20 September 2017.

Changes to the Conduct of Business Sourcebook (COBS) have effect from 3 January 2018.


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Financial Assistance Scheme: increased cap for long service


Summary

Draft regulations have been issued to increase the annual cap on support from the Financial Assistance Scheme (FAS) in respect of members with more than 20 years' pensionable service in the same scheme. 

  • The FAS cap applicable when FAS compensation first becomes payable will be increased by 3% for each full year of pensionable service over 20 years, subject to a maximum of double the standard cap.
  • The increase will not be backdated and will apply from the first pay day after the amending regulations come into force.

  • A member whose FAS compensation is increased by the long service cap will not be able to take an additional pension commencement lump sum (tax free cash) in respect of the increased pension.

Background

  • Broadly, the FAS offers support to pension scheme members whose scheme:

    • commenced winding up between 1 January 1997 and 5 April 2005 and which does not have sufficient funding to pay members' benefits in full; or

    • commenced winding up after 5 April 2005 but is ineligible for the Pension Protection Fund (PPF) because the employer became insolvent before this date.

  • Assistance from the FAS is subject to a cap (£34,339 per year for individuals whose entitlement commences between 1 April 2017 and 31 March 2018).

  • A similar increased long service cap was introduced for PPF compensation in April 2017.


Key Dates

Consultation paper and draft regulations issued on 18 September 2017.  Consultation closed on 25 October 2017.

The introduction of an increased FAS long service cap was announced on 15 September 2017.

The Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018/207 in force on 21 February 2018


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Money laundering: Trusts Registration Service (TRS)


Summary

HMRC's latest Trusts and Estates Newsletter includes information on the new Trusts Registration Service (TRS). Key points are as follows.

The TRS launched in July 2017 for trustees. Agents will be able to register on behalf of trustees from October 2017.

  • Existing self-assessment rules require trustees (or their agents) to register their trust with HMRC by 5 October of the year after the tax year in which a liability to capital gains tax (CGT) or income tax first arises. Registration of trusts which first have a liability to income tax or CGT in 2016/17 or later must now be done online via TRS.
  • A trust which registers with TRS (having first incurred a liability to income tax or capital gains tax in 2016/17 or later) must also provide beneficial ownership information by the 5 October deadline, not by the following 31 January. In the first year of TRS, there will be no penalty for late registration if registration is completed after 5 October but before 5 December 2017.
  • In subsequent years, trustees of trusts which have registered for self-assessment and which incur a UK tax liability (to income tax, capital gains tax, inheritance tax, stamp duty land tax, stamp duty reserve tax, or land and buildings transaction tax (Scotland)) must provide beneficial ownership information about the trust, via TRS, by 31 January after the end of the tax year in which the liability arose.
  • HMRC has confirmed elsewhere that if trustees do not have an income tax or capital gains tax liability (and so have not registered for self-assessment) but do incur a liability for inheritance tax, stamp duty land tax, stamp duty reserve tax, or land and buildings transaction tax (Scotland), then the trustees must register and provide beneficial ownership information by 31 January after the end of the tax year.

Key dates

HMRC Trusts and Estates Newsletter: September 2017 issued on updated on 14 September 2017.


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GDPR: draft guidance on controllers and processors


Summary

The Information Commissioner's Office (ICO) has issued draft guidance on the requirements and best practice for contracts between data controllers and data processors under the General Data Protection Directive (GDPR). Key points include the following.

Controller's liability

  • The ICO points out that controllers must only use processors which can guarantee that they will meet the GDPR requirements and protect data subjects' rights. This requires the controller to carry out checks before appointing a processor, even if the processor is part of a future certification scheme (see below).
  • Controllers remain directly liable for compliance with all aspects of GDPR and for demonstrating that compliance. The controller will be fully liable for any damage caused by non-compliant processing, unless it can prove that it was "not in any way responsible for the event giving rise to the damage". A controller may be able to reclaim compensation it has paid from its processor, if the processor is liable.

Who is a processor?

  • The guidance states that if a processor determines the purpose and means of processing (rather than merely acting on the instructions of the controller), then it will be considered to be a controller and will have the same liability as a controller.

Requirement for contracts

  • GDPR requires there to be a written contract in place whenever a controller uses a third party processor to process personal data on its behalf. A written contract is also needed whenever a processor delegates processing of personal data to a sub-processor.

What must be included in contracts between a controller and its processor?

Contracts with processors should set out:

  • the subject matter and the duration of the processing:
  • the nature and purpose of the processing;
  • the type of personal data and categories of data subject; and
  • the obligations and rights of the controller.

The ICO expects the extent of the processing to be clear from the outset, and states that very general or "catch all" contract terms should not be used.

Contracts must also contain minimum terms, including requiring the processor to:

  • act only on the controller's written documented instructions (unless required to do so by law). The ICO expects this term to make clear that it is the controller, rather than the processor, who controls what happens to the personal data;
  • ensure that anyone the processor allows to process the data (including temporary workers and agency workers) is subject to a duty of confidentiality;
  • take appropriate measures to ensure the security of processing, in compliance with the requirements of article 32 GDPR (Security of processing);
  • use sub-processors only with the controller's prior consent, and with a written contract in place which meets the requirements of GDPR. The processor must remain liable to the controller for the compliance of the sub-processor;
  • assist the controller in allowing data subjects to exercise their rights under GDPR (including enabling data subject access);
  • assist the controller to meet its obligations under GDPR in relation to: security of processing; notification of data breaches; and data protection impact assessments (where necessary);
  • delete or return all personal data to the controller, at the controller's choice, at the end of the contract (unless required by law);
  • submit to audit and inspections;
  • provide the controller with information needed to demonstrate compliance with the GDPR obligations relating to processors; and
  • tell the controller immediately if it considers that an instruction breaches GDPR or other data protection legislation of the EU or an EU member state.

When agreeing the contract, GDPR requires the processor's specific tasks and responsibilities, and the risk to the rights and freedoms of the data subjects, to be taken into account.

Security of processing

  • The guidance points out that the requirements under article 32 GDPR for controllers and processors to implement "appropriate technical and organisational measures to ensure a level of security appropriate to the risk" includes, as appropriate: encryption, pseudonymisation, resilience of processing systems, and backing up personal data.

Processor's direct responsibilities

  • In addition to a processor's contractual obligations to its controller, it will also have some direct responsibilities under GDPR, including:
    • not to use a sub-processor without the controller's prior written consent;
    • to cooperate with supervisory authorities;
    • to ensure security of its processing and to keep records;
    • to notify the controller of any personal data breaches;
    • to employ a data protection officer; and
    • to appoint a representative within the EU, if needed.
  • The ICO considers it good practice for a controller to highlight these direct obligations in its contract with the processor.
  • If a processor uses a sub-processor, the processor will remain directly liable to the controller for the sub-processor's performance of its obligations. The processor's contract with the sub-processor should impose the same legal obligations which the processor owes to the controller.

Standard clauses and codes

  • GDPR allows standard contractual clauses from the EU Commission or supervisory authority (such as the ICO) to be used in contracts between controllers and processors. The ICO confirms that no standard clauses are currently available.
  • GDPR also allows standard clauses to form part of a code of conduct or certification regime to demonstrate compliant processing. However, no codes of conduct or certification schemes are currently available.

Future guidance

  • The ICO has indicated that it will issue guidance in due course on various subjects, including: security provisions under GDPR; record-keeping; data subjects' rights; personal data breach notification; assisting the controller; any future certification schemes; data protection officer requirements; and on breaches and liability.


Key dates

Draft guidance issued on 13 September 2017.  The consultation period ends on 10 October 2017.


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All Metal Services Limited Pension Scheme: Regulator not required to issue new warning notice where outcome would be the same


Summary

The Pensions Regulator does not have to issue a new warning notice before bringing a matter before the Tribunal when the regulatory outcome that would be achieved (a fine) was the same in broad terms as set out in the original notice.

Background

The trustee contested a £300 fine imposed by the Regulator for failure to provide a scheme return. The January 2017 warning notice had stated that the Regulator was considering issuing a financial penalty for failure to provide a scheme return and, alternatively, for failure to notify the Regulator of changes to registrable information (that the scheme had been wound up). The determination notice confirming the fine referred only to the failure to submit a scheme return.

Decision

The Tribunal held that (as the Regulator had accepted) a scheme return was not required as the scheme had been wound up. However, it was within the Regulator's jurisdiction to impose a penalty for failing to notify the Regulator that the scheme had wound up, even though the determination notice sought to impose a penalty on a different basis.


Key dates

Decision issued 21 August 2017


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Auto-enrolment: post-staging employers – amending regulations


Summary

The DWP has issued amending regulations concerning the position of new employers who are not covered by the auto-enrolment staging timetable ("post-staging employers"). Amendments made in April 2017 provided that the trigger date for a post-staging employer is the date the first worker starts employment with the employer; and that the option of deferring auto-enrolment for three months is also available to post-staging employers (known as a "deferral period" for post-staging employers). 

Further amending regulations make technical changes, which include providing that:

  • The deferral period may effectively be any period up to three months (rather than being a fixed period of three months from the "starting day"); and
  • An employer who first employs an eligible worker before 1 October 2017 but who first pays PAYE on or after this date may also use a deferral period.

Key dates

The Employers' Duties (Miscellaneous Amendments) Regulations 2017/868 in force on 1 October 2017.

The Employers' Duties (Implementation) (Amendment) Regulations 2017/347 in force on 1 April 2017.

The Employers' Duties (Implementation) Regulations 2010/4 in force on 1 September 2012.


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Pension Protection Fund (PPF): bridging pensions


Summary

The DWP is consulting on draft regulations intended to address an anomaly in current legislation which means that a pensioner in receipt of a bridging pension when his/her scheme enters the PPF becomes entitled to PPF compensation based on this higher rate for life.  Under scheme rules, a bridging pension would be expected to reduce once the member reaches state pension age or another age specified in the rules.  Members in receipt of a bridging pension can therefore receive higher benefits from the PPF than they would be entitled under their own scheme.  The consultation points out that compensation from the Financial Assistance Scheme (FAS) already takes account of bridging pensions.

The draft regulations would enable the PPF to reduce compensation payments to more closely reflect the benefits members would have received from their own schemes.  Key points to note are as follows.

Smoothing lifetime benefits

  • The DWP's preferred option is to calculate PPF compensation by actuarially converting bridging pensions into a flat rate lifetime-equivalent amount. 
  • Trustees of a scheme which entered a PPF assessment period would be required to smooth bridging pensions using actuarial factors provided by the PPF.
  •  Survivors' compensation would be calculated by reference to the smoothed PPF compensation.

Mirroring scheme rules

  •  An alternative method would be to mirror existing scheme rules, so that a member's PPF compensation would reduce on the date specified under the original scheme.  The consultation document points out that this would require separate calculations for each scheme.
  • Survivors' compensation would be payable in accordance with current PPF rules.  The DWP would consider whether survivors' compensation should be reduced at the point the deceased member's payments would have decreased.

Other points

  • The reduction in PPF compensation will only apply to members of schemes which enter a PPF assessment period on or after the regulations come into force. 
  • Where a bridging pension is the default retirement benefit under a scheme, rather than an option, PPF compensation payable to deferred members will reflect the reduction which would have taken place under the original scheme rules.
  • The DWP has asked for evidence of how many schemes have a bridging pension as the default retirement benefit.  It has also asked for examples of how scheme rules reflect bridging pensions in benefits payable to survivors.
  • The DWP has asked for views on whether PPF compensation should also take account of increases in scheme pension which would have taken place under the original scheme at the member's GMP age to reflect contracting-out requirements.  However, it believes that the PPF and the pension industry should be allowed to become familiar with step-downs in respect of bridging pensions before further changes are made.

 

 


Key dates

Consultation and draft regulations issued on 31 August 2017.

Consultation closes on 1 October 2017.

The draft Pension Protection Fund (Compensation) (Amendment) Regulations 2017 expected in force on 15 January 2018.


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Mr S: £2,000 award for distress and inconvenience caused by maladministration


Summary

A pension trustee's failure to respond to a member's request for funding information and application for internal dispute resolution caused significant distress and inconvenience, meriting an award for non-financial loss of £2,000.

Background

A member had requested funding information about his pension on multiple occasions and received insufficient response. The scheme also failed to respond to the member's application for the internal dispute resolution procedure.

Judgment

The Ombudsman upheld the complaint of  maladministration. The trustee had been "extremely uncooperative" for no "relevant reason".

The Ombudsman directed the trustee to pay the member £2,000 for the distress and inconvenience suffered and directed that the information and (if required) a transfer value must be provided, commenting that his directions were enforceable in the County Court.


Key dates

Determination issued 26 July 2017.


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Eden Consulting Services (Richmond) Ltd v Revenue and Customs Commissioners: loans did not satisfy authorised employer loan requirements


Summary

Loans made by a pension scheme to its sponsoring employer did not satisfy the requirements governing authorised employer loans by registered pension schemes.

Background

The employer had taken loans from the pension scheme in 2007 and 2009. The 2007 loan was secured by a first charge against items at commercial property owned by the employer and by a second charge over the property itself. Neither charge was registered with Companies House. The 2009 loan was secured by a first charge on the items at the property and again was not registered with Companies House.
 
Judgment

The Tribunal held that the loans did not comply with the requirement in section 179(1)(b) of the Finance Act 2004 that an authorised employer loan must be "secured by a charge which is of adequate value". The absence of priority over other charges over the company's assets meant the unregistered floating charges did not provide effective security for the loans.


Key dates

Judgment issued 1 August 2017


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Mrs N: provider ordered to pay tax charges after insufficient due diligence into QROPS status


Summary

The scheme provider's failure to carry out sufficient checks before authorising a transfer resulted in an unauthorised member transfer charge.

Background

The member complained that the provider had authorised a transfer of funds into a scheme which had lost its staus as a Qualifying Recognised Overseas Pension Scheme (QROPS). As a result, the member had to pay a tax charge.

Determination

If the provider had acted with due diligence (for example, investigating why the scheme was not on the HMRC list), it would have recognised that the scheme was no longer a QROPS and would not have allowed the transfer.

The provider was directed to refund the member the amount of the tax charge, and awarded £1,000 for significant distress and inconvenience.


Key dates

Determination issued 27 June 2017


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Pension liberation: response on anti-scamming measures


Summary

HM Treasury and the DWP have issued a response to consultation on various measures intended to reduce the risk to members of the public from pension scams. Points to note include the following.

Ban on cold calling

  • The government intends to proceed with its proposed ban on cold calling in relation to pensions and will extend the ban to include all electronic communications about pensions.  However, the ban will not cover cold calls about other investment products as the government considers the risks in relation to pensions to be uniquely high.
  • There will be no exceptions to the ban for particular sorts of offers about pensions, and the prohibition will be drafted widely enough to include offers to "trace lost pension pots" or to "consolidate pension pots".
  • Calls to individuals with whom the provider has an existing relationship, or in response to a request for a call, will be permitted.  
  • The Information Commissioners' Office (ICO) will be responsible for enforcing the ban.
  • The government intends to work on final details of the ban during the course of 2017 and to bring forward legislation when Parliamentary time allows. 

