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Pensions Matter at Pinsent Masons: November 2018

Monthly update from the Pinsent Masons Pensions team.

Select a topic to read more:

High Court: trustees must address GMP inequality
Budget 2018
Supreme Court: Barnado's cannot shift to CPI uprating
Government consults on CDC approach
Auto-enrolment – Regulator updates guidance on inducements
High Court confirms SIPP providers' due diligence duty
Regulator may intervene even if there is no disagreement between employer and trustees
More detail on expanded governance duties expected in 2019
PPF and FAS payments to rise following European Court ruling
New FCA rules on DB to DC transfer advice
FCA seeks views on climate change actions
And finally...

 


 

High Court: trustees must address GMP inequality

Lloyds Banking Group Pensions Trustees Ltd v Lloyds Bank plc & others (High Court)

The High Court has confirmed that pension scheme trustees have a legal duty to address inequality arising from guaranteed minimum pensions (GMPs).  GMPs are benefits provided to members of final salary schemes who contracted out of the state earnings-related pension scheme between April 1978 and April 1997.  Men and women do not receive equal GMPs because the legislation which governs these benefits provides for a payment age of 60 for women, and 65 for men.  Now, the High Court has confirmed that GMPs must be equalised because European law requires equal pension benefits for men and women in respect of service after 17 May 1990.  The court decided that employers and trustees have some flexibility in choosing how to address GMP inequality (although certain methods that replace benefits with others of actuarially equivalent value are unlawful).  Winding up does not exempt schemes from equalising GMPs, and a scheme's own documentation will determine the time limit for compensating members for any underpayments.

Comment:  There is no need for trustees to rush to address this inequality.  Aside from the possibility of an appeal, the issue has existed for a long time and will not be straightforward or cheap to remedy.  The government is likely to revise its proposed methodology for GMP equalisation in the light of this judgment. In the meantime, however, trustees need to decide on their policies on transfer and commutation payments, and start planning for implementation.

Budget 2018

There were no major tax changes affecting pensions in this year's Budget.  However, the government published its response to the consultation on pensions cold calling, and has tweaked the wording of the ban to make it clear that it applies to individual consumers and not to businesses.  The government also plans to make CPIH its headline measure of inflation over time.  It will reduce the use of RPI where practicable – but any changes are likely to take place over an extended period.  The lifetime allowance for pension savings will increase in line with CPI for 2019/20, rising to £1,055,000.  Also, the government will consult later this year on the detailed design for pensions dashboards; there is extra funding in 2019/20 for the dashboard project.   

There were some new measures announced under the government's "patient capital" programme, which aims to reduce barriers to pension scheme investment in innovative businesses.  We can expect a Financial Conduct Authority (FCA) discussion paper later this year and the British Business Bank will work with pension funds to explore options for pooled investment in patient capital.  This winter, the government also plans to set out its policy on increasing pension participation among the self-employed.

Supreme Court: Barnado's cannot shift to CPI uprating

Barnado's v Buckinghamshire and others (Supreme Court)

The Supreme Court has confirmed that the trustees of the Barnardo's pension scheme are not permitted to change the rate of inflation used to uprate benefits.  Under the Barnado's scheme rules, indexation and revaluation should take place in line with RPI, "or any replacement adopted by the trustees without prejudicing [Revenue] approval".  Both the High Court and the Court of Appeal held that the scheme rules prevented the trustees switching to CPI. As long as RPI remained an officially published index, there was no "replacement" of the index.  This decision will be of interest to other schemes contemplating a shift to CPI indexation and revaluation – in particular the BT pension scheme, which is awaiting the result of an appeal on a similar point.

Government consults on CDC approach

The government is seeking views on its approach to developing collective defined contribution (CDC) schemes.  CDC schemes pool contributions which are invested with a view to providing a targeted benefit level (which may be adjusted if necessary).  Supporters believe they allow savers to share longevity risk and reap the benefits of scale, with the potential to provide savings and retirement income from one package – although there are potential problems (including fluctuating benefit levels and the challenge of ensuring inter-generational fairness).  For now, the government plans to adopt legislation to facilitate the CDC design broadly as proposed by Royal Mail, which has been lobbying for the government to make CDC possible.  The government wants to learn from experience before making provision for other types of pooled schemes.

The government wants CDC schemes to be occupational trust-based schemes run by single or associated employers (probably with a minimum membership size) and authorised by the Pensions Regulator.  Unlike existing DC schemes, they would need a scheme actuary and annual actuarial valuations to determine whether benefit levels should be adjusted.  The government wants to ensure scheme design is robust enough to withstand changes such as closure or reduction in numbers of active members.  It is still considering requirements in respect of winding up, including how to manage the risks associated with employer insolvency.  The consultation closes on 16 January 2019, and the government says it is committed to bringing forward legislation "as soon as Parliamentary time allows".  Much of the detail would be contained in regulations, with the flexibility to adjust provisions as CDC schemes bed in.

