Trustee Quarterly Update - March 2019

Professional Trustee Standards Working Group publishes standards for professional trustees

The Professional Trustee Standards Working Group (PTSWG), an industry working group established with support from the Pensions Regulator, has published a set of standards which it considers professional pension scheme trustees should meet, together with details of a proposed accreditation process.  The standards have been published following a consultation process.  They do not of themselves have legal force, but as the PTSWG includes a representative from the Pensions Regulator, they are likely to be indicative of the standards which the Regulator expects from professional trustees. 

For more information, click here.

Lloyds Bank GMP case: latest developments

We have previously reported on the landmark judgment in Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank plc which established that trustees must adjust scheme benefits to equalise for the effect of GMP legislation which treats men and women unequally.  A supplementary judgment on 6 December clarified that, if the employer consents, equalisation can be achieved using legislation that allows GMPs to be converted into non-GMP benefits.  This method involves calculating the actuarial value of the benefits (before equalisation) then taking the higher of the benefit value for a man and a woman and using that for the conversion process.  For many employers, this is likely to be their preferred equalisation method due to its "one off" nature.

We understand that a further "consequential hearing" is likely to take place in relation to the Lloyds Bank case, but it is not yet clear what this hearing will cover or when it will take place.  On the question of whether schemes remain liable for benefits transferred out, the parties put detailed arguments before the court at the original hearing, but decided that the judge should proceed to judgment without ruling on this point, so it will be interesting to see whether the consequential hearing will address this issue.

Making changes to benefits can have tax consequences, particularly for members who are at risk of exceeding their annual allowance or lifetime allowance under pensions legislation.  HMRC's Pension schemes newsletter 106 says that HMRC is considering the tax issues in relation to GMP equalisation and will provide more information in the coming months.  

Appeal dismissed in BT Pension Scheme RPI/CPI case

In our March 2018 Update, we reported on the High Court judgment in British Telecommunications plc v BT Pension Scheme Trustees Limited, in which the court held that the employer was not allowed to substitute a different cost of living index for RPI where the scheme rules allowed this if RPI "ceases to be published or becomes inappropriate".  BT appealed, but on 4 December 2018 the Court of Appeal dismissed the appeal.  BT had argued that the judge had been wrong to hold that whether RPI had become inappropriate was an objective test.  BT argued that the rules allowed BT to decide whether RPI had become inappropriate.  However, the Court of Appeal held that the High Court judge had interpreted the rule correctly.  The Court of Appeal also rejected various arguments raised by BT to the effect that the High Court judge had adopted an incorrect approach to the question of whether RPI had become inappropriate.

Our thoughts

This judgment came less than a month after judgment in another RPI/CPI case, Barnardo's v Buckinghamshire, in which the Supreme Court also rejected an appeal from an employer arguing that its scheme's rules allowed a switch from RPI to CPI.  Whether a scheme can switch from RPI to CPI when calculating pension increases will always depend on the wording of the scheme's rules.  However, these judgments suggest that the courts will not be readily persuaded that a switch from RPI to CPI is permitted if the scheme rules are not completely clear on the point.

Ill-health pension calculated on part-time salary not disability discrimination holds Supreme Court

In our September 2017 Update we reported on the Court of Appeal ruling in the case of Williams v The Trustees of Swansea University Pension & Assurance Scheme in which the court found that the Scheme had not discriminated against a disabled member by providing an ill-health pension calculated on the basis of the member's part-time salary immediately before retirement where the member had originally worked full-time, but had switched to part-time hours because his medical condition prevented him from working full-time.  The member appealed, but on 17 December 2018 the Supreme Court dismissed the appeal.

Transitional measures re changes to pension arrangements breached age discrimination legislation

On 20 December 2018 the Court of Appeal gave judgment in two related age discrimination cases, one relating to judges' pensions, the other related to firefighters' pensions.  The Court of Appeal held that transitional measures relating to changes to the pension arrangements gave rise to unlawful direct age discrimination.  For both professions, the government had introduced new, less generous pension arrangements.  The claims related not to the changes themselves, but to the transitional arrangements put in place in connection with the changes.  The transitional measures had the effect of substantially cushioning the blow for older judges/firefighters who were closer to retirement age.  The government argued that the transitional measures were objectively justified, but the Court of Appeal rejected this argument.  The Government is seeking leave to appeal.

Judicial review case on change of women's state pension age

The judicial review hearing regarding the way in which the Government has handled the increase in state pension age for women born in the 1950s has been listed for 5 and 6 June 2019.  If there are changes to state pension age as a result of this case, that could impact schemes whose benefit structure is closely integrated with the state scheme (eg where a bridging pension is provided if the member retires before state pension age).  Changes to state pension age are not relevant to GMP equalisation issues, as GMP legislation provides that a female member's GMP is payable from age 60 regardless of her state pension age.