Limiting statutory transfer rights

  • The proposed restriction on statutory transfer rights will be taken forward, so that individuals will only have a statutory right to transfer to:
    • personal pension schemes operated by a provider authorised by the Financial Conduct Authority (FCA);
    • authorised master trust schemes; 
    • occupational pension schemes where there is evidence of a genuine employment link to the new scheme.
  • Members will have primary responsibility for supplying evidence of a genuine employment link before transferring to an occupational scheme.  
  • The government intends to work further with stakeholders on the details of the requirement for an employment link during the course of 2017.
  • The government will consider how to extend the restrictions to allow legitimate statutory transfers to qualifying recognised overseas pension schemes (QROPSs).
  • The consultation response suggests that schemes may need to consider amending their rules, where the rules would not allow legitimate non-statutory transfers.  The government intends to considered whether an overriding statutory amendment power is required and whether the need for trustees to undertake due diligence on a receiving scheme prior to a transfer should be underlined in legislation.
  • Alternative proposals of asking members to sign a statutory discharge letter before transfer and requiring members to be given a cooling off period were not supported by the majority of respondents and will not be taken forward.

Making it harder to open fraudulent schemes

  • The government intends to require all new pension scheme registrations to be made through an active company.  HMRC will be given discretion to register schemes with a dormant sponsoring employer in legitimate circumstances.
  • The requirement will also apply to existing schemes registered with a dormant sponsoring employer, with HMRC having discretion not to de-register a scheme in legitimate circumstances.
  • Procedures will be put in place to ensure that sponsoring employers are aware of, and consent to, opening a new scheme with their support.
  • The government has decided not to require small self-administered schemes (SSASs) to have a pensioner trustee at this stage.

Definition of a scam

The proposed definition of a pension scam has been amended slightly to read as follows.

"The marketing of products and arrangements and successful or unsuccessful attempts by a party (the "scammer") to:

  • release funds from an HMRC-registered pension scheme, often resulting in a tax charge that is not anticipated by the member
  • persuade individuals over the normal minimum pension age to flexibly access their pension savings in order to invest in inappropriate investments
  • persuade individuals to transfer their pension savings in order to invest in inappropriate investments

where the scammer has misled the individual about the nature of, or risks attached to, the purported investment(s), or their appropriateness for that individual investor."


Key dates

Consultation response issued on 21 August 2017.

Consultation issued in December 2017.

The government intends to work on final details of the ban on cold calling during the course of 2017 and to bring forward legislation when Parliamentary time allows.

The government intends to consider how legislation to implement the proposal to limit transfer rights can align with the introducion of the authorisation regime for master trusts.

Legislation will be included in the Finance Bill 2017 to ensure that only active companies can register a pension scheme.


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Mrs S: overpayments not recoverable as member had relied on incorrect reassurances by the scheme


Summary

A member had relied on incorrect reassurances that her pension benefits would not be affected by her receipt of state benefits and had spent the excess funds, in good faith, in such a way that she had irreversibly changed her position.

Background

Mrs S was receiving Incapacity Benefit from state benefits. When these benefits were stopped in 2003, the administrator agreed to increase and backdate her NHS benefits which had been reduced to reflect the receipt of state benefits. When her state benefits were reinstated in 2005, Mrs S was informed the administrator but was informed in writing that her NHS benefits were unaffected. She claims she took out a car hire purchase agreement (HP agreement) in 2006, relying on these assurances.

When the NHS pension scheme administrator discovered it had overpaid Mrs S by £31,000, the scheme sought to recover approximately half the overpaid sum from Mrs S. Mrs S complained she had relied on the additional income in good faith and could not afford to repay it.

Determination

 

The Ombudsman upheld the complaint; Mrs S had relied on the overpayments in good faith and she irreversibly changed her financial position. It would be inequitable for the administrator to require her to repay money paid to her in error.

 

Both the defences of change of position and estoppel were satisfied. The Ombudsman was satisfied that she took out the HP agreement with the administrator's written assurances in mind and bank statements indicated she had spent the overpayment income on daily living expenses. It was likely she would not have incurred the same expenditure, had she not received the overpayments.

 

The Ombudsman directed the administrator to write off the overpayment and reimburse Mrs S any overpayments it had already recovered, with interest added. 


Key dates

Determination issued 9 June 2017


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Pensions Regulator: professional trustee description policy


Summary

The Pensions Regulator has issued a revised version of its policy setting out factors to take into account when considering whether or not an individual is a professional trustee (which includes a "professional trustee" who is a director of a corporate trustee). Key points to note are as follows.

  • A professional pension scheme trustee will include any person, whether or not incorporated, who acts as a trustee of the scheme in the course of the business of being a trustee.
  • A remunerated trustee will not normally be acting in the course of business of being a trustee if:
    • the trustee is, or has been, a member of the scheme (or a related scheme with a sponsoring employer in the same corporate group), or an employee or director of a participating employer (or of an employer in the same corporate group); and
    • the trustee does not act, or offer to act, as a trustee in relation to any unrelated scheme.
  • A trustee who represents him/herself as having expertise in a range of trustee matters is likely to be considered a professional trustee. In contrast, a remunerated trustee who holds him/herself out as having expertise in a limited area (such as investment or finance) may not be a professional trustee – though their expertise in their particular field would be taken into account when calculating the penalty for a breach.
  • Trustee boards are expected to regularly assess and evidence the value any remunerated trustees bring to the board.
  • Those appointing trustees are expected to understand whether the trustee meets the Regulator's description of a professional trustee.
  • A trustee may be a professional trustee without being remunerated for a particular trustee role, for example if the trustee is acting pro bono in relation to a scheme or is being compensated in some other way.
  • Long service as a trustee of a particular scheme will not usually, on its own, cause a remunerated trustee to be considered a professional trustee. 
  • A trustee who is a professional trustee of a pension scheme will be considered to be a professional trustee in relation to all other schemes of which it is a trustee. If a non-professional trustee becomes a professional trustee in relation to a different scheme, it must notify the sponsoring employer and any other trustees of the original scheme of the trustee's new status as soon as possible.
  • The scheme returns requires trustees to notify the Regulator if any trustees are professional trustees. However, the Regulator may take a different view as to whether a trustee is a professional trustee, depending on the facts of the case.
  • Being an independent trustee is not determinative of being a professional trustee. The Regulator recognises that it is possible for a lay trustee to be independent.
  • The Regulator expects higher standards from professional trustees and will normally impose higher penalties for those meeting the professional trustee description.

 


Key dates

Consultation paper issued in March 2017.

Consultation response and final version of professional trustee description policy issued on 10 August 2017.


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Data Protection Bill (now Act) 2018: Statement of Intent


Summary

The Department for Digital, Culture, Media and Sport (DCMS) has issued a Statement of Intent in relation to the new Data Protection Bill announced in the Queen's Speech.  The Statement confirms that the Bill will be consistent with the General Data Protection Regulation (GDPR), the Data Protection Law Enforcement Directive 2016/680 and the Council of Europe Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data.  Points to note include the following:

·         The new data protection standards will be applied to all general data, not just to data within the competence of the EU.

·         The UK government will legislate to allow organisations (in addition to official authorities) to process personal data on criminal convictions and offences.

·         There will be a new offence of altering records with intent to prevent disclosure following a subject access request. 

Follow-up

The Data Protection Act 2018 received Royal Assent on 23 May 2018.


Key dates

Statement of Intent issued 7 August 2017.

The Data Protection Act 2018 received Royal Assent on 23 May 2018.


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Bradbury v BBC: cap on pensionable pay was valid


Summary

The Court of Appeal dismissed an appeal from the High Court's decision that the imposition by the employer of a cap on the pensionable element of pay rises was valid. It was within the employer's power under the scheme rules and it was not a breach of section 91 of the Pensions Act 1995 or the employer's implied duty of trust and confidence.

Background

The employer, concerned about rising pension scheme deficits, offered members a choice between remaining in the current final salary section of the scheme, but with any future pay increases limited to 1% for the purposes of pensionable pay, and moving to a new DC plan or a new career average section. The member chose the latter but complained to the Pensions Ombudsman about the imposition of the cap on various grounds: the employer had no power under the rules to introduce it; it was a breach of the anti-alienation provisions of section 91 of the Pensions Act 1995 (which makes any agreement purporting to surrender/reduce any "right to a future pension" unenforceable) and it was a breach of the employer's duty of trust and confidence.

The Pensions Ombudsman and High Court rejected the claim.

Judgment

The Court of Appeal dismissed the appeal from the High Court's decision.

Under the scheme rules, the employer had the power to determine what basic salary was for pension purposes. As a result, it was open to the employer to decide that all (or part) of a future pay rise would be excluded from basic salary for the purpose of calculating pension benefits.

There was no breach of section 91. The member's rights to a future pension did not include a final salary link on the rights built up to date. There was a clear difference between a "right to a future pension" and where a person may "acquire a future right to a pension" and section 91 only protects the former.

The Court also dismissed the appeal in relation to a breach by the employer of the duty of trust and confidence. The High Court's decision on this point could not be faulted. The employer's conduct had to be assessed against the background that the employer was faced with a multi-billion pound deficit in the scheme and where the trustees, the unions and the employer had all agreed that something had to be done.


Key dates

Judgment issued 28 July 2017


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Williams v The Trustees of Swansea University Pension & Assurance Scheme: pension based on hours reduced because of disability was not discriminatory


Summary

The Court of Appeal upheld the EAT decision that it was not discrimination arising from a disability to calculate an ill-health retirement pension by reference to the part-time salary the claimant was earning at the point of retirement.

Background

The claimant took ill-health retirement at age 38 because of disability. He was entitled to a pension calculated as if he had worked on until retirement age, paid immediately and without any actuarial reduction, although based on his salary at the date of his retirement. At that time he was working half time, having had his hours reduced at his request, in the last two years of employment, to accommodate his disabilities. He claimed that this was a breach of section 15 of the Equality Act (unfavourable treatment because of something arising in consequence of his disability: working part-time) and that his pension should have been calculated by reference to a full-time equivalent final salary.

The Employment Tribunal accepted his case but the EAT upheld the employer's appeal.

Judgment

The Court of Appeal upheld the EAT's decision. Treatment which confers advantages on a person with a disability but which would have conferred greater advantages had the disability arisen more suddenly (for example, someone who had been working full-time but then suffered a heart attack leading immediately to permanent incapacity) could not amount to unfavourable treatment. If the logic of the claimant's argument was correct, a disabled person who secured a part-time job because he could not work full-time would also be able to claim discrimination arising from a disability on the basis of being paid a part-time rather than full-time salary. It could not have been Parliament's intention that the onus in those circumstances would fall on the employer to show that paying a part-time salary was justified.


Key Dates

Judgment handed down on 14 July 2017


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Walker v Innospec Ltd


Summary

The Supreme Court, overturning the Court of Appeal, held that the exemption for service prior to December 2005 from the requirement for occupational pension schemes to give survivors' benefits for same-sex married partners is incompatible with EU law.

Background

For the purposes of survivors' pensions payable under occupational schemes, the Equality Act requires equal treatment for civil partners and same-sex married partners, but (in relation to all but the contracted-out element of the pension) only for pensionable service from 5 December 2005 (the date the Civil Partnership Act came into force).

The claimant was a member of his employer's contributory pension scheme from 1980 until his retirement in 2003. Under the rules of the scheme his surviving spouse would receive a pension on his death. At the date of his retirement, the claimant had been living with his male partner for 10 years; they registered a civil partnership in 2006 and have since married.  However, as all his service was completed before 5 December 2005, the only pension payable to his husband was about £1,000 (his GMP), whereas if the claimant was married to a woman, his pre-5 December 2005 service would be taken into account, and she would receive on his death a pension of about £45,000.
 
The claimant challenged this and, although the Employment Tribunal found in his favour, the Employment Appeal Tribunal and the Court of Appeal reversed that decision.

Judgment

The Supreme Court held that the exemption for pre-2005 service is incompatible with EU law and the claimant's husband is entitled on the claimant's death to a spouse’s pension, provided they remain married.

Following EU case law on the equal treatment rights of same-sex partners to survivors' pensions, unless there was evidence that there would be "unacceptable economic or social consequences" of giving effect to the claimant's entitlement to a survivor's pension for his husband, there is no reason why he should receive unequal treatment in relation to the payment of the pension.

Although there is a general rule under EU law that legislative changes do not apply retrospectively, this only applies to situations which are "permanently fixed" before the legislation came into force. In this case, the right to a spouse's pension was not fixed at the date of retirement – the claimant could have married after that date, for example.

In any event, the survivors' pension was not earned during employment; it was something that the spouse became entitled to when the member died, so providing equal treatment for the claimant's same-sex spouse would not be retrospective. 


Key dates

12 July 2017


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Early exit charges: guidance on cap


Summary

The DWP has issued guidance on the calculation of the 1% limit on early exit charges which will apply from 1 October 2017 to members of occupational pension schemes who joined the scheme before that date. (Where a member joins an occupational scheme after 1 October 2017, no early exit charges will be allowed.)

Market value adjustments (MVAs)

The guidance points out that MVAs are outside the scope of an "early exit charge" in the regulations. The regulations therefore do not prohibit or limit the application of MVAs in occupational pension schemes.

Where a trustee or manager needs to assess whether an early exit charge breaches the 1% cap, any MVA should be applied before calculating the value of the member's pension pot.

Terminal bonuses

The guidance also confirms that terminal bonuses in relation to a with profits policy are also outside the scope of the early exit charges cap. Where there is a guarantee or "reasonable expectation" that a terminal bonus will be paid, the value of the member's pot should be taken to include the terminal bonus when assessing whether an early exit charge breaches the 1% charges cap.

Other charges in with profits funds

The guidance makes clear that any other early exit charges derived from occupational scheme investments in with profits funds are within the scope of the cap.

Background

The Occupational Pension Schemes (Charges and Governance) Regulations 2015/879 are amended by the Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017/774 from 1 October 2017 to introduce a ban on early exit charges for new joiners after this date and a cap of 1% on early exit charges for existing members of occupational pension schemes.


Key dates

Guidance issued on 21 July 2017.

The Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017/774 in force on 1 October 2017.


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Increase in State pension age


Summary

The DWP has published its review into State pension age (SPA) and has announced that it proposes to bring forward the increase in SPA to 68.  Under the proposed timetable, the increase in SPA to 68 will occur between 2037 and 2039 and will affect everyone born between 6 April 1970 and 5 April 1978.  Under current legislation, the increase in SPA to 68 was to have taken place from 2044 to 2046. 


Key dates

State Pension age review and Press release announcing an acceleration in the increase in state pension age issued on 19 July 2017.


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Auto-enrolment: call for evidence - DB alternative quality requirements and seafarers and offshore workers


Summary

The DWP has called for evidence in relation to:

  • the operation of the alternative quality requirements for defined benefit (DB) schemes used for auto-enrolment; and 
  • provisions which include seafarers and offshore workers within the remit of auto-enrolment.

The call for evidence has been made as part of the DWP's review of auto-enrolment. The DWP has asked in particular how the relevant provisions work in practice and whether there are any unintended consequences.

Background – alternative quality requirements for DB schemes

Regulations under section 23A of the Pensions Act 2008 allow DB schemes used for auto-enrolment to satisfy the quality requirements if they meet a cost of accruals test or, in certain conditions, the money purchase quality requirements.

The alternative tests were introduced in April 2015, in anticipation of the abolition of DB contracting-out on 6 April 2016. Prior to April 2016, a DB scheme could meet the auto-enrolment quality requirements by being contracted-out on the DB basis.


Key dates

Consultation and call for evidence issued on 19 July 2017.

Consultation closed on 30 August 2017.


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Pan-European personal pensions: proposal from European Commission


Summary

The European Commission has issued a proposal for a pan-European personal pension (PEPP), intended to create a new class of pension products.

Key features of the proposed PEPP include the following.

  • The PEPP would be a voluntary personal pension.
  • It would be intended to complement existing state-based, occupational and national personal pensions, but not to replace or harmonise national personal pension regimes.
  • It could be offered by a range of providers, including insurance companies, banks, occupational pension schemes, investment firms and asset managers.
  • PEPP providers would need to be authorised by the European Insurance and Occupational Pensions Authority (EIOPA).
  • Savers would be protected by strong requirements on information and distribution.
  • Savers would be able to switch providers, domestically and cross-border, every five years at a capped cost.
  • The Commission recommends that Member States give the same tax treatment to the PEPP as to existing similar national products.
  • Different payment options would be allowed at the end of the accumulation phase.
  • PEPP providers would have an EU passport and be able to develop PEPPs across several Member States.

The UK Cabinet Office has subsequently issued a memorandum on the proposal, in which it expresses reservations about whether the proposal would contribute to the Capital Markets Union (CMU) objectives. It also questions whether the proposal could be justified on subsidiarity and proportionality grounds. In addition, the memorandum considers that Member States should retain the right to refuse tax reliefs to the PEPP if it is clearly incompatible with their national pension system.


Key dates

Proposal for a regulation issued on 29 June 2017.

Cabinet Office memorandum issued on 14 July 2017.

The regulation is intended to come into force in 2019.


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Single financial guidance body: consultation response


Summary

HM Treasury and the DWP have issued a response to their December 2016 consultation on creating a single body to provide public financial guidance. The response confirms that the proposals will be taken forward, with provisions to establish the guidance body included in the Financial Guidance and Claims Bill.

The guidance body's remit will include the provision across the UK of guidance and information on all matters relating to occupational and personal pensions. It will be financed by levies on the financial services industry and through the general levy on pension schemes.

The response reports that some commentators thought the guidance body should have a role in the development of a pensions dashboard. It comments that HM Treasury worked with the pension industry to produce a working prototype of the dashboard in April 2017, but that the dashboard is still at a very early stage, with many policy questions outstanding.


Key dates

Consultation response published on 5 July 2017.

The Financial Guidance and Claims Bill was introduced in Parliament on 22 June 2017.


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Early exit charges: consultation response


Summary

The DWP has published a response to consultation on draft regulations to impose a cap on early exit charges in money purchase occupational schemes (or in relation to money purchase benefits in mixed benefit schemes) for members who wish to access the pension freedoms. Power to restrict charges is included in the Pensions Act 2014, as amended by the Pension Schemes Act 2017. Following consultation, the draft regulations have been amended slightly in response to minor technical points and requests for clarification.

(The regulations will also extend the ban on member-born commission to charges under existing contracts (please see separate entry)).

The cap on "early exit charges" will apply to charges imposed on members (aged between 55 and their pension age when seeking to take benefits under their scheme, convert their benefits into different benefits under the scheme or to transfer benefits to a different pension scheme which they would not face if they carried out the same transaction at the agreed pension age for their scheme.

The cap on early exit charges from occupational schemes will be:

·         for existing members at 1 October 2017: 1% of the value of the benefits being taken, converted or transferred (to be calculated in accordance with guidance issued by the Secretary of State); and

·         for members who join their scheme on or after 1 October 2017: 0%, that is a complete ban.

Compliance

Service providers must confirm in writing to the trustees or managers of a relevant scheme that they are complying with the restrictions on early exit charges within one month of:

·         1 October 2017 or, if later,

·         the date on which the service provider becomes a service provider in relation to the scheme.

 Personal pensions and stakeholder schemes

A similar cap on early exit charges applies to stakeholder and personal pension schemes. The Financial Conduct Authority (FCA) brought rules containing the cap into force on 31 March 2017.

Background

In the 2016 consultation and response to consultation, the DWP explained that:

·         Market value adjustments (MVAs) and terminal bonuses will not be included in the cap. However, the DWP commented that where there is a guarantee or "reasonable expectation" of a terminal bonus being paid, then for the purposes of the cap on charges, this should be treated as forming a part of the total value of the member's pot.

·         Charges associated with accessing one of the options for drawing benefits will not be "early exit charges", if they would apply whether the member was accessing the option at the scheme's agreed pension age or earlier.

It was not intended to require that the exit cap be disclosed to members, but this will be kept under review.


Key dates

Consultation response and final regulations issued on 3 July 2017.

The Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017 intended to come into force on 1 October 2017.

The DWP intends to issue guidance on how market value adjustments and terminal bonuses are to be treated at the time the regulations are laid.


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Banning member commission in existing arrangements: consultation response


Summary

The DWP has published a consultation response on draft regulations issued in April 2017.  The regulations will prohibit charges imposed on members of occupational pension schemes used for auto-enrolment to recover the cost of commission payments made to advisers in relation to contracts entered into before 6 April 2016 (and not varied or renewed after this date).  To give service providers time to update their systems, the prohibition will not apply until 1 April 2018, six months after the regulations come into force.

Service providers will be required to confirm in writing to trustees or managers, within one month of 1 April 2018, that they are complying with the prohibition. 

Background

Regulations in force on 6 April 2016 prohibited charges on members of occupational pension schemes used for auto-enrolment in relation to agreements entered into on or after 6 April 2016. The Financial Conduct Authority (FCA) banned commission in workplace pension schemes from the same date. 

 


Key dates

Consultation response and final regulations issued on 3 July 2017.

The Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017 intended to come into force on 1 October 2017, although the commission ban is not expected to apply until 1 April 2018.


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Money laundering: new requirements for pension trustees


Summary

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force on 26 June 2017.  The regulations introduce three new requirements which are relevant to occupational pension schemes:

·         a requirement to keep records about" beneficial owners" under the scheme;

·         a requirement to notify third parties about the trustees' status as trustees and about the scheme's "beneficial owners", in certain circumstances; and

·         a requirement, in some cases, to give information about the scheme and its beneficial owners to HMRC. 

For more details, please see our briefing note.


Key dates

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017/692 in force on 26 June 2017.

Frequently asked questions (FAQs) published on 9 October 2017.


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Financial Guidance and Claims Bill


Summary

The Financial Guidance and Claims Bill has been introduced in the House of Lords. The principal features of the Bill are as follows.

  • The Bill will establish a new "single financial guidance body" with responsibility for coordinating the provision of pension guidance, money guidance and debt advice, to replace the Pensions Advisory Service (TPAS) and the Money Advice Service. The Bill provides for the new body to be renamed in regulations at a future date. 
  • The new body will be specifically required to provide information and guidance to help a member (or survivor) of a pension scheme to make decisions about what to do with flexible benefits. 
  • Provision of pension guidance (and money guidance and debt advice) may be delegated to a "primary delivery partner". Any further delegation must be with the consent of the new body.
  • The new body's activities will be funded through existing levies on pension schemes and the financial services industry.
  • The regulation of claims management services will be transferred to the Financial Conduct Authority (FCA), with responsibility for claims handling transferred to the Financial Ombudsman Service.

A cross-party amendment was made to the Bill at report stage in the House of Lords, despite government opposition, intended to require trustees or managers to ask members or survivors if they have received information and guidance before they access or transfer their pension assets.  Where the member or survivor has not received information and guidance, the trustees or managers will be expected to provide access to this before proceeding to the individual's request.


Key dates

The Financial Guidance and Claims Bill was introduced in the House of Lords on 22 June 2017. 


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Financial Conduct Authority: advising on pension transfers


Summary

The Financial Conduct Authority (FCA) has issued consultation paper CP17/16, setting out proposed changes to the requirements for giving advice on the transfer or conversion of safeguarded benefits. Concerns which have led to the new proposals include that current rules do not explicitly allow for the variety of options available to members under the pension freedoms; and that advice has become focussed on the compulsory transfer value analysis (TVA) rather than on a broader assessment of suitability. 

Key points in relation to the proposals are as follows.

Personal recommendation

  • A new rule will require all advice on the transfer or conversion of safeguarded benefits (including where the safeguarded benefit is a GAR) to result in a personal recommendation. This will require considering the client's individual circumstances and providing a specific recommendation.
  • The FCA Handbook will contain a statement that for most people retaining safeguarded benefits will likely be in their best interests. This will replace existing guidance that advisers should start from the assumption that a transfer will be unsuitable. Instead, suitability of a transfer should be assessed on a case by case basis, starting from a neutral position, with the adviser expected to demonstrate that a transfer is in the best interests of the client.
  • To provide a suitable personal recommendation, factors the adviser should consider will include:
    • the client's income needs and expectations;
    • the specific receiving scheme being recommended and the investments being recommended within that scheme;
    • the way in which funds will be accessed following the transfer;
    • alternative ways of achieving the client's objectives; and
    • relevant wider circumstances of the client.

Role of pension transfer specialist

  • The requirement that advice on pension transfers, conversions or opt-outs must be given or checked by a pension transfer specialist will continue. The FCA Handbook will be amended to make clear that checking advice means assessing the reasonableness of the personal recommendation reached by the adviser, including independently assessing the soundness of the basis for that advice and taking into account the client's wider circumstances. The pension transfer specialist will be expected to document the reasons for his/her view and the adviser should take this into account in its recommendation to the client.

Replacement of transfer value analysis (TVA)

  • The current requirement to carry out a transfer value analysis (TVA) will be replaced with an overarching requirement to undertake appropriate analysis of the client's options, to be known as "appropriate pension transfer analysis" (APTA). Advisers may consider the detailed approach which is appropriate for each client, but rules will set out factors which should be included as a minimum. 
  • An APTA must include a prescribed transfer value comparator (TVC) indicating the value of the benefits being given up, using notional annuity purchase as a proxy to determine the value of the safeguarded benefits. The comparator will be similar to the existing TVA except that, for clients more than 12 months from their scheme retirement date, advisers must determine an appropriate discount rate to value the amount needed to reproduce the safeguarded benefits, after charges. The discount rate should be appropriate for each client and based on their attitude to risk. The TVC must be presented to the client in a prescribed format, comparing the transfer value offered with the estimated current replacement cost of the pension under the transferring scheme.

Overseas transfers

  • The consultation acknowledges that the requirements for the appropriate pension transfer analysis (APTA) are likely to mean that more complex analysis will be needed for overseas transfers than for transfers to UK defined contribution (DC) arrangements. It considers it likely that a UK based adviser will need to work in conjunction with an overseas adviser to understand the proposed destination for the client's funds.
  • The FCA expects that an APTA concerning an overseas transfer will contain sufficient information to compare financial and tax regimes in the two countries. Advisers should also consider the potential for higher inflation in the receiving country or for exchange rate movements, which might offset higher projected rates of return in the receiving scheme.

Application

  • The additional requirements will be restricted to cases where there are potential safeguarded benefits.
  • The requirement for a personal recommendation will apply to all advice on the transfer or conversion of safeguarded benefits, including where the safeguarded benefit is a guaranteed annuity rate (GAR).
  • The requirement to undertake an appropriate pension transfer analysis (APTA) including a transfer value comparator (TVC) will apply to all transfers and conversions of safeguarded benefits, except where the only safeguarded benefit is a guaranteed annuity rate (GAR).


Key dates

Consultation paper CP17/16 issued on 21 June 2017.

Consultation ends on 21 September 2017.

The FCA expects to publish its new rules in a Policy Statement by early 2018.

The FCA intends to consult separately on the issue of insistent clients later in 2017.


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Pensions Regulator: response to DWP Green Paper


Summary

The Pensions Regulator has published its response to the Green Paper, "Security and Sustainability in Defined Benefit Pension Schemes", issued in February 2017.  Key points to note include the following.

Scheme funding

  • The Regulator is concerned that the absence of clear definitions of "prudence" or "appropriateness" has led to diverging approaches between schemes.  It considers that greater clarity over what is expected would be beneficial and suggests this could most readily be achieved with standards set out by the Regulator in codes or guidance, supported by a legally enforceable "comply or explain" regime.
  • The Regulator agrees that there may well be a case for treating schemes whose sponsors can readily afford contributions differently from those where there is significant underfunding plus an employer with a weak covenant.  It considers there is a case for measures to encourage employers with significant resources to repair deficits more quickly when they can afford to do so.
  • In relation to stressed schemes with weak employers, the Regulator agrees that options for change should be considered, but that careful controls would be needed to ensure that a scheme in these circumstances was treated fairly.
  • Concerning pension increases, the Regulator accepts that there may be a case for suspension of indexation in specific situations where an employer is stressed and the scheme is underfunded.  However, it does not believe that a move to reduce member pensions across the board could be justified on grounds of affordability, or of rationalisation or simplification of benefit structures.

Regulator's power to wind up schemes

  • The Regulator considers it would be helpful to revisit its statutory power to wind up schemes to allow it to take account of all its objectives in relation to DB schemes when deciding whether to exercise the power.  At present, the Regulator can only direct a scheme wind up if certain conditions are met, including that it is satisfied the wind up is necessary to protect the interests of the generality of members of the scheme.

Regulator powers to enhance member protection

  • The Regulator notes that the Financial Conduct Authority (FCA) has a principle requiring regulated firms to cooperate with it and that a similar approach has been taken with the Regulator's future supervision of master trusts.  It would like to see the principle of cooperation extended across all aspects of its casework, to enable it to request information regularly and on an ad hoc basis.
  • In particular, the Regulator would like its powers extended to enable it to compel parties to be interviewed and so that it could use its inspection powers under section 73 Pensions Act 2004 more quickly.  It would also like the power to impose civil or administrative penalties for non-compliance with an information request under section 72, rather than being limited to pursuing a criminal conviction.

Clearance and corporate transactions

  • The Regulator considers that a universal requirement to obtain clearance before a corporate transaction would be disproportionate but remains open to proposals which would strengthen its clearance powers in other ways.

Governance

  • The Regulator will be launching a targeted communication campaign focusing on governance and is working with the pension industry to develop fitness and propriety protocols.

Key dates

Response dated 17 May 2017 but not published until 16 June 2017 (postponed until after the General Election on 8 June).


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Pension Protection Fund: Strategic Plan 2017-20


Summary

The Pension Protection Fund (PPF) has issued its latest strategic plan, setting out its vision for the next three year, focussed on three strategic objectives: meeting its funding target through prudent and effective management of its balance sheet; delivering excellent customer services to members, levy payers and other stakeholders; and pursuing its mission within a high calibre framework of risk management.

In particular, over the next three years the PPF intends:

  • to bring more of its assets under in house management (the process started in 2016/16 with part of its liability driven investment (LDI) portfolio); 
  • following notification of some possible claims on the Fraud Compensation Fund in the next couple of years, to raise a fraud compensation levy in 2017/18, set at 25p per member (approx. £5million in total);
  • to explore whether more work currently carried out by third parties during an assessment period could be delivered in house;
  • to continue to improve the data quality of schemes in an assessment period;
  • to remain committed to completing the assessment of at least 75% of schemes in an assessment period within two years;
  • to bring administration of the Financial Assistance Scheme (FAS) in house within the next three years;
  • to implement changes to its insolvency risk model to ensure that levies charged reflect the level of risk as far as possible; and
  • to begin work on its strategy for the fourth levy triennium (starting in 2020/21).

Key dates

Strategic Plan 2017-20 issued on 15 June 2017.


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FCA final rules on information prompts in the annuity market


Summary

The Financial Conduct Authority (FCA) has issued a policy statement containing the final rules on implementing information prompts in the annuity market.

The changes require firms to inform consumers of the benefits of comparing quotations from different providers and, where appropriate, switching provider before a potential purchase.

The rules require firms to include certain information when communicating an annuity quotation to a consumer as part of pre-sale disclosure. This should show the difference between the provider's own quotation and the highest guaranteed quotation available on the open market.

Firms affected by these changes will need to ensure compliance from 1 March 2018.


Key dates

FCA consultation paper (CP16/37) issued on 25 November 2016.

Consultation period closeed on 24 February 2017.

Policy statement containing final rules (PS17/12) issued on 26 May 2017.

Firms affected by these changes will need to ensure compliance from 1 March 2018 


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British Airways PLC v Airways Pension Scheme Trustee Limited: trustees acted properly in amending the scheme to allow discretionary pension increases and in awarding increases


Summary

The trustees acted properly in using their unilateral power to amend the scheme to allow discretionary pension increases and in subsequently deciding to award increases.

Background

The rules of the Airways Pension Scheme provided for annual increases to be paid based on statutory orders.  The power of amendment stated that no amendment could be made that (among other things) would have effect of changing the purposes of the scheme.

In 2010 the Government switched from RPI to CPI for statutory pension increases. In response, the trustees used their unilateral power of amendment to introduce a new rule 15 allowing them to award discretionary annual increases.

The employer challenged both the exercise of the power of amendment and the subsequent decisions by the trustees in 2013 under amended rule 15 to award additional pension increases.

Judgment

Morgan J found in favour of the trustees on all points, except that one purported exercise of amended rule 15 was invalid because no effective date was determined.

The amendment to the pension increase rule was valid and effective; it was not beyond the scope of the power to amend or an abuse of the power to amend. The power to amend was unilateral.  The employer's position was relevant but it did not have a veto, regardless of whether the scheme was in surplus or deficit. The amendment did not offend the restriction in the objects clause of the scheme preventing “benevolent or compassionate” payments, nor did it have the effect of changing the purposes of the scheme. The trustees actively and genuinely engaged with the decision-making process in deciding to amend the rule and were not guilty of unlawful pre-determination.

The subsequent decision to award discretionary increases was also valid, for the same reasons as the amendment was found to be. The Court also found that the trustees had regard to all relevant factors (including the employer's wishes and interests and its funding commitments, the position of the Pensions Regulator, and the potential cost) and had not taken into account any irrelevant considerations.


Key dates

19 May 2017


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Pensions Regulator: annual funding statement


Summary

The Pensions Regulator has issued its annual funding statement, aimed primarily at schemes undertaking valuations with effective dates from 22 September 2016 to 21 September 2017. Points to note include the following.

  • The Regulator expects that market conditions mean that many schemes are likely to show larger funding deficits than projected in their previous valuation. Its analysis suggests, however, that 85-90% of schemes have employers who are able to manage the deficits and so do not have long term sustainability issues.
  • The Regulator comments that all schemes are expected to put contingency plans in place in the event a downside risk materialises. Where schemes find themselves in a worse funding position than expected, trustees should implement their contingency plans to recover their funding position and to mitigate against further downside risk. Trustees should agree their contingency plan with the employer in advance and should ensure that it is legally enforceable.
  • When setting discount rate assumptions, trustees should take robust advice and should document clearly the rationale for any change or, where the same method is retained, why they consider the method remains prudent.
  • The Regulator plans to take a tougher approach to schemes which fail to submit their valuations on time.
  • Schemes have been segmented according to their risk profile (including any increased deficit which could arise in future because of the scheme's investment strategy) into four groups:
    • Strong / tending to strong employer; strong technical provisions and recovery plans which are not unduly long: as a minimum, trustees should continue with the current pace of funding and should not extend their recovery plan without good reason;
    • Strong / tending to strong employer; weak technical provisions and long recovery plans: trustees should seek higher contributions now to mitigate against future risks;
    • Weak employer but trustees assume a strong covenant because of strong group companies, though no formal support in place: trustees should seek legally enforceable support and should take every opportunity to reduce risk to an appropriate level or secure additional funding.
    • Weak employer at risk of being unable / already unable to support the scheme adequately: further action is expected of trustees of stressed schemes – please see below.

Stressed schemes

  • The Regulator estimates that approximately 5% of schemes in the group covered by this annual funding statement are stressed.
  • Trustees of stressed schemes will be expected to demonstrate to the Regulator that they have taken appropriate measures to reach the best possible funding outcome, including that:
    • the scheme is closed to future accrual;
    • they have tested the strength of the employer covenant, including considering the effect of any dividends paid or due to be paid;
    • they have sought to maximise non-cash support from the employer and, where applicable, the wider group;
    • they have identified risks to the scheme and taken steps to control these;
    • where the rules allow, they have considered whether the scheme should be wound up.

Dividends

  • The Regulator comments that where an employer's total distribution to shareholders is higher than deficit reduction contributions to the pension scheme, the scheme should have a relatively short recovery plan, underpinned by an investment strategy which does not rely excessively on investment outperformance. Where this is not adhered to, the Regulator warns that it will consider opening an investigation.

Key dates

Annual funding statement issued on 15 May 2017. 


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Mrs Y: trustees not required to inform retired member of changes to normal pension age or transfer calculation factors


Summary

The Ombudsman found there was no duty on the trustees to continue to inform retired members of changes to normal pension age or calculation basis for transfers; a claim by ex-spouse of a retired member that this might be relevant to couples who were divorcing was rejected.

Background

Mrs Y complained that she was misinformed regarding the age at which she would be able to access an unreduced share of her ex-husband's pension, on obtaining a pension sharing order. Mrs Y claimed that they went ahead with their divorce in 2015, having relied on information provided by the scheme in 2004 that she could receive an unreduced pension at age 63.5 (earlier than the normal pension age of 65).

 Mrs Y also claimed that the Cash Equivalent Transfer Value (CETV) quote sent on 30 March 2015 was invalid, as the basis for calculations had changed by April 2015, after she had received the quotewith the result that, once the pension sharing order had been implemented, the final CETV calculations were lower. She claimed she should have been informed of this change.

Determination

The Ombudsman dismissed the complaint.

The scheme had no duty to notify Professor Y of the change to normal pensionable age in 2011, as he had retired 14 years before the change was implemented. This information was stated on the March 2015 quotation's covering letter and was readily available on the scheme's website. The scheme was also not obliged to inform Professor Y that the basis for CETVs was changing, because the initial March quotation had stated it was only an illustration, and would be recalculated when the Decree Absolute (finalising the divorce) was granted by the court.

The trustees had a fiduciary duty to ensure the scheme was being managed in accordance with the scheme rules, which includes ensuring the calculation basis for transfers was suitable. 


Key dates

Determination issued 22 March 2017


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Contracting-out: final transfer regulations


Summary

The DWP has issued final regulations to allow the transfer of pensions in payment which include guaranteed minimum pensions (GMPs) and / or section 9(2B) rights to schemes which have never been contracted-out, in limited circumstances. The regulations were finalised following a short consultation.

The draft regulations were issued to amend existing legislation which provided that pensions in payment which include GMPs / section 9(2B) rights could only be transferred to a scheme which has formerly been contracted-out. In contrast, transfers of deferred members' contracted-out rights can be made with consent to a scheme which has never been contracted-out.

As amended, the Contracting-out (Transfer and Transfer Payment) Regulations 1996/1462 will allow transfers of GMPs / section 9(2B) rights to a scheme which has never been contracted out when all of the following conditions are met:

  • the member has consented in writing;
  • the member has must acknowledge in writing that benefits under the new scheme may be of a different amount and in a different form to benefits under the transferring scheme and that the new scheme has no statutory obligation to provide a survivor's benefit; and
  • the transferring scheme is in a PPF assessment period or a regulated apportionment arrangement (RAA) has been entered into in relation to the scheme.

Transfers of contracting-out rights without consent

The DWP has confirmed that it will consider the issue of bulk transfers of contracted-out rights without consent to schemes which have never been contracted-out later in 2017.


Key dates

Consultation and draft regulations issued on 10 April 2017. Consultation ended on 23 April 2017.

Consultation response issued on 27 April 2017.

The Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2017/600 in force on 3 July 2017.


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Finance (No 2) Bill 2016-2017: removal of employer-arranged advice provisions


Summary

Following the announcement of the general election to be held on 8 June 2017, the Finance (No 2) Bill was fast tracked to ensure that it would be passed before Parliament was dissolved.  This involved the removal of some provisions from the Bill, including provisions concerning employer-arranged pension advice.

Background

The Finance (No 2) Bill 2016-2017 was issued in March 2017, following consultation on draft legislation at the end of 2016. In relation to employer-arranged pensions advice, key points include the following.

  • The provision of "relevant pensions advice" valued at up to £500 per year and given to employees, former or prospective employees will be exempt from income tax.
  • Where an individual has more than one employer or former employer, the individual may receive up to £500 of relevant pensions advice from each employer/former employer.
  • Relevant pensions advice must be advice or information in relation to:
    • the individual's pension arrangements; or
    • the use of the individual's pension funds.
  • Relevant pensions advice must be provided either:
    • to an employer's employees generally (or generally to employees at a particular location); or
    • generally to all an employer's employees who meet the ill health condition or who are within five years of normal minimum pension age (or their protected pension age, if lower).


Key dates

The Finance (No 2) Bill 2016-17 received Royal Assent on 27 April 2017. 

Provisions concerning employer-arranged advice were removed on 26 April 2017.


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Pension Schemes Act 2017: power to override contract terms


Summary

In addition to provisions concerning master trusts, the Pension Schemes Act 2017 also contains an amendment to paragraph 6 of schedule 18 to the Pensions Act 2014, to permit regulations to override terms in a "relevant contract".  A relevant contract is defined as a contract between the trustees or managers of a "relevant scheme" and a service provider in relation to the scheme. 

A relevant scheme is defined in regulations to be an occupational pension scheme which provides money purchase benefits (or, where a scheme provides money purchase and non-money purchase benefits, the scheme so far as it relates to those benefits), except for executive pension plans or certain small schemes.  Schedule 18 of the 2014 Act already enables regulations to override provisions of a relevant scheme.

At Third Reading of the Bill in the House of Commons, the Under-Secretary of State for Pensions (Richard Harrington) explained that the government intends to use the provision, along with existing powers, to make regulations to cap early exit charges and ban member-borne commission in some occupational pension schemes.


Key dates

The Pension Schemes Bill received Royal Assent on 27 April 2017 to become the Pension Schemes Act 2017.  

Section 41 (power to override contract terms) came into force on 27 April 2017.


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Pension Schemes Act 2017: authorisation of master trusts


Summary

The Pensions Schemes Bill, which provides for the authorisation of master trusts, has received Royal Assent to become the Pension Schemes Act 2017.  Many details of the new requirements and procedures will be set out in regulations.

Definition of master trust scheme

An occupational scheme will be a master trust scheme if it:

  • provides money purchase benefits (whether or not it also provides other benefits);
  • is used, or intended to be used, by two or more employers;
  • is not used, or intended to be used, only by connected employers; and
  • it is not within a specified category of public service pension scheme.

Comments have been made that the definition is wide enough to catch defined benefit non-associated multi-employer schemes (NAMES), where the schemes provide money purchase additional voluntary contributions (AVCs).

In Committee in the House of Lords, an amendment which would have allowed NAMES schemes to be excluded from the definition of "master trust" was rejected. Instead, the government stated that it intends to use power under section 40to disapply all or part of the master trust provisions in relation to mixed benefit schemes where the only money purchase benefits provided are AVCs. However, it is not clear whether NAME schemes will still have to comply with the requirements for authorisation, including meeting the authorisation criteria (please see below).

Authorisation of master trust schemes

  • A master trust may only be operated if it is authorised by the Pensions Regulator.
  • A person will be "operating" a master trust if s/he:
    • accepts money from employers or members (or prospective employers or members) in respect of fees, charges, contributions or otherwise in respect of the scheme; or
    • enters an agreement with an employer in relation to the provision of pension savings for employees or other workers.
  • When considering an application for authorisation, the Regulator must decide whether it is satisfied that the scheme meets the "authorisation criteria", which are that:
    • the persons involved with the scheme (including the person who established the scheme, the trustees or manager, anyone with power to vary the scheme or to appoint or remove a trustee or manager, the scheme strategist and scheme funder) are fit and proper;
    • the scheme is financially sustainable;
    • each scheme funder meets specified requirements (please see below);
    • the scheme's systems and processes are sufficient to ensure the scheme is run effectively; and
    • the scheme has an adequate continuity strategy.

Scheme funder

  • A master trust will be required to have a "scheme funder", which must be a separate legal entity.
  • The scheme funder must also only carry out activities that relate directly to master trust schemes in relation to which it is a scheme funder (or prospective scheme funder).  This requirement was amended as the Bill passed through Parliament: as originally drafted a scheme funder could operate in relation to one scheme only.  In addition, a regulation making power was added, enabling the Secretary of State to make exceptions to the requirement.  In debate in the House of Lords, the Under-Secretary of State explained that, for example, a scheme funder which carried out activities other than those relating to the master trust might be required to disclose additional information in its accounts, so that activities relating to the master trust would be distinct from its other lines of business.  Where the scheme funder is part of a corporate group, disclosure may be required about the group's structure to the extent that it affects the financing of the master trust.  
  • In Report Stage in the House of Lords, an opposition amendment was passed to require the Secretary of State to provide for a funder of last resort, to manage any cases where the scheme does not have sufficient resources to cover the costs of running the scheme after a triggering event (please see below).  This clause was subsequently removed in the House of Commons.

Financial sustainability

  • When considering the financial sustainability of the scheme, the Regulator must be satisfied that the scheme has sufficient financial resources to meet the costs of setting up and running the scheme, and also of complying with duties following a "triggering event" (please see below). The scheme's resources must also be sufficient to cover the costs of running the scheme after a triggering event occurs for a period the Regulator considers appropriate for the scheme (between six months and two years). In Committee in the Lords, the government stated that when determining whether a master trust is financially sustainable, the Regulator may take account only resources relating to the money purchase part of a the scheme.
  • The scheme's continuity strategy must address how members' interests will be protected if a triggering event occurs and must set out the administration charges which will apply.

Triggering events

Triggering events for the purposes of the Act include:

  • the Regulator giving a warning notice or determination notice relating to the withdrawal of the scheme's authorisation, or a notice that the scheme is unauthorised; 
  • a scheme funder undergoing an insolvency event, being unlikely to continue as a going concern, or terminating its relationship with the master trust; 
  • a decision being made to wind up the master trust;
  • an event occurring which will or may result in the master trust being wound up; or
  • the trustees deciding that the master trust is at risk of failure.

Continuity options

  • When a triggering event occurs, the trustees must comply with any notification requirements and must pursue one of two "continuity options". 
  • Continuity option 1 must be followed when the Regulator has made a final decision to withdraw authorisation of the master trust or has issued a notice that the trust is unauthorised. In other cases, the trustees must decide whether to pursue continuity option 1 or 2.
  • Under Continuity option 1, the accrued rights of members must be transferred to one or more other master trusts (or to an alternative scheme meeting prescribed requirements), subject to members' statutory transfer rights. Details about how continuity option 1 is to be pursued must be set out in regulations.
  • Under Continuity option 2, the triggering event must be resolved. The trustees must notify the Regulator when they consider that the triggering event has been resolved and the Regulator must in turn notify the trustees of whether it is satisfied that this has happened.

Existing master trusts

  • Existing schemes falling within the definition of master trust must either apply for authorisation within six months of the prohibition on operating an unauthorised master trust coming into force (known as the "commencement date") or must give notice to the Pensions Regulator that the scheme will be wound up.  The Regulator may extend the six month period by up to six weeks if it is satisfied that the trustees have good reason to need an extension.
  • Some provisions of the Act apply from the date of Royal Assent (27 April 2017). These include provisions concerning: the definition of "master trust"; triggering events; notification requirements; and powers of the Regulator to request information.
  • Where a triggering event occurs on or after 20 October 2016 (the date the Bill was published in Parliament) but before the commencement date (when the prohibition on operating an unauthorised master trust has effect), the trustees must notify the Regulator of the triggering event within seven days of the occurrence of the triggering event.
  • In contrast, where a triggering event occurs after the commencement date, the time limit for giving notification will be set out in regulations.

Key dates

The Pension Schemes Act 2017 received Royal Assent on 27 April 2017.  Certain provisions (including the definition of a Master Trust scheme and notification requirements)  have effect from Royal Assent.  Other provisions will come into force on a day or days decided by the Secretary of State.

Initial consultation to inform regulations is expected in autumn 2017, followed by formal consultation on draft regulations in early 2018.

the authorisation requirement and associated regulations are expected to apply from October 2018.


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Finance (No 2) Bill 2016-2017: removal of reduction in money purchase annual allowance


Summary

Following the announcement of the general election to be held on 8 June 2017, the Finance Bill was fast-tracked to ensure that it would be passed before Parliament was dissolved.  This involved stripping out certain provisions, including those which would have reduced the money purchase annual allowance from £10,000 to £4,000.

Background

The Finance (No 2) Bill 2016-2017 was issued in March 2017, following consultation on draft legislation at the end of 2016. At the same time, HM Treasury issued a response to consultation on reducing the money purchase annual allowance (MPAA).

Key points in relation to the reduction MPAA include the following.

  • The government has confirmed that the MPAA will be reduced from £10,000 to £4,000 from 6 April 2017. The Finance Act 2004 will be amended accordingly.
  • Calls for the reduced MPAA to apply only to member contributions have been rejected. The government points out that salary sacrifice is commonly used to allow increased employer contributions and has confirmed that the reduced MPAA will apply to pension savings in aggregate.
  • The government has also rejected calls for transitional protection for individuals who accessed benefits flexibly before the proposed reduction in the MPAA was announced on 23 November 2016. 
  • The government intends to ensure that the MPAA remains at a level that does not impact on the future development of auto-enrolment.
  • The reduced MPAA will apply only when pension benefit have been accessed flexibly and will not be extended to drawing defined benefit (DB) benefits or using defined contribution (DC) funds to purchase a non-reducing lifetime annuity (plus tax free lump sum). Where DC savings have been accessed flexibly, the alternative annual allowance will apply to any DB accrual in respect of the same individual.
  • The government will consider concerns that individuals may fail to notify schemes that they have flexibly accessed pension benefits with the pension industry.

Key dates

The Finance (No 2) Bill 2016-17 received Royal Assent on 27 April 2017.  

The provisions for reducing the money purchase annual allowance were removed on 26 April 2017.

A response to consultation on reducing the money purchase annual allowance (MPAA) was issued on 20 March 2017.

The reduction in the money purchase annual allowance was to have had effect from 6 April 2017.


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Employer debts: new deferred debt arrangement and technical changes


Summary

The DWP has issued a consultation paper and draft regulations to introduce a new option for dealing with section 75 debts where an employer in a multi-employer scheme undergoes an employment cessation event.

As a reminder, an employment cessation event will occur in relation to an employer in a multi-employer scheme if the employer ceases to employ an active member at a time when another employer (other than a defined contribution employer) continues to employ at least one active member. A debt under section 75 Pensions Act 1995 becomes due from the employer which underwent the employment cessation event.

Under the new option, to be known as a "deferred debt arrangement", payment of the section 75 debt arising on an employment cessation event may be deferred. Instead, the employer will continue to be treated as if it employed an active member, including remaining liable for to pay contributions under the scheme specific funding regime and retaining responsibility for its share of any orphan liabilities.

The deferred debt arrangement will sit alongside existing options to manage employer debts which arise when an employer in a multi-employer ceases to employ an active member.

Trustees must give notice of a decision to enter a deferred debt arrangement, and of any decision to terminate such an arrangement, to the Pensions Regulator.

Conditions for a deferred debt arrangement

A deferred debt arrangement can take effect where an employment cessation event has occurred in relation to an employer (or would have occurred if the employer had not immediately entered a period of grace) and the following conditions are met:

  • The trustees' have given their written consent.
  • The funding test under the OPS (Employer Debt) Regulations 2005 (applicable in relation to scheme apportionment arrangements, flexible apportionment arrangements and withdrawal arrangements) must be met. This means that the trustees must be reasonably satisfied that, when the arrangement takes effect, the remaining employers will be reasonably likely to be able to fund the scheme so that after the applicable time it will have sufficient and appropriate assets to cover its technical provisions.
  • The scheme is not in a PPF assessment period or being wound up and the trustees are satisfied that the scheme is unlikely to enter a PPF assessment period in the 12 months after the deferred debt arrangement takes effect.

Ending a deferred debt arrangement

A deferred debt arrangement will be terminated if:

  • the deferred employer employs an active member of the scheme;
  • the deferred employer chooses to trigger a section 75 debt, subject to the trustees' consent; or
  • the deferred employer undergoes an insolvency event or commences voluntary winding up.

A deferred debt will also terminate in the following circumstances, in which case the employer will be treated as having undergone an employment cessation event (meaning that an employer debt will become due):

  • the deferred employer restructures;
  • the scheme ceases to employ any active members (and so undergoes a "freezing event"); or
  • the trustees give notice of termination to the employer, being reasonably satisfied that:
    • the employer has failed to comply with its obligations under the scheme funding regulations; or 
    • the deferred employer's covenant is likely to weaken in any other way in the next 12 months.

Other technical amendments

The draft regulations also make certain other technical amendments to the employer debt legislation, including the following:

  • Change of employer's legal status: reg 2(3A) of the OPS (Employer Debt) Regulations 2005 will be amended to clarify that where, for example, an employer which is an unincorporated charity changes status to become an incorporated company without any other changes, no employer debt arises.
  • Period of grace: an employer which has temporarily ceased to employ an active member but which intends to employ an active member in the future must currently notify the trustees within two months of the cessation. This period will be extended to three months.
  • Former employers: regulation 9 of the OPS (Employer Debt) Regulations 2005 will be amended to clarify that a "former employer" includes an employer who ceased to employ active members as a result of the "freezing event".

Key dates

Consultation paper and draft regulations issued on 21 April 2107.

Consultation period ends on 18 May 2017.

The draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017 expected in force on 1 October 2017.


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Pensions Regulator: corporate plan 2017/2020


Summary

The Pensions Regulator has published its corporate plan for 2017/2020. Aspects of the Regulator's work which receive particular mention include:

  • "TPR Future" – work intended to design and deliver a sustainable approach to regulating all types of occupational pension schemes for the next five to ten years.';
  • Completing the roll out of the remaining stages of auto-enrolment;
  • Preparing for the authorisation of master trusts; 
  • Simplifying and providing greater clarity in the Regulator's communications;
  • More proactive and better targeted interventions in relation to funding of defined benefits schemes;
  • Driving up standards of stewardship, focussing on professional trustees and chairs, following up from its work on the 21st Century Trustee in 2016;
  • pension scams and data security.


Key dates

Corporate plan published on 21 April 2017. 


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Financial Advice Market Review (FAMR): progress report


Summary

HM Treasury and the Financial Conduct Authority (FCA) have issued a report on progress towards implementing the 28 recommendations in FAMR's final report issued last year. Points to note in relation to employers and workplace pension provision include:

  • The FCA and Pensions Regulator have issued a draft factsheet to set out what help employers and trustees can provide on financial matters without being subject to regulation.
  • A subgroup of the Financial Advice Working Group has created a guide for employers to support their employees' financial well-being. It is hoped that the guide will be fully available later in 2017.
  • Legislation to allow payment of a pensions advice allowance came into force on 6 April 2017.
  • Work on a pensions dashboard is underway, with a prototype of the dashboard having been created.


Key dates

Progress report issued on 11 April 2017.

FAMR final report published in March 2016.

FAMR launched 2015, in response to concerns that the market for financial advice was not working well for consumers.

A review of the outcomes from FAMR will be conducted in 2019.


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Thales UK Limited: construction of rules referring to RPI did not allow a switch to another index to be made


Summary

The High Court held that, on the construction of the references to RPI in the rules on pension increases in two sections of the scheme, the employer/trustees were not able to select an alternative index to RPI.

Background

The CARE section of the rules stated that if the compilation of the RPI is "materially changed", the principal employer, with the trustees' agreement, "will determine the nearest alternative index" to be applied.  In the TOPS section, the rules stated that if RPI is revised to a new base or "otherwise altered", subsequent variations would be on a basis determined by the trustees having regard to the alteration.

Judgment

The High Court held that although RPI had "materially changed" and "altered" as a result of the introduction of UKHPI, the "nearest alternative index" (for the CARE section) was still RPI; and for the TOPS section, the "basis determined by the Trustees having regard to the alteration" had to be RPI.


Key dates

31 March 2017


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Dutton v FDR Ltd: Court of Appeal prefers employer's interpretation of effect of amendment to pension increase rule


Summary

The Court of Appeal decided that the effect of amendments made to the pension increases rule in 1991 were that the pre 1991 element of a pension in any given year had to be increased by the greater of two separate retrospective calculations of cumulative increases since retirement, on the basis of the pre and post 1991 rule.

Background

A deed of amendment dated 20 June 1991 which changed annual pension increases from 3% to the lesser of 5%/RPI was valid prospectively but in breach of the proviso to the amendment power for benefits accrued for pensionable service prior to 20 June 1991.  The High Court decided that this meant that, as argued by the trustees, the pre-20 June 1991 element of pension had to be increased by the greater of 3% per annum and 5%/RPI on each anniversary of the start of the pension.

Judgment

The Court of Appeal upheld the employer's appeal and decided that pensions should be increased annually by the greater of the two retrospective calculations of cumulative increases since retirement, at the lesser of 5%/RPI and at 3%.

This interpretation was in accordance with Foster Wheeler v Hanley in that it did the least interference to the integrity of the scheme as modified.


Key dates

29 March 2017


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Member-borne commission: draft regulations


Summary

The DWP is consulting on draft regulations to ban member-borne commission payments in relation to contracts entered into before 6 April 2016. Payments which are made before 1 October 2017 will not be affected. However, ongoing commission payments (trail commission) under existing arrangements will be banned from 1 October 2017.

This is the second phase of the DWP's ban on member-borne commission - a ban on member-borne commission under new arrangements (or under existing arrangements which are varied or renewed after 6 April 2016) has been in force on 6 April 2016.

Power to restrict charges is included in the Pensions Act 2014, as amended by the Pension Schemes Act 2017.

The ban on member-borne commission in existing arrangements seeks to align with the Financial Conduct Authority (FCA) rules on banning commission in workplace schemes.

Application

In relation to new and existing contracts:

  • The ban on member-borne commission applies in relation to occupational pension schemes which provide money purchase benefits and which are being used as a qualifying scheme for auto-enrolment purposes in relation to at least one jobholder.
  • The ban applies to all members (whether active or deferred) who are, or were, employed by the employer for whom the scheme is being used as an auto-enrolment qualifying scheme.
  • For multi-employer schemes, the ban applies only to members who are current or former employees of an employer who is using the scheme as an auto-enrolment qualifying scheme.

Compliance and application of extended ban

  • Since 6 April 2016, trustees have had to confirm to service providers that a scheme they are managing is a money purchase auto-enrolment qualifying scheme within three months of the later of:
    • 6 April 2016;
    • the date the scheme becomes used as an auto-enrolment qualifying scheme; or
    • the date the service provider is appointed in relation to the scheme.
  • The extension of the ban to existing contracts will start to apply to a service provider six months from:
    • 1 October 2017 or, if later, 
    • the date it is notified by the trustees that the scheme is a money purchase scheme used for auto-enrolment. 
  • Service providers must give written confirmation to the trustees or managers that it is complying with the ban on member-borne commission:
    • In relation to contracts entered into on or after 6 April 2016, within one month of the ban applying; or
    • In relation to contracts entered into before 6 April 2016 and not subsequently varied or renewed, within six months of the ban applying in relation to those contracts.


Key dates

Consultation paper and draft regulations issued on 5 April 2107. Consultation closes on 31 May 2017.

The draft Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2017 expected in force on 1 October 2017. The 2017 regulations will amend the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (the "2015 Regulations").

The Pension Schemes Act 2017 received Royal Assent on 27 April 2017, with the amendment to para 6, sch 18 Pensions Act 2014 in force from this date.


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Pensions Regulator: guidance on DB investment


Summary

The Pensions Regulator has issued new investment guidance for trustees of defined benefit (DB) schemes.  Areas covered include the following.

DB investment governance

  • Where possible trustees, employers and their advisers should follow a collaborative approach and should communicate regularly about notable developments relevant to the scheme's investments.
  • Trustees should ensure that their investment governance structure allows effective decisions to be made in a timely manner.
  •  It is important that the terms of contractual arrangements and fund documents in place with investment managers and advisers are reviewed (including legal review) and negotiated as appropriate to ensure that the functions outsourced are being carried out with the best interests of beneficiaries in mind, and by people with the right expertise.
  •  Trustees may find it helpful to consider their investment decisions in order, from those most likely to impact future outcomes to the least.  This consideration may help trustees to decide which decisions to retain and which to delegate.

Investing to fund DB

  • The trustees' investment strategy is a key part of integrated risk management and should be considered alongside the employer covenant and funding level.  Where the employer covenant is expected to weaken, trustees should consider what action to take.
  • Trustees may find it helpful to develop and maintain a set of beliefs about how investment markets work and which factors lead to good investment outcomes.  Where trustees develop a set of investment beliefs, their investment strategy should then reflect those beliefs.
  • Where trustees believe a long-term factor (such as climate change or corporate governance) to be financially material, the factor should be taken into account in the trustees' investment decision making.
  • Trustees are encouraged to have a journey plan which is appropriate and proportionate to their scheme's circumstances.
  • The risk of future investment underperformance is particularly relevant for mature schemes, where the value of the assets held is expected to decline over time.
  • Trustees should take their scheme's need for cash into account and are encouraged to develop a cash flow management policy.
  • Trustees' use of models should be proportionate to the risks relevant to their scheme.  As a minimum, the Regulator expects trustees to complete some scenario or sensitivity analysis.

Matching DB assets

  • Trustees should understand the purpose of their matching assets and the risks they introduce, so they can adopt appropriate strategies to manage these risks.  Trustees should also understand the principal characteristics of the liabilities or cash flows they are trying to match.

DB growth assets

  • Trustees should understand the risks their growth assets are taking to seek return and should manage those risks appropriately, for example through diversification, hedging and governance arrangements.

Implement a DB investment strategy

  • Trustees should understand and manage the risks associated with implementing an investment strategy, including operational risk and risks to the security of their assets. 
  • Where relevant, trustees should understand their scheme's exposure to collateral movements and should develop and maintain a collateral management plan.
  • The Regulator considers it good practice for trustees to obtain legal and investment advice on their managers' fund documentation and, where appropriate, explore negotiating investor protections. 

Monitoring DB investments

  • Trustees should focus on and monitor the key drivers which change their scheme's funding level and investment performance and should take action when necessary.
  • The Regulator advises that a dashboard giving an overview of key monitoring statistics may help trustees with their monitoring of the scheme's investments.  The dashboard should be focussed on information which the trustees will find useful and on which they are able to take action if appropriate.

Key dates

Guidance issued on 30 March 2017.


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Pension Protection Fund: schemes without a substantive employer


Summary

Following consultation, the Pension Protection Fund (PPF) has issued a new rule for calculating the risk-based levy for schemes which:

  • have separated from their previous substantive employer or whose employer has undergone an insolvency event;
  • are running on and are seeking to pay benefits purely from scheme assets (or have established a new scheme to run on and pay benefits solely from scheme assets, perhaps with a modified benefit structure); and
  • have entered into an ongoing governance arrangement.

In drawing up its proposals, the PPF assumed that any arrangement for the separation of a scheme from its sponsoring employer would include appropriate controls over the scheme's operation and winding up in the event of poor investment performance. 

Having reviewed the consultation responses, the PPF has decided to apply the proposals set out in the February 2017 consultation for the 2017/2018 levy year.  The PPF has committed to consulting further on the methodology for calculating the levy before the finalisation of rules in 2018/2019.

Key points are as follows.

  • The PPF believes that its standard approach to calculating the levy, which includes assessment of the insolvency risk of the sponsoring employer, is inappropriate for schemes which have no substantive sponsor.
  • Failure of the scheme's investment strategy is the primary risk which PPF levy payers would face in relation to such schemes.
  • Calculation of the levy will be based on a commonly used pricing model for assessing put options, as the PPF views the risks of put options as most closely comparable to the risks posed by schemes without a substantive sponsor.
  • The amount of a scheme's levy will be subject to an underpin of the amount which would be due under the PFF's standard rules, assuming that the scheme was sponsored by the weakest possible employer.
  • Annual testing of the scheme's funding level, long-term sustainability and its ability to afford to pay the levy would be expected.  If the PPF's criteria are no longer met, the scheme must be wound up, triggering a PPF assessment period.
  • The proposed rules will apply to schemes that continue without a sponsoring employer as a result of arrangements put in place between 1 January 2017 and 31 March 2018.  The PPF has reserved the right to recalculate the levy in respect of a scheme within the scope of the new rule, where the scheme's levy for 2017/18 has previously been calculated on the standard basis.
  • Although schemes which entered into arrangements before 1 January 2017 are outside the scope of the new rules applicable for the 2017/2018 levy year, the PPF has not ruled out including such schemes within the rules at a later date.  The PPF has committed to further consultation, if it considers it appropriate to extend the scope of the rule.

Key dates

Consultation issued on 21 February 2017. 

Policy statement and new rule issued on 30 March 2017, to apply to 2017/2018 levy year.

Further consultation expected before finalising rules in 2018/2019.


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Baugniet v Capita Employee Benefits Limited : High Court upholds appeal on maladministration claim


Summary

The High Court upheld an appeal against the Pensions Ombudsman's determination of a complaint about the service credit a member was given when he transferred the value of a personal pension which had been built up during previous employment to the teachers' pension scheme. The case was sent back to the Ombudsman for reconsideration, to be dealt with as a complaint raising an allegation of negligence causing financial loss.

The Court also commented that the upper limit of compensation for maladministration not infringing a legal right and falling short of being very exceptional should be increased from £1,000 to £1,600.

Background

In May 2011, Scottish Widows (SW) provided transfer values. In August, the administrators of the teachers' pension scheme (TP) received the member's completed transfer-in form together with SW's transfer values. On 17 August, TP provided him with an incorrect estimated service credit. On 27 September 2011 the member sent TP a second transfer valuation from SW and on 30 September 2011 TP sent a new service credit estimate and transfer documentation.

On 26 October 2011 the member sent documentation to TP, but on the same day the government approved revised guidance on the discount rates used for calculating cash equivalent transfer values (CETVs), and the Government Actuary's Department advised that work on the operation of those values should be suspended with immediate effect. On 3 November 2011TP received the transfer funds from SW.

After the suspension was lifted, new factors for CETVs came into effect and the member was advised of his service credit which was significantly less generous than the credit that would have been awarded had the transfer been completed before 26 October 2011.He complained to the Pensions Ombudsman who agreed that TP's delays constituted maladministration and awarded £750 as compensation for non-financial injustice. However, the Ombudsman declined to award further compensation, having concluded that the member was partly responsible for the delays that had occurred: he became a teacher in 2010 so could have requested a transfer sooner and delayed posting of transfer documentation at the end of September 2011.

Judgment

The High Court upheld the member's appeal (except in relation to one claim about the right to informed consent).

The Ombudsman had failed to consider causation properly: whether it was more likely than not that "but for" TP's conduct, the member would have obtained the service credit he had asked for before 26 October 2011. Had this consideration been given to his complaint, the outcome would, in all probability, have been very different.

TP's conduct fell below the standard of reasonable skill and care to be expected of an ordinary pensions administrator and owed to the member in connection with his proposed transfer. On the evidence, it was highly probable, if not certain, that but for TP's delay, he would have obtained the full service credit before the government-imposed suspension came into effect.

The case was sent back to the Ombudsman for reconsideration, to be dealt with as a complaint raising an allegation of negligence causing financial loss.

The High Court commented that the upper limit of compensation for maladministration not infringing a legal right and falling short of being very exceptional had been set at £1,000 in a case decided in 1998. Having regard to inflation, the Ombudsman should consider increasing the limit to £1,600.


Key Dates

Date of Judgment: 20 March 2017


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Pensions Regulator: revised definition of professional trustee and draft monetary penalties policy


Summary

The Pensions Regulator has issued a consultation paper and draft policy on monetary penalties. The consultation also covers a revised description of a "professional trustee". In the Regulator's response to its 21st century trusteeship discussion paper it explained that it intends to make greater use of its powers, including its power to impose monetary penalties, where there have been wider governance and administration failings.

Description of "professional trustee"

The Regulator's proposed description of a professional trustee is "any person, whether or not incorporated, who:

  • acts as a trustee of the scheme in the course of the business of being a trustee; 
  • is an expert, or holds themselves out as being an expert, in trustee matters generally."

Trustees who receive financial compensation for their work (beyond reimbursement of expenses) will not automatically be considered professional trustees. The Regulator will be less likely to consider a remunerated trustee to be acting in the course of the business of being a trustee if:

  • they are or have been a member of the scheme (or a related scheme), or employed by a participating employer (or an employer in the same group);
  • they do not act, or offer to act, as a trustee in relation to any unrelated scheme.

The Regulator expects trustee boards have regular assessments of the value any remunerated trustees bring to the board.

Monetary penalties

The consultation paper sets out a proposed penalty framework with three band levels of increasing severity of penalties:

  • Band 1: up to £1,000 for individuals and to £10,000 in any other case;
  • Band 2: up to £2,500 for individuals and £25,000 in any other case;
  • Band 3: up to £5,000 for individuals and £50,000 in any other case.

The Regulator gives examples of breaches which might fall within each band:

  • Band 1: failing to submit the scheme return;
  • Band 2: failing to provide members with a statutory money purchase illustration (SMPI) within the required timeframe;
  • Band 3: reimbursing a trustee out of scheme assets in breach of legislative restrictions.

When deciding the level of penalty to apply, the Regulator will consider a number of factors, including whether the person is a professional trustee; acts in a professional capacity in relation to the scheme; or has expertise in an area relevant to the breach.

Where the Regulator does not consider an individual to be a professional trustee, it may, on a case by case basis, take into account any relevant expertise the individual has (or holds him/herself out as having) when deciding whether to impose a monetary penalty and the amount of such a penalty.


Key dates

Consultation paper and draft monetary penalties policy issued on 23 March 2017.

Consultation closes on 9 May 2017.


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GMP equalisation: response to consultation


Summary

The DWP has issued a response to its consultation in November 2016 on its proposed methodology for equalising guaranteed minimum pensions (GMPs) and on draft regulations amending various aspects of contracting-out legislation.  The DWP comments that some concerns raised by the pension industry in responses to the consultation require further consideration and it does not expect to take them forward before autumn 2017. 

Areas covered in the response include the following.

GMP equalisation

  • The DWP has emphasised that the methodology proposed in the consultation is not the only method by which schemes can equalise for the effect of GMPs.  It considers that it is for trustees to decide what, if any, action is needed to provide equal pension benefits. 
  • The DWP has rejected calls to provide a statutory safe harbour for schemes which use the proposed methodology.  It intends to consider other methodologies with the GMP working group.
  • The DWP will consider further concerns raised in the consultation process, including: treatment of GMPs which have been transferred or bought out; whether backdating payments more than six years is unnecessary; and whether interest should be added to back payments.
  •  Where data is unavailable, the DWP expects schemes to rely on HMRC records in the first instance.  It will consider suitable approaches with the working group for situations where HMRC data is inconclusive.
  • In relation to conversion of GMPs, the DWP agrees that the definition of conversion should include survivors.

 

Contributions equivalent premiums (CEPs)

  • The new regulations will give HMRC discretion to extend the notification and payment periods for CEPs, which would otherwise have fallen outside the current legislation.  The changes are intended to help schemes complete the GMP reconciliation process.
  • Updated online guidance for administrators is expected in spring 2017.

Amending rules of former contracted-out schemes

  • The DWP has decided that proposed amendments to reg 17 of the OPS (Schemes that were Contracted-out) (No 2) Regulations 2015/1677, which concerns alterations of rules in relation to section 9(2B) rights, need further consideration before taking forward.  Any proposed amendments would not be implemented before autumn 2017.

Circumstances in which inherited GMP is payable

  • The DWP has incorporated a minor change into the draft regulations, to clarify when a GMP is payable to a widow, widower or surviving civil partner.

Fixed rate revaluation of GMPs

  • The DWP has accepted GAD's recommendation of 3.5% as the new rate of fixed rate revaluation of GMPs for members leaving pensionable service after 5 April 2017. 

Review of Occupational and Stakeholder Pension Schemes (Miscellaneous Amendments) Regulations 2013/459

  •  Concerns had been raised that regulation 3 of these regulations could potentially result in more generous benefits being provided by a scheme after its rules had been altered than the scheme had originally provided under the reference scheme test.  The DWP intends to consider whether further changes to legislation are required.
  • The DWP believes that further consideration is needed of concerns relating to actuarial certification of amendments to contracted-out schemes.  Any changes to legislation would not be implemented before autumn 2017.

Transfers from former contracted-out schemes to schemes which have never been contracted-out

  • The DWP has acknowledged the pension industry's concerns about bulk transfers without consent to schemes which have never been contracted-out.  It hopes to consult on any proposed changes by autumn 2017.


Key dates

Consultation response issued on 13 March 2017.

The Occupational Pension Schemes and Social Security (Schemes that were Contracted-out and Graduated Retirement Benefit) (Miscellaneous Amendments) Regulations 2017/354 in force on 6 April 2017.

The DWP intends to notify interested parties in the pension industry when it is in a position to give a more definitive timeline for publishing guidance and, potentially, amending legislation, concerning GMP equalisation.


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Auto-enrolment: technical changes


Summary

The DWP has issued a response to consultation and finalised regulations to amend the auto-enrolment requirements for new employers who fall outside the auto-enrolment staging timetable.  The regulations make two changes:

  •  Where an employer first pays PAYE income in respect of any worker on or after 1 October 2017 and the auto-enrolment duties do not already apply to that employer, the trigger date for  the  auto-enrolment duties to apply will be the day the first worker starts employment. 
  • Post-staging employers will be able to postpone auto-enrolling their workers for up to three months by giving the workers a notice which meets prescribed requirements, including specifying the "deferral date" from which the auto-enrolment requirements will apply.


Key dates

Consultation paper and draft regulations issued 10 February 2017.

Consultation response issued on 10 March 2017.

The Employers' Duties (Implementation) (Amendment) Regulations 2017/347 in force on 1 April 2017.


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Pension Protection Fund: schemes without a substantive employer


Summary

The PPF has consulted on a new rule for calculating the risk-based levy for schemes which no longer have a substantive sponsor following an agreed restructuring of the sponsoring employer's pension arrangements.  In drawing up its proposals, the PPF assumes that any arrangement for the separation of a scheme from its sponsoring employer will include appropriate controls over the scheme's operation and winding up in the event of poor investment performance.   Key points are as follows:

·         The PPF believes that its standard approach to calculating the levy, which includes assessment of the insolvency risk of the sponsoring employer, is inappropriate for schemes which have no substantive sponsor.

·         Failure of the scheme's investment strategy is the primary risk which PPF levy payers would face in relation to such schemes.

·         Calculation of the levy will be based on a commonly used pricing model for assessing put options, as the PPF views the risks of put options as most closely comparable to the risks posed by schemes without a substantive sponsor.

·         The amount of a scheme's levy will be subject to an underpin of the amount which would be due under the PFF's standard rules, assuming that the scheme was sponsored by the weakest possible employer.

·         Annual testing of the scheme's funding level, long-term sustainability and its ability to afford to pay the levy would be expected.  If the PPF's criteria are no longer met, the scheme must be wound up, triggering a PPF assessment period.

·         The proposed rules will apply to schemes that continue without a sponsoring employer as a result of arrangements put in place between 1 January 2017 and 31 March 2018.  The PPF has reserved the right to recalculate the levy in respect of a scheme within the scope of the new rule, where the scheme's levy for 2017/18 has previously been calculated on the standard basis.

 


Key dates

Consultation issued on 21 February 2017. 

Consultation closed on 16 March 2017.


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Taxation of overseas pensions: Spring Budget and Finance (No 2) Bill 2016-2017


Summary

The Finance (No 2) Bill 2016-2017 has been issued, following consultation on draft legislation at the end of 2016. Proposals in relation to overseas pensions were announced in the 2016 Autumn Statement and draft legislation was issued at the end of last year. Key points include the following.

  • 100% of foreign pensions (instead of 90%) will be brought into tax for UK residents, to the same extent as benefits from domestic pension arrangements.
  • Lump paid to or in respect of UK residents from overseas arrangements will be subject to UK tax in the same way as payments from registered pension schemes.
  • Specialist pension arrangements (known as "section 615" schemes) for individuals employed abroad will be closed to new saving.
  • Lump sums payable to former UK-residents from funds in overseas arrangements which have benefitted from UK tax relief will remain subject to UK tax for 10 years after leaving the UK (increased from five years at present).
  • The eligibility criteria for a non-UK scheme to qualify as an overseas pension scheme for the purposes of UK tax will be updated, by removing the requirement for 70% of transferred funds to be used to provide the member with a lifetime income; and by bringing the pension age test in line with registered schemes.
  • The introduction of a 25% "overseas transfer charge" on transfers to qualifying recognised overseas schemes (QROPSs) is covered in a separate entry.


Key dates

Spring 2017 Budget delivered on 8 March 2017.

The Finance (No 2) Bill 2016-17 had its first reading in the House of Commons on 14 March 2017.

The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendments) Regulations 2017/398 in force on 6 April 2017.

HMRC Newsletter 85, which contains information on the tax changes to overseas pensions, was updated on 21 March 2017.


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Pension Protection Fund: long service cap


Summary

The DWP has issued a response to consultation and finalised regulations. The regulations and amendments to the Pensions Act 2004 will bring into force the increased PPF compensation cap for members with long service. Details include the following:

  • Members with more than 20 years' pensionable service will benefit from a 3% uplift in the compensation cap for each year above 20 years, to a maximum of double the cap. 
  • Individuals with long service who are already receiving PPF compensation will see their payments increased, with the uplift applied from 6 April 2017 to the cap which originally applied to that individual's compensation. 
  • The DWP has confirmed that schemes already in an assessment period on 6 April 2017 will not have to reflect the long service cap. If the scheme comes out of an assessment period and is wound up outside the PPF, the benefits provided also do not need to reflect the long service cap.
  • The regulations have been amended to make clear that where an individual has accrued pension entitlement in their own right, plus a pension credit in the same scheme, the two entitlements should be kept separate and separate compensation caps should apply when calculating PPF compensation.
  • The regulations have also been amended to clarify that the pensionable service is to be treated cumulatively where an individual has more than one period of pensionable service under the same scheme.

Money purchase lump sum discharge

  • The amount of money purchase benefits the PPF may discharge as a lump sum will be increased from £2,000 to £10,000, to align with changes to HMRC rules on lump sums.


Key dates

Consultation response issued on 13 March 2017.

Relevant provisions of the Pensions Act 2014, amending the Pensions Act 2004, in force on 6 April 2017.

The Pension Protection Fund (Modification) (Amendment) Regulations 2017/324 in force on 6 April 2017.

The Pensions Act 2014 (Pension Protection Fund: Increased Compensation Cap for Long Service) (Pension Compensation on Divorce) (Transitional Provision) Order 2017/301 in force on 6 April 2017.


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Tax charge on transfers to QROPS


Summary

The Spring Budget announced a new "overseas transfer charge" of 25% on transfers to qualifying recognised overseas schemes (QROPSs) where the transfer is requested on or after 9 March 2017. Key points are as follows.

  • The charge will apply unless one of the following applies.
    • The member is resident in the country where the QROPS is based.
    • The member is resident in the European Economic Area (EEA) and is transferring funds to a QROPS based in another EEA country.
    • The QROPS is an occupational pension scheme (or a public service pension scheme) and the member is employed by a participating employer in the scheme.
    • The QROPS is a pension scheme of an international organisation and the member is employed by the international organisation at that time.
  • To decide if the overseas transfer charge applies, schemes will have to ask the member for information about the transfer. If the member does not supply the information and the transfer is made, the scheme must automatically deduct the 25% charge.
  • If the member's circumstances change within five years of the transfer, the tax charge may become payable (or refundable).
  • From 6 April 2017, payments out of funds transferred to a QROPS will be subject to UK tax rules for five years after the transfer, regardless of where the member is resident.
  • The scheme administrator of the registered pension scheme and the scheme manager of the QROPS will be jointly and severally liable for payment of the charge.
  • An overseas scheme cannot be a QROPS unless the manager undertakes to HMRC that it will operate the new charge. Existing QROPSs must give the undertaking by 13 April 2017 or they will automatically cease to be recognised by HMRC.


Key dates

Spring 2017 Budget was delivered on 8 March 2017.

A policy paper and guidance on the overseas transfer charge; and a policy paper on the qualifying recognised overseas pension schemes regime were issued on 8 March 2017.

The Finance (No 2) Bill 2016-17 had its first reading in the House of Commons on 14 March 2017 and contains provisions in relation to transfers to a QROPS.

HMRC Newsletter 85 was updated on 21 March 2017.

The tax charge on transfers to QROPSs will apply to transfers requested on or after 9 March 2017.

The tax charge on payments from funds transferred from the UK to a QROPS in the previous five years will apply from 6 April 2017.


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Master trusts: Spring Budget


Summary

The government announced as part of the Spring Budget that it would amend the tax registration process for master trust schemes to align with the Pension Regulator's new authorisation and supervision regime.  HMRC indicated in Newsletter 85 that it will provide further updates on the implications for scheme administrators as work progresses. 


Key dates

Spring Budget delivered on 8 March 2017.

HMRC Newsletter 85 updated on 21 March 2017.


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Amending the definition of financial advice: consultation response


Summary

HM Treasury has issued a response to its consultation on changing the definition of financial advice. The consultation followed findings from the Financial Advice Market Review (FAMR), whose final report was issued in March 2016, that firms were limiting the amount of guidance they were giving consumers for fear of unintentionally straying into providing financial advice. The review also found that for consumers with relatively straightforward needs the cost of taking regulated advice could outweigh the benefits – and that these individuals in particular could benefit from high quality detailed guidance.

Following consultation, the government has decided to change the definition of financial advice as follows.

Unregulated firms

  • For unregulated firms, the definition of "advising on investments" in article 53 of the Regulated Activities Order (RAO) will continue to apply. As at present, an unregulated firm will be giving advice without proper authorisation if it "advises on investments" as set out in the RAO.

Regulated firms

  • The definition of financial advice for regulated firms will be changed to align with the EU definition in the Markets in Financial Instruments (MiFID) directive. Following the change, a regulated firm will only be giving advice when it makes a personal recommendation.
  • Regulated firms will be exempt from the authorisation requirements when carrying out activities under article 53, except where they are making a personal recommendation.
  • EU guidance on what constitutes a personal recommendation will apply to the new UK definition of financial advice for regulated firms. The consultation response points out that recommendations to hold a product (that is, not to sell an existing holding) will count as financial advice. In addition, a personal recommendation can be made implicitly - for example, by saying "people like you buy this product".

Key dates

Consultation paper issued in September 2017.

Consultation response issued 28 February 2017.

New definition expected to have effect from 3 January 2018. The FCA is expected to consult on and issue new guidance before the new definition comes into force.


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Knight v Sedgwick Noble Lowndes: presumption of regularity meant schemes had been equalised despite lack of evidence of formalities


Summary

A Scottish court applied a presumption that documents have been properly executed and found that retirement ages in the four schemes had been equalised and the Barber window closed.10 February 2017.

Background

The trustees and principal employer of a scheme to which four separate schemes had been transferred started proceedings against the defendants for negligence in relation to an alleged failure to advise on amendments to equalise.  The Court had to decide as a preliminary issue whether the Barber window had in fact been closed in each scheme.

Judgment

The court applied the presumption of regularity and ruled that normal retirement ages in the four schemes had been validly equalised at 65 in 1993/94.  There was sufficient evidence of compliance with the necessary formalities through surrounding documents such as member announcements and minutes of board of directors of the employer. 

As a result, no loss had arisen and the proceedings could be dismissed.


Key dates

10 February 2017


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Danvers v Revenue and Customs Commissioners: loan to individual who transferred pension fund to a SIPP was an unauthorised payment


Summary

The Upper Tribunal confirmed that a loan to a former pension scheme member who had transferred his pension to a SIPP on the understanding that the loan would be made was an authorised payment.

Background

The claimant, then aged 41, transferred about £35,000 from his pension schemes to a registered SIPP.  Shortly after, he signed a loan agreement under which he would receive an £18,000 loan from G Loans Ltd.  He agreed that the SIPP would invest in KJK preference shares and the loan would be repaid from his SIPP fund.

Judgment

The loan was an unauthorised payment under the Finance Act 2004 because it was a "payment" from the SIPP; it was made "in connection with an investment acquired using" assets held by the SIPP.  The investment in KJK was inextricably linked to the loan.


Key dates

10 January 2017


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Green paper on Defined Benefit (DB) pensions


Summary

The DWP has issued a green paper considering the future of defined benefit (DB) pension schemes. The paper explores concerns with the funding and regulation of DB schemes, although its main conclusion is that there is not a significant structural problem with the regulatory and legislative framework.

The paper considers evidence and suggested changes in relation to four broad areas:

  • Funding and investment;
  • Employer contributions and affordability;
  • Member protection; and
  • Consolidation of schemes.

Key points are as follows.

Funding and investment

  • In relation to discount rates for valuing liabilities, the paper concludes that it is not clear that the rates used are overly pessimistic. 
  • The paper asks whether shorter valuation cycles should be introduced for high risk schemes, with valuations required less often for schemes presenting low risk (and asks how low and high risk should be determined).
  • The DWP would like to explore possibilities for schemes to make more optimal investment decisions and to mitigate any barriers to using alternative asset classes.
  • Further research will be commissioned on the quality of trustees' investment decision making.

Employer contributions and affordability

  • The DWP is not persuaded that there is a general problem with affordability for the majority of sponsoring employers of DB schemes. It expects that the vast majority of members will receive their  benefits in full.
  • The DWP recognises that some schemes are "stressed", with employers paying very substantial deficit repair contributions which may not be sustainable long term. It comments that proposals put forward so far to relieve the pressure on stressed schemes and employers would have significant drawbacks and could raise moral hazard issues. It has asked for further feedback.
  • While the DWP does not believe that there is a case for across the board reductions in DB benefits, it may be appropriate to change arrangements for stressed schemes and sponsors to help preserve jobs while delivering a good deal for members. It comments that how stressed employers should be identified and in what circumstances easements should be allowed would be key.
  • The DWP considers that there may be a case for rationalising indexation of pensions in payment. However, it points out that proposals to make pension increases conditional on a measure of affordability would raise a moral hazard risk of employers having an incentive to allow funding levels to worsen.

Member protection

  • The DWP considers that a blanket requirement to obtain clearance in relation to any planned corporate actions would be disproportionate. It comments that if a regime of compulsory clearance were to be introduced, then a high threshold should be set for the circumstances in which clearance would be required. 
  • In relation to the Regulator's information-gathering powers, options considered include creating a duty for all parties responsible for a scheme to cooperate with the Regulator; and giving the Regulator power to interview relevant parties.
  • The government is interested in exploring the case for giving the Regulator stronger powers to safeguard members' benefits and has asked for views.

Consolidation of schemes

  • The DWP considers that there is a strong case for supporting greater voluntary consolidation. It is not convinced that compulsory consolidation would be a proportionate response. It has asked for comments on legal or regulatory barriers preventing meaningful consolidation.
  • The DWP has concluded that it would not be appropriate for government to design and run "superfund" consolidation vehicles. However, it has asked whether government should introduce structures or incentives to encourage the pension industry to develop new consolidation vehicles.
  • The paper suggests that a legislative requirement could be introduced for trustees to state explicitly what they are doing to consolidate and to reduce costs. Alongside this, the requirement for a chair's statement could be extended to apply to DB schemes and the DB sections of hybrid schemes.
  • The DWP has asked whether the rules for paying winding up lump sums (WULSs) should be widened, for example to allow schemes to partially wind up in order to pay WULSs.

Key Dates

Green paper, "Security and Sustainability in Defined Benefit Pension Schemes", published on 20 February 2017.

Consultation closes on 14 May 2017.


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Dr S: overstatement of pension quotation was not an augmentation of benefits or anti-franking


Summary

A member who received two overstated pension quotations was not entitled to payment of the overstated amount; there was no evidence that the company requested the benefits to be augmented or any act of anti-franking by the trustees.

Background

In 1984 and 1996, Dr S received quotations of his annual pension from the scheme. In 2014, he received a lower pension quotation at age 65 than stated previously and was informed that those figures had been overstated.

Dr S sought payment of the higher pension quoted; he argued that the 1984 letter and his response constituted a contract and the higher pension quoted in 1984 was a conscious act of anti-franking at a time when the fund was financially healthy. He also suggested that the option provided in the 1984 letter to purchase an annuity or to "buy out" his benefits (which was not previously allowed) was in fact the trustees augmenting his benefits.

Determination

The Ombudsman partially upheld the complaint. The criteria for a legal contract had not been met and there was no evidence to suggest the company requested Dr S's benefits to be augmented, as required by the scheme rules. The option to buy out the benefit with an insurance company is not an increase to benefits and in offering it to Dr S, the trustees were not offering to augment.

His argument that the scheme had been in a good financial position at the time of leaving was not enough to assume that an augmentation was awarded. The anti-franking legislation did not come into force until 1 January 1985, after Dr S had left membership of the scheme, meaning that the legislation change did not apply to him. The rules specify that the pension payable will not be lower than GMP, suggesting that franking will not be used. 


Key dates

Determination issued 5 January 2017.


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Pensions Advice Allowance: response to consultation


Summary

Final regulations have been made to allow schemes to pay a pension advice allowance from April 2017.  The final regulations follow a response to consultation, which reported strong support for the introduction of the allowance.  Detailed points are as follows.

General

  • Withdrawal of up to £500 from a pension pot to pay for retirement advice will be an authorised payment for tax purposes. 
  • The allowance may be drawn from defined contribution (DC) pension funds and from hybrid funds with a money purchase or cash balance element. 
  • The Government intends to review the level of the allowance as part of the three year review of the Financial Advice Market Review (FAMR). 