Auto-enrolment – Regulator updates guidance on inducements

The Pensions Regulator has updated its auto-enrolment guidance to give more detail about how to avoid falling foul of restrictions on inducements.  Examples make it clear, for instance, that employers may offer the option of contributions at a lower rate in a non-qualifying scheme.  The employer must still demonstrate that its sole or main purpose is not to induce individuals to leave the auto-enrolment qualifying scheme.  

High Court confirms SIPP providers' due diligence duty

The High Court has confirmed that self-invested personal pension (SIPP) providers accepting business on an execution-only basis must still consider the client outcome in line with FCA client protection rules.  SIPP providers Berkeley Burke lost an application for judicial review after the Financial Ombudsman Service decided they had failed to act with due skill, care and diligence when accepting a member's request to invest in an unregulated scheme which turned out to be a scam.  Although the SIPP provider had no duty to give the member advice or consider the suitability of the investment for him, it should have concluded that the investment was not acceptable for the SIPP. 

Regulator may intervene even if there is no disagreement between employer and trustees

The Pensions Regulator has published a report into its regulatory intervention in relation to the Martin Currie group pension scheme.  The Regulator was concerned about the off-shoring of the scheme's employer and the flexible apportionment arrangement (FAA) agreed with the trustees.  Although there were no immediate concerns about the employer's solvency, the Regulator doubted that the Pension Protection Fund (PPF) would recognise the offshore employer, potentially jeopardising the scheme's eligibility for PPF protection. The Regulator was also concerned about the way some trustees managed their personal conflicts, and insisted that an independent professional trustee was appointed.  In a second FAA, the scheme was moved back to the UK and enhanced protections were put in place, and the Regulator granted clearance.  This case highlights that even where employers and trustees reach an agreement, the Regulator may still intervene.  The Regulator encourages companies and trustees to engage with it when there is the potential for any commercial activity to have a materially detrimental impact on the scheme.  It believes this will save employer time and costs in the long run.

More detail on expanded governance duties expected in 2019

New regulations which come into force on 13 January 2019 impose a duty on trustees to establish an effective system of governance, including internal controls.  The law currently refers just to internal controls, so the new duty is slightly wider but only requires trustees to adopt an approach which is proportionate to the size and nature of their scheme.  The regulations also set out broadly what will be included in an updated code of practice which is expected to be published by the Pensions Regulator in 2019.  These changes reflect governance requirements in the European IORP II Directive which needs to be transposed into UK law by 13 January (when the UK will still be a member of the EU).  According to a memorandum accompanying the new regulations, trustees will be expected to carry out and document a review of their governance systems by the end of the next scheme year following publication of the code of practice (or in line with their existing review cycle).  In practice the new EU requirements are aligned with the current position in the UK so many schemes will need to tweak existing processes rather than make significant changes.

Changes to the regime for cross-border transfers will also take effect in January.  Regulatory approval will be required prior to cross-border transfers and there are new duties to obtain member consent.

PPF and FAS payments to rise following European Court ruling

The PPF is writing to members who are subject to the PPF compensation cap and who may be affected by a recent European Court ruling that individuals are entitled to receive at least 50% of their accrued pension in the event of employer insolvency.  The PPF is adopting an interim process to uplift payments in advance of legislative changes.  Where compensation is less than 50%, the PPF will increase its compensation until it is at least 50% of the member's expected pension.  Members of insolvent schemes receiving Financial Assistance Scheme (FAS) assistance can also expect payments to rise.  The PPF believes the number of PPF and FAS members affected by the Hampshire ruling will be very small, as the vast majority already receive more than 50% of their accrued pension.

New FCA rules on DB to DC transfer advice

The FCA has confirmed final rules and guidance governing advice on DB to DC transfers.  The new rules specify a specific qualification for pensions transfer specialists providing advice on investments.  Also, advisers must consider clients' attitudes to, and understanding of, the risks of giving up safeguarded benefits (where there is some form of guarantee or promise) for flexible benefits.  However, following consultation, the FCA has decided to carry out further analysis before changing the rules on contingent charging (where a fee for advice is only paid when a transfer goes ahead).  The FCA does not believe evidence shows contingent charging is the main driver of poor outcomes for savers.

FCA seeks views on climate change actions

The FCA is seeking views on its planned response to climate change risks.  As well as requiring Independent Governance Committees  to report on their climate change policies (announced earlier this year), the FCA also wants to boost innovation in specialist green products and services and provide more support to businesses working in this field.  The FCA intends to consult on guidance to those issuing securities about how the current regulatory regime might be interpreted to apply to climate change risks.  Also, the FCA is considering a new requirement for financial services firms to report publicly on how they manage climate risks to their customers and operations.  The consultation ends on 31 January 2019.

And finally…

To commemorate the centenary of the end of World War One, a pensioner has walked and cycled 350 miles to lay poppies at 100 war memorials.  Eric Riddle travelled all around Hertfordshire to honour his grandfather Private James Riddle, who died after the Battle of Passchendaele aged 27, leaving a one-year-old son (Eric's father).  Eric has learnt about many personal histories on his travels, including the story of Newsells village which lost nearly all its men and later ceased to exist.  Eric's journey, which ended at Ware on Armistice Day 2018, has raised over £5,000 for the Royal British Legion.

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