Brexit-related pensions regulations

In our December Update we reported on the draft Occupational and Personal Pensions Schemes (Amendment etc) (EU Exit) Regulations 2018 which make Brexit-related amendments to numerous sets of pensions regulations.  At that time we reported that the wording of the regulations could have had major implications for scheme investment strategies, as it would have provided that the assets of pension schemes had to consist predominantly of assets traded on UK regulated markets.  The Government has since altered the wording so that it continues to cover EU regulated markets as well as UK regulated markets.

Ban on pensions cold calling now in force

On 9 January 2019, regulations came into force banning cold calling for the purpose of direct marketing in relation to pension schemes.  There are some exceptions from the ban, eg for certain pre-existing client relationships with FCA-authorised persons.

Tougher powers for Pensions Regulator announced

The Government has published a response to its consultation on new tougher powers for the Pensions Regulator, confirming its intention to press ahead with many of the changes proposed in the consultation which it published in June 2018.  For more detail, see our e-bulletin.

Consultation on changes to Pensions Ombudsman powers

The Government has consulted on making changes to the Pensions Ombudsman's powers to allow for the early resolution of disputes following the transfer of TPAS's dispute resolution function to the Pensions Ombudsman's office.  In particular, the Government has sought views on what the legal status should be of an agreement reached following an early dispute resolution process, and whether the Ombudsman should have the power to make legally binding directions in connection with such a process.  The consultation also sought views on whether employers should be permitted to bring pensions complaints to the Ombudsman on their own behalf.

Consultation on defined benefit scheme consolidation via "superfunds"

The Government has consulted on proposals for a new regime which would allow consolidation of defined benefit schemes via "superfunds", thus allowing employers to divest themselves of defined benefit scheme liabilities in circumstances where buying out scheme benefits via annuities is not affordable.  A "superfund" is a vehicle which either is or contains an occupational pension scheme set up for the purposes of consolidating the liabilities of a number of defined benefit schemes.  The Government is proposing that superfunds should require Pensions Regulator authorisation under a regime analogous to the authorisation regime in force for master trusts.  

The Government proposes that consolidation via a superfund should not be permitted if there is a reasonable prospect of a scheme achieving buy-out in the "foreseeable future", which in this context the Government suggests should mean within the next five years.

Pensions dashboard consultation

The Government has consulted on its approach to enabling delivery of a "pensions dashboard", ie the facility for individuals to view information about all their pension benefits in a single place online.  The Government proposes that development of the dashboard will be industry-led, but that the newly created Single Financial Guidance Body will convene and steward a delivery group.

It is proposed that pension schemes will be compelled to provide the necessary information for inclusion in the pensions dashboard, save that participation will be voluntary for small self-administered schemes (SSASs) and executive pension schemes.  The Government proposes a phased approach to compelling schemes to provide data for dashboards, suggesting that master trusts (and perhaps some other schemes) might be compelled to provide data from 2019/20, allowing the first phase of the dashboard to be introduced from then.  The consultation says that the timescale for "onboarding" other schemes will need to be agreed by industry via the delivery group following more detailed work, but suggests that the majority of schemes could be included within 3-4 years of the first dashboards being available to the public.

The Government considers that most funding for the dashboard should come from the pensions industry and intends to explore using industry levies to fund the dashboard service, possibly with different funding routes being used for different elements of dashboards.

The consultation closed on 28 January 2019 and the Government plans to respond to the consultation within 12 weeks of this date.

Consultation on investment in illiquid assets and encouraging consolidation of DC schemes

The Government is consulting on proposals designed to facilitate investment by defined contribution (DC) occupational pension schemes in illiquid investments (for example, direct property investments, investments in infrastructure projects, and private equity).

The consultation seeks views on requiring the largest DC schemes to state their policy in relation to illiquid assets in their statement of investment principles and report annually on their main default investment option's approximate percentage holdings in illiquid assets, together with a breakdown of such holdings.  The consultation suggests that the threshold for triggering a reporting obligation might be 5,000+ members or 20,000+ members.  Alternatively, it suggests that there could be a threshold based on asset value, perhaps set at £250 million or £1 billion of assets held for providing money purchase benefits.  It seeks views on whether an asset-based or membership-based threshold would be more proportionate and effective.

For schemes at the smaller end of the scale, the consultation seeks views on whether the Government should "nudge" such schemes to consolidate.  It seeks views on its proposal to require such schemes to include in their chair's statement an assessment of whether it would be in members' interests to be transferred into a larger scheme such as an authorised master trust, and to update such assessment every three years and after any significant change in the scheme's size or membership profile.  The consultation suggests that schemes in scope could be schemes with less than 1000 members or alternatively schemes with less than £10 million in assets to provide for money purchase benefits.  (There would be some exceptions, eg small self-administered schemes where all members are trustees and decision-making is unanimous.)

The consultation also proposes an additional method of assessing whether charges are within the 0.75% cap applicable to the default fund, the aim of the proposal being to make it easier for trustees to make investments involving performance-based fees.  The Government is also proposing to publish guidance, which might carry statutory weight, on appropriate performance fee structures.

Finally, the consultation includes an updated list of costs which fall within or outside the scope of the charge cap and seeks views on whether there are other areas which require clarification.

The consultation runs until 1 April 2019.