Retirement advice

  • "Retirement advice" is intended to include consideration of other factors, including the individual's other assets, which may be relevant to their retirement planning.  It is not intended to cover advice on non-retirement matters, such as inheritance tax planning.  The allowance may be used for implementation and administration costs associated with the advice given.
  • The allowance must be spent on advice which is "fully regulated".  The consultation response points out that advice on some types of occupational pension schemes is not fully regulated. 
  • The allowance must be paid direct from the pension arrangement to the adviser.

Lifetime limit

  • The allowance will be restricted to £500 per use.  An individual may access the allowance up to three times in their lifetime (using up to £500 each time), with no more than one use in any tax year.
  • There will be no age restriction on using the allowance. 

Taxation

  • The withdrawal from the individual's pension fund will not be subject to tax, regardless of the level of the individual's income in the tax year. 
  • Using the allowance will not be a benefit crystallisation event for lifetime allowance purposes, nor will it affect an individual's ability to take 25% of their remaining pension funds as a pension commencement lump sum.

Employer arranged pension advice

  • Employers will be able to arrange pension advice for their employees worth up to £500 free of tax.  Salary sacrifice will be allowed in relation to employer arranged advice.  The tax exemption will also apply if the employer reimburses an employee for pension advice arranged by the employee.
  • The pension advice allowance may be used alongside employer arranged advice.

Compliance

  • Providers and trustees will not have to report the numbers of times individuals use the allowance.  Instead, individuals will have to declare that they have not used the allowance more than three times in total.  The response comments that providers and trustees should consider making individuals aware that there could be a 55% tax charge if they are found to have misused the allowance.

Position of trustees

  • The regulations do not  require trustees or providers to allow deduction from members' pots to pay the allowance.  The response comments that it will be for providers and trustees to determine whom they do business with and that there is no barrier to offering members a tie-in arrangement with a third party adviser.  It adds that the Pensions Regulator is expected to release a fact sheet in early 2017 which will clarify that, generally, trustees will not be liable for advice given by a third party.
  • The government has rejected calls for a statutory override to enable scheme rules to be amended to provide for payment of the advice allowance, but says it will consider any new evidence at the three year review.

Key dates

Consultation response issued on 8 February 2017.  (Original consultation issued on 30 August 2016).

The Registered Pension Schemes (Authorised Payments) (Amendment) Regulations 2017/397 in force on 6 April 2017.

HMRC is expected to publish guidance on the pensions advice allowance shortly after it comes into force.


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Brewster: requirement for written nomination in addition to evidence of relationship for the payment of survivor's pension was marital status discrimination under the European Convention on Human Rights which was not justified


Summary

The Supreme Court allowed an appeal from the Northern Ireland Court of Appeal and held that a provision in the Local Government Pension Scheme that required an unmarried cohabitee to be nominated by the member before the death in order to be entitled to receive a survivor's pension was a breach of Article 14 of the European Convention on Human Rights (discrimination) as it was discriminatory on the basis of marital status. The nomination requirement did not apply to members who were married or in a civil partnership.

Background

The regulations of the Local Government Pension Scheme (LGPS) governing the payment of survivors' pensions to unmarried partners required the member and unmarried partner to satisfy various conditions (such as living together as man and wife or as if civil partners; financial dependence or interdependence) and also that the partner had to have been nominated by the member before the death. The requirement for nomination was absolute; there was no discretion for the trustees.  The conditions were clearly satisfied in this case (the parties were engaged, had lived together for 10 years and had bought a property together) but there had been no nomination so the LGPS refused to pay a survivor's pension.

The survivor brought a judicial review claim which was upheld by the High Court but this decision was overturned by the Northern Ireland Court of Appeal.  

Judgment

The appeal was upheld. The requirement for nomination should be disapplied and the applicant paid a survivor's pension.

The test for the purposes of Article 14 was whether the nomination requirement was "manifestly without reasonable foundation".  The requirement was unjustified. It added nothing to the independent process whereby the survivor had to show the necessary longstanding relationship/financial dependence. For married couples or civil partners, the wishes of the member did not have to be ascertained or stated, so there was no objective justification for that requirement to apply to unmarried partners.


Key dates

8 February 2017


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Auto-enrolment: exception for 2016 lifetime allowance protections


Summary

The exceptions from the auto-enrolment requirements are being extended to include individuals with fixed protection 2016 or individual protection 2016.  Where an employer has reasonable grounds to believe that a jobholder has one (or both) of these protections, the employer will have a discretion whether or not to auto-enrol the jobholder into a qualifying scheme.


Key dates

The Occupational and Personal Pension Schemes (Automatic Enrolment)(Amendment) Regulations 2017/79 in force on 6 March 2017.


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Mr Y: administrators required to compensate SIPP member pro rata for causing unnecessary delays in transfer


Summary

Scheme administrators required to pay compensation to a SIPP member who suffered actual financial loss owing to delays caused by the administrators in the transfer between SIPPs.

Background

Mr Y complained that delays caused by the two scheme administrators facilitating a transfer of his pension rights from the transferring scheme SIPP to the receiving scheme SIPP resulted in financial loss of nearly £14,000.

Once Mr Y's transfer request was submitted, the transferring administrator recorded the transfer on the electronic transfer system, ORIGO, as "in progress." The receiving administrator inquired due to a lack of response; the transferring administrator stated the transfer was not suited for the ORIGO system and only then sent the required documents to the receiving administrator to process manually. This first delay amounted to 23 working days.

From the date of receiving the forms for completion, the receiving administrator took 13 working days to send the discharge form and letter of authority to Mr Y.

By the time the transfer payment was sent to the receiving administrator, the delay caused Mr Y a financial loss of £13,917.

Determination

The Deputy Pensions Ombudsman (DPO) upheld the complaint; both administrators were responsible for the delay.

The DPO directed the two administrators to recalculate the compensation amount and pay it into Mr Y's receiving scheme SIPP. The compensation was split between the two pro rata. The transferring administrator was to pay more as they were solely responsible for the first delay and the receiving administrator responsible for the second delay. 


Key dates

Determination issued 16 December 2016.


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Mr E – member entitled to late payment of pension commencement lump sum despite unauthorised payment


Summary

Trustees were wrong to deny member Pension Commencement Lump Sum (PCLS) re-calculation on basis of costs and tax charges that would be incurred.  

Background

In 2012, Mr E requested early retirement and was given the options of a full annual pension or a PCLS with a reduced annual pension. Mr E chose the latter and his benefits were put into payment. In March 2014 an error was discovered that the link to final pensionable salary had not been maintained.

The administrator informed Mr E in May 2015 that his benefits quoted in 2012 had been understated; he would receive an equivalent higher pension and a back payment rather than an additional PCLS and reduced annual pension. Mr E requested what his entire pension benefits would have been had they been correctly calculated in 2012, in particular his PCLS. The administrator did not provide this, citing HMRC rules on timescales for paying PCLS, fees for the calculation and tax charges. The trustees argued that they should not pay for any personal tax liabilities applying to Mr E as this would be against pension legislation and inequitable to other scheme members and the ongoing funding position of the scheme.

Determination

The Pensions Ombudsman upheld the complaint. It was maladministration on the part of the trustees; there was a fundamental misunderstanding of the salary link dating back to 2005, which ultimately impacted the benefits of Mr E. It is unreasonable of the trustees to suggest that Mr E should pay a tax liability when the mistake was directly caused by the trustees' misinterpretation of the scheme rules. There is no evidence HMRC will impose a penal tax charge on the scheme or Mr E.

The Ombudsman directed the administrator to re-calculate the PCLS with interest that would have been payable to Mr E in December 2012. If Mr E opts to proceed on the basis of the re-calculated amount, the trustees were directed to pay any difference between this and the actual amount he received. The trustees were also required to pay any related charges, such as any unauthorised payment charges and the cost of carrying out the calculation. If Mr E chooses the additional PCLS, the administrator must reach an agreement with him regarding repayment of overpayments since May 2015.


Key Dates

Determination issued 23 November 2016.


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Mrs E – trustees not required to pay trivial commutation lump sum to estate of the recipient of spouse's pension


Summary

The estate of a deceased member was not entitled to receive a trivial commutation lump sum benefit, as the member had not signed the option provided by the trustees before her death.

Background 

In September 2015, Mrs E received a letter from the trustees with an option to take a trivial commutation lump sum benefit or to continue receiving her existing spouse's pension. She died shortly after and the payments of the spouse's pension ceased. The estate sought payment of the lump sum, claiming that, had she been capable, she would have signed the option to take it. The estate argued that the trustees had not considered the member's unexpected death and that had she lived beyond her diagnosis, power of attorney would have been sought and the lump sum payment would have been signed for.

Determination

The Ombudsman dismissed the complaint; without Mrs E's signature confirming her decision, the trustees, the estate nor the Ombudsman were cable of determining what she would have chosen prior to her diagnosis. Where there is no power of attorney in place and instructions from a member do not exist, the trustees should not be requested to make assumptions on behalf of the member. It was not a death benefit and there was no obligation on the trustees to pay it to the estate.


Key dates

Determination issued 30 November 2016.


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Pension Protection Fund (PPF): compensation cap


Summary

The PPF compensation cap for 2017/18 has been set at £38,505.61, increased from £37,420.42 for 2016/17.


Key dates

The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2017/50 in force (in relation to the compensation cap) on 1 April 2017.


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Pension Protection Fund: updated FAQs for 2017/18 levy


Summary

The Pension Protection Fund ("PPF") has issued some FAQs in relation to the 2017/18 risk-based levy. Points to note include the following:

  • Where revised (originally known as "restated") company accounts are produced, Experian will recalculate the insolvency score if the accounts are filed before the end of February 2017. If the revised accounts are filed on or after 1 March 2017, Experian and the PPF have discretion over whether to recalculate scores.
  • Non-sterling accounts will be converted to sterling as at the balance sheet date of the most recent accounts. 
  • Experian will accept accounts not published in English, if they are accompanied by a translation and auditor's certificate confirming that the translation is accurate. 
  • Before submitting an accounting standard change certificate, companies should test whether the requested adjustment will actually impact the Mean Score or Levy Band, as analysis suggests that most adjustments will not.

Key dates

22 December and 16 January 2017 – updated FAQs issued

28 February 2017 – deadline for submission of revised accounts for guaranteed recalculation of score

31 March 2017 – finalised levy determination is due


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European reform: revised IORP II Directive formally adopted


Summary

On 8 December 2016, the European Council formally adopted the revised Directive  on Institutions for Occupational Retirement Provision (IORPs) which regulates occupational pension schemes across the EU with 100 or more members. The revision of Directive 2003/41/EC aims to reinforce the role of IORPs as institutional investors and to give better protection for scheme members and beneficiaries. 

Solvency rules

·         The review was originally intended to bring the IORP Directive more closely in line with the insurance sector directive, Solvency II, through the introduction of scheme solvency capital requirements. However, following representations from the UK pension industry and others, it was decided that developing Union level quantitative solvency requirements would not be practical (see recital 77).

Cross-border schemes

·         The requirement for cross-border schemes to be fully funded has been retained. Where full funding is not met, the regulatory authorities of the home Member State must require the IORP to immediately draw up appropriate measures and implement them without delay in a way that members and beneficiaries are "adequately protected" (article 14(3)). 

Cross-border transfers

·         The provisions governing cross-border transfers have not changed since the March 2014 version of the draft Directive (when they were largely rewritten to clarify the processes involved and the authorisations required) (article 12).

Governance

·         The list of key functions which IORPs must have in place (risk management, internal audit and, where applicable, actuarial) was expanded in the March 2014 version of the draft Directive to include internal control and compliance. The internal control function must include at least administrative and accounting procedures, an internal control framework, and appropriate reporting arrangements. (See articles 20 and 21.)

·         Schemes are required to have a risk management function in a manner appropriate to the scheme's size and internal organisation, as well as to the nature, scale and complexity of its activities (article 25).

·         IORPs will be allowed to outsource key functions or other activities to third parties, in accordance with requirements set out in the Directive (article 31).

·         Schemes must be effectively run by at least two persons.  However, Member States may allow a scheme to be run by only one person, on the basis of a reasoned assessment by national authorities (article 21(6)).

·         A scheme's written policies on key functions to be reviewed at least every three years (article 21(3)).

·         Schemes will be required to prepare a risk evaluation at least every three years, or without delay following any change in the scheme's risk profile (article 28). 

·         The requirements for what the risk evaluation must cover now include assessments of the effectiveness of key functions.

Fit and proper person requirement 

·         Persons who effectively run a scheme or carry out key functions must be of good repute and integrity ("proper") and must be "fit" meaning, for individuals who effectively run the scheme, that their "qualifications, knowledge and experience are collectively adequate to enable them to ensure a sound and prudent management of the [scheme]" (article 22). 

Remuneration policy

·         Schemes must be required to have a remuneration policy to cover those who effectively run the scheme, holders of key functions and also "other categories of staff whose professional activities have a material impact on the [scheme's] risk profile" (article 23).

·         As in the March 2014 version of the Draft Directive, the public disclosure of the remuneration policy is no longer a requirement, although it must be disclosed to members and beneficiaries.

Disclosure: pension benefit statements

·         IORPs will be required to give every member a "pension benefit statement" containing key information at least annually.  The earlier requirement that the new pension benefit statement should be printable on no more than two A4 sheets of paper has been replaced with a requirement that the statement should be a "concise document" (article 39).

·         The statements may be provided electronically but must be provided in hard copy on request.

·         Key information which must be provided includes information on:

o    full or partial guarantees under the scheme and, if relevant, where further information can be found;

o    pension benefit projections including, where projections are based on economic scenarios, a best estimate scenario and an unfavourable scenario;

o    accrued entitlements or accumulated capital;

o    (where applicable) a breakdown of the costs deducted by the IORP in the previous 12 months;

o    for defined benefit schemes, information on the funding level of the scheme as a whole.


Key dates

White Paper "An Agenda for Adequate, Safe and Sustainable Pensions" published 16 February 2012.

Draft Technical Specifications QIS of EIOPA's Advice on the Review of the IORP Directive: consultation paper issued 15 June 2012.

EBA, EIOPA and ESMA's Joint Consultation Paper on its proposed response to the European Commission's Call for Advice on the Fundamental Review of the Financial Conglomerates Directive, issued 14 May 2012.

Quantitative Impact Study launched 16 October 2012.  Memo from European Commission issued 23 May 2013.

Proposal to revise the IORP Directive (covering occupational pension schemes) issued 27 March 2014.

Revised version of proposed Directive issued on 17 September 2014.

A draft report on the proposal for a revised IORP II Directive was issued in July 2015.

The Council of the EU approved the revised IORP II Directive on 30 June 2016.

On 24 November 2016 the European Parliament adopted its first-reading position on the proposal for a Directive of the EP and of the Council on the activities and supervision of institutions for occupational retirement provision (recast) (IORP II).

On 8 December 2016 the Directive was formally adopted by the Council, without further amendments. The Directive was published in the Official Journal on 23 December 2016 and will enter into force 20 days later.

Member States will have until 13 January 2019 to transpose it into national law.


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