Trustee Quarterly Update - 1 September 2018

Closed scheme with retained final salary link is "frozen scheme" under employer debt regulations

In the case of G4S Plc v G4S Trustees Ltd, the High Court has held that a scheme that has been closed to future benefit accrual, but in which the value of accrued benefits continues to be linked to salary after the closure date, is a "frozen scheme" for the purposes of the employer debt regulations, which provide that a debt can be triggered on an employer that ceases to employ active members at a time when other employers continue to do so.  The court held that members who stopped accruing additional periods of pensionable service on closure, but whose accrued benefits continued to be uplifted in line with future salary increases were not "active members" for the purposes of the legislation.

Our thoughts

This is an important judgment for many closed schemes, as restrictions in a scheme's amendment power can often result in accrued benefits having to be increased in line with future salary increases notwithstanding the scheme's closure to future benefit accrual.  Had the judgment gone the other way, many such schemes might have found that significant debts had been triggered inadvertently on an employer ceasing to employ members who had been regarded as deferred rather than active members.

Court of Appeal holds trustees could not unilaterally amend scheme to increase pensions

In British Airways plc v Airways Pension Scheme Trustee Ltd, the Court of Appeal (in a 2:1 majority judgment) has allowed BA's appeal, holding that the trustees were not entitled to use the scheme's amendment power to increase pensions against the employer's wishes. For more information, please click here.

Government consults on amending law in relation to statement of investment principles

On 18 June 2018 the Government published its final response to the Law Commission's report on pension funds and social investment together with a consultation on changing the law in relation to statements of investment principles.  Currently, the law requires a statement of investment principles to include details of the extent, if at all, to which social, environmental or ethical considerations are taken into account in the scheme's investment policy.  The Law Commission report considered that this is confusing as the law conflates such factors being taken into account (a) because of their potential impact on financial performance, and (b) for non-financial reasons such as ethical concerns. The Law Commission recommended a change to the law to require the statement to address these two issues separately. For more information, please click here.

Ombudsman increases awards limit for non-financial injustice 

The Pensions Ombudsman's annual report for 2017/18 says that the Ombudsman has decided to increase the normal limit for awards for non-financial injustice to £2000.  This means that the range for awards for non-financial injustice is now £500 to £2000, save that the Ombudsman may award more in exceptional circumstances.  The report also says, "We are drafting guidance outlining fixed levels of awards (including those falling within the £500 to £2,000 range) and in which circumstances these are likely to be made.  However, every case will be considered individually on its facts."

Ombudsman corporate plan encourages one stage IDRPs

On 20 August 2018, the Pensions Ombudsman published his corporate plan for 2018-2021.  This includes a commitment to "communicating with a view to influencing industry to adopt a one stage IDRP" and considering earlier intervention in disputes, "For example, reaching out to providers and schemes to either avoid complaints arising in the first place or to assist in resolution."

Trustees ordered to give reasons for death benefit decision

In his determination in the case of Dr G (PO-18953), the Ombudsman has ordered a scheme's administrator to give reasons for its decision regarding the distribution of death benefits held on discretionary trusts. For more information, please click here.

Ombudsman upholds complaint against scheme for allowing transfer out without adequate checks

In the case of Mr N (PO-12763) the Ombudsman has upheld a complaint against Northumbria Police Authority for not undertaking adequate checks before processing a member's request to transfer out of the Police Pension Scheme. The member said that it was only following the transfer that he realised with concern that he had signed up to a high risk investment as a "sophisticated investor".  The Ombudsman has ordered the Authority to reinstate the member's accrued benefits in the Police Pension Scheme or provide equivalent benefits, though on the basis that the Authority will be entitled to recover from the member any amount which the trustee of the receiving scheme recovers in respect of the member's benefit. For more information, please click here.

Ombudsman holds trustees should have done more to explain options to terminally ill member

In the case of the Estate of the late Mr R (PO-17639), the Ombudsman has held that scheme trustees should have done more to explain benefit options to a terminally ill member and has ordered the trustees to increase the widow's pension to the amount which the widow would have received had the member brought his pension into payment before death, and to pay the member's estate the lump sum which the member would have received had he brought benefits into payment before death. For more information, please click here.

Ombudsman holds expression of wish form invalid and substitutes own decision on death benefits

In the case of Miss A (PO-12332), the Ombudsman has held an expression of wish form to be invalid and taken the unusual step of substituting his own decision for that made by the trustees.  The Ombudsman also ordered the scheme's administrator to pay three beneficiaries £2000 each for the distress and inconvenience caused by its maladministration. For more information, please click here.

Ombudsman upholds trustee's approach to reducing transfer values

In the case of Mr N (PO-18320) the Ombudsman has upheld the trustee's approach to applying reductions to cash equivalent transfer values where the scheme was underfunded.  The trustee's approach was to calculate a transfer value based on the benefits the member would receive if the scheme were to go into the PPF and then to apply a proportionate reduction to the transfer value calculated on that basis (the same proportion being applied in all cases).  The Ombudsman held that there was no maladministration in the trustee's approach which was motivated by, and consistent with, the trustee's duty to protect the security position of remaining members and to treat members equitably.

Manage and Register Pension Schemes service

On 4 June 2018, HMRC published a newsletter detailing progress on its Manage and Register Pension Schemes service.  The newsletter states that the service is already in operation for the purposes of registering new schemes.  Ultimately, HMRC intends to migrate existing schemes using the current Pension Schemes Online on to the new service and for the service to be used for making reports to HMRC.

End of contracting-out – HMRC publishes Countdown Bulletin 36

On 14 August 2018, HMRC published its Countdown Bulletin 36 on administrative issues arising from the end of contracting-out.  The bulletin says that the deadline for submitting Scheme Reconciliation Service queries which require clerical action is 31 October 2018 and that HMRC will respond to all queries received by that date.

Consultation on valuation assumptions

The PPF has published a consultation on the assumptions to be used for valuations under section 143 and section 179 of the Pensions Act 2004.  The changes relate to mortality assumptions and to the discount rates for certain tranches of benefit.  The PPF proposes to introduce the changes for valuations with an effective date on or after 1 November 2018.  The consultation, which closes on 21 September 2018, can be found on the Document Library section of the PPF website.

Requirement to re-execute contingent asset documentation where fixed cap applies

For the levy year 2019/20, the PPF intends that schemes which benefit from a "Type A" contingent asset (guarantee) or "Type B" contingent asset (security over cash, real estate or securities) and wish to continue to do so will need to provide a fresh certification based on the new standard form documentation (published in January 2018) if the current contingent asset is subject to a fixed cap.  The deadline for providing the necessary documentation to the PPF will be 5pm on 29 March 2019.  The PPF plans to address this point when it publishes its levy documentation for the 2019/20 levy year.  However, we understand that in advance of that, the PPF is sending an e-mail flagging the point to all schemes that certified a Type A or Type B contingent asset for levy year 2017/18.

Updated guidance on chair's statements 

On 27 June 2018 the Pensions Regulator published an updated version of "A quick guide to the chair's statement".  The obligation to produce a chair's statement broadly applies to occupational schemes that provide money purchase benefits (other than those where the only money purchase benefits are from AVCs).  The guide includes a checklist for trustees, including notes on the Regulator's expectations and common misunderstandings and omissions.

The Regulator is legally obliged to fine trustees who fail to produce a chair's statement in accordance with statutory requirements.  However the Regulator's quarterly compliance and enforcement bulletin for April to June 2018 says that the Regulator recently carried out a review its mandatory fines issued in response to non-compliant chair's statements and revoked 74 penalties in the quarter as a result.  The Regulator says it did this "due to a time delay on our part in explaining to schemes why their statement was not compliant with the regulations".

Trustee fined £25,000 for failure to submit actuarial valuations

The Pensions Regulator has fined a corporate trustee £25,000 for failure to comply with its duties to submit actuarial valuations to the Pensions Regulator in accordance with the statutory deadlines.  An actuarial valuation as at 6 April 2012 had been due for submission by 6 July 2013, but still remained outstanding as at 14 May 2018, the date when the Regulator's Determinations Panel decided to impose the penalty.  By this point the due date for the scheme's 2015 valuation had also passed without a valuation being submitted.  As at 31 March 2015, the scheme had 141 members.  The scheme's trustee had informed the Regulator in 2012 that the scheme was imminently expected to merge with a much larger scheme.  However, the Regulator had made clear that it did not regard this as an adequate reason not to produce an actuarial valuation, and at the date of the Determination Panel's decision, no merger had occurred.

Our thoughts

The determination notice in this case states that the scheme's actuarial valuations for 2006 and 2009 had also been submitted late, as well as scheme accounts in 2010 and the scheme return in 2016.  Perhaps what is most striking about this case is the time it took the Regulator to impose the penalty – almost 5 years after the 2012 valuation was due for submission.  Since the Regulator was criticised by a parliamentary select committee in the wake of BHS's insolvency for being slow to act, the Regulator has been keen to show that it is a quicker, tougher Regulator.  In the future, we consider it highly unlikely that a late actuarial valuation will escape regulatory action for so long.

New guides on managing conflicts and meetings and decision-making

As part of its "21st Century Trusteeship" initiative to raise the standards of scheme governance, the Regulator has published guides on managing conflicts of interest and on meetings and decision-making to clarify the Regulator's expectations in these areas.  The guidance on meetings and decision-making says that meeting agendas should be circulated at least two weeks before the meeting and that trustees should arrive prepared to discuss each item on the agenda.  The guidance says, "Trustee boards should meet often enough to maintain effective oversight and control, which in most cases will be at least quarterly".

Master trust developments

We have previously reported on the introduction of legislation which will prohibit the operation of a master trust unless the scheme is authorised by the Pensions Regulator.  Broadly, a master trust scheme is an occupational pension scheme which provides money purchase benefits and is intended for use by two or more unconnected employers.  On 2 July 2018, the Pensions Regulator published its response to its consultation on its code of practice "Authorisation and supervision of master trusts" and laid the final code before Parliament.

The Regulator has also consulted on its draft policy for the supervision of master trusts.

Government proposes much tougher powers for Pensions Regulator

In a consultation published on 26 June 2018, the Government has proposed a major overhaul of the Pensions Regulator's powers.  The proposed changes could have a significant impact, particularly on the way in which pensions are dealt with on corporate transactions.  The consultation, which has now closed, fleshes out the proposals contained in the White Paper on Defined Benefit Pension Schemes published in March.  For more detail, see our e-bulletin.

Competition and Markets Authority proposals for pension investment reforms

The Competition and Markets Authority (CMA) has published proposals that pension scheme trustees selecting a first fiduciary manager should be required to run a competitive tender, and that trustees who have already appointed a fiduciary manager without a competitive tender should be required to put the role out to tender within the first five years.  A particular concern of the CMA is that around half of pension schemes choose the same provider for fiduciary management that they use for investment consultancy, and that this stems in part from investment consultancies steering trustees in favour of their own firm's fiduciary manager.  This puts firms that offer fiduciary management but not investment consultancy at a competitive disadvantage.

At these stage, what the CMA has announced are proposals on which it has sought feedback before issuing its final report by 13 March 2019.

Excepted group life schemes: proposals to amend beneficiary definition

On 6 July 2018, the government announced plans to amend the law in relation to excepted group life schemes (EGLSs) so that benefits can be paid to a wider class of persons without the premiums being taxable as a benefit in kind. An EGLS is a type of life assurance scheme which is not a registered pension scheme, but which benefits from favourable tax treatment in some respects.  Because an EGLS is not a registered scheme, benefits paid from it do not count towards a member's lifetime allowance. 

Under existing legislation, premiums under an EGLS will not be taxable as a benefit in kind if a death benefit will be paid to "a member of the employee's family or household".  The definition of "family" for this purpose is quite narrow.  The proposed changes would allow schemes to provide that a benefit may be paid to any individual (other than the deceased employee's estate) or to a charity without the premiums being taxable as a benefit in kind.  The Government proposes that the changes will take effect from tax year 2019/20 onwards.

Code of practice on combating pension scams updated

The Pension Scams Industry Group (former the Pension Liberation Industry Group) has updated its code of good practice on combating pension scams.  The Code is not legally binding, but has the backing of a number of stakeholders in the pension industry including the PLSA.

Changes to the revised Code include:

• a checklist of risk indicators for small self-administered schemes (SSASs) and additional examples of information which transferring schemes can consider when conducting due diligence on a SSAS, eg whether there is an employment link between the member and SSAS employer and, if not, why the member wants to transfer to the SSAS;
• information on the use of "international SIPPs" as scam vehicles;
• the suggestion of contacting the member by telephone as part of the due diligence process and /or referring the member to TPAS if the proposed transfer raises concerns;
• information on applying to the Pensions Regulator for an extension of the usual six month time limit for the payment of a transfer;
• detailed guidance on reporting potential scams to Action Fraud; and
• expanded example letters.

LGIM reported to FCA

In July 2018, the FT reported that at least three employees in Legal & General's investment management arm (LGIM) had reported LGIM to the Financial Conduct Authority (FCA) accusing the asset manager of compliance and risk failures that potentially cost its clients millions of pounds.  We have no further information beyond that published in the FT, so do not know the detail of the allegations or whether they are well founded.  However, given the seriousness of the allegations reported in the FT, we suggest that trustees whose schemes have investments with LGIM should contact their investment advisers to seek the adviser's views on the implications for the scheme's investments.  If advisers are themselves unclear on the position at this stage, trustees should make sure they understand what steps the advisers are taking to obtain information, and should make sure the adviser commits to updating the trustees promptly and within an agreed timescale.

Consultation on cold calling ban

The Government has consulted on draft regulations to ban "cold calling" in relation to pensions, ie unsolicited calls for the purposes of direct marketing.  The Government says it intends to lay the regulations in autumn 2018 "Subject to Parliamentary timetabling".

ESMA and FCA clarification on clearing obligation under EMIR 

We have previously reported on the transitional exemption for pension schemes from the requirement that would otherwise apply to them under EMIR (the European Market Infrastructure Regulation) for over-the-counter derivative transactions to be centrally cleared.  That exemption expired on 16 August 2018 and there is no power under the existing provisions of EMIR to extend it.  However, EMIR is currently being reviewed and it is expected that it will be amended to extend the temporary exemption.  On 3 July 2018, the European Securities and Markets Authority (ESMA) issued a statement that it expects "national competent authorities" (the FCA in the UK) not to prioritise taking supervisory action against entities that are expected to be exempted again in a relatively short space of time.  The FCA has confirmed that it will not require pension schemes and their counterparties to start putting processes in place to clear derivatives for which they were exempt until the exemption expired on 16 August. The FCA says that this approach is subject to any further statements that may be issued by ESMA or the FCA.

PASA publishes administration governance trustee checklist

The Pensions Administration Standards Association (PASA) has published an administration governance trustee checklist, intended for use by trustees to evidence and action appropriate levels of governance over their pensions administration service provider, whether administration services are provided in-house or by a third party.

Select committee launches costs and transparency enquiry into workplace pensions

Parliament's Work and Pensions select committee is holding an enquiry into whether the pensions industry provides sufficient transparency around charges, investment strategy and performance.  The inquiry will examine whether enough is being done to ensure individuals:

• get value for money for their pension savings;
• understand what they are being charged and why;
• understand the short- and long-term impact of costs on retirement outcomes;
• can see how their money is being invested and how their investments are performing;
• are engaged enough to use information about costs and investments to make informed choices about their pension savings; and
• get good-value, impartial service from financial advisers.