FCA consults on changes to allow greater range of illiquid investments via unit-linked funds

The FCA has consulted on proposed amendments to its "permitted links" rules which specify the types of underlying investments which insurers can include within unit-linked policies when it is an individual who bears the investment risk (eg where investments are held by a money purchase pension scheme).  The aim of the proposed changes is to allow investment in a wider range of long-term assets, particularly where the investment priority is to maximise long-term returns rather than have access to short-term liquidity.

Consultation on legislation to avoid bridging pensions breaching age discrimination

The Government has consulted on legislation to ensure that bridging pensions can continue to be paid without breaching age discrimination legislation now that state pension age has increased above age 65, as existing legislation designed to address this issue provides that any pension reduction must start between ages 60 and 65.  The Government says that the new legislation will come into force at the earliest opportunity, subject to parliamentary approval.

Complaint upheld against administrator for wrongly implementing ambiguous pension sharing order

In the case of Mr A (PO-19073), the Ombudsman has upheld a complaint against scheme administrators for incorrectly implementing an ambiguous pension sharing order made in respect of the member's divorce.  The member had benefits in both the defined benefit and money purchase section of the scheme.  

The scheme administrator was asked to confirm that it would be able to implement a draft court order which provided, “There shall be a pension sharing order of the husband’s pension with Rettig no. H93849 as to 54% in favour of the wife”.  It confirmed that it would be able to do so, and the order was duly made.  However, the reference number in the order related only to the money purchase section of the scheme.  The administrator subsequently queried with the member's wife's lawyer whether the pension sharing order applied to the member's benefits in both sections.  After the lawyer confirmed that it did, the administrator made a transfer equal to 54% of the member's benefits into the wife's pension scheme.  The member subsequently complained that the order was only intended to cover his money purchase benefits.  The matter ended up going back to court.  Having retrieved the original file, the judge concluded that the actual intention had been to make an order in respect of the member's benefits in the defined benefit section only and made an order accordingly.  The member's wife refused to repay any funds and the member complained to the Pensions Ombudsman.

The Ombudsman upheld the complaint against the scheme administrator, which had realised that the order was unclear, but had relied on the member's wife's lawyer rather than taking advice from its own lawyer or referring the matter back to the scheme trustees as it should have done.  The Ombudsman ordered the scheme administrator to liaise with such other parties as were appropriate to reinstate the member's money purchase pension fund in the scheme in full, adjusted to reflect the investment return that would have arisen in the scheme had no transfer been made in respect of the money purchase section.  He also ordered the administrator to reimburse the member for the legal expenses he had incurred in going back to court, and also to pay the member £500 for his distress and inconvenience.

Our thoughts

This case illustrates that if trustees/administrators are presented with a draft court order and given the opportunity to comment, it is well worth taking the time to check that the order is unambiguous and in a form that can be implemented.  The case also illustrates the danger of relying on the word of a lawyer who has been appointed to advise someone else.

Complaint upheld where trustees made insufficient enquiries outside expression of wish form

In the case of Mrs G (PO-17602), the Ombudsman has upheld a complaint where the trustees relied on an expression of wish form alone without making further enquiries to decide on the distribution of a lump sum death benefit held on discretionary trusts.  The member had completed an expression of wish form two years before his death, in which he nominated Mrs E, describing her as his "sister".  On the basis of the form alone, the trustees paid the lump sum to Mrs E.  However, following a complaint by another family member, it emerged that Mrs E was not a blood relative of the deceased member (though they did share a half-sibling) and there were allegations that the member had been pressurised into nominating Mrs E after he fell behind with rent owed to her and she threatened legal action.  The Ombudsman ordered the trustees to re-consider their decision and to pay the complainant £500 for distress and inconvenience.

Our thoughts

This case illustrates that even in apparently straightforward cases, trustees should make their own enquiries before deciding how to distribute a death benefit held on discretionary trusts, and should not make a decision based on the expression of wish form alone.

Complaint rejected despite finding that trustees should not have made transfer

In the case of Mr N (PO-21141), the Deputy Pensions Ombudsman (DPO) has rejected a member's complaint despite finding that the scheme trustees should not have gone ahead with paying a transfer value.  The member was initially quoted a transfer value of £2,354,243.  Following some correspondence with the member's IFA, the member was sent a transfer value quotation that was almost £7000 lower than the first one.  It subsequently transpired that the first transfer value had been overstated due to an administrative error.  However, at the time of quoting the second transfer value, the trustees did not make clear in their covering letter that the transfer value figure had been reduced, nor did they alter the figure in the discharge form, so that still incorrectly showed the higher figure.  The DPO found that prior to the transfer value being paid, there had been a telephone call between the member's IFA and the scheme's representative in which it had been explained that the lower amount would be paid.

The DPO found that trustees should not have gone ahead with the transfer, as the regulations governing transfer values provide that an application to take a cash equivalent transfer value lapses if the amount quoted is subsequently reduced.  The DPO also found that the trustees had breached the transfer value regulations, which require that where a transfer value is reduced following an initial quotation, the member must be notified of this, given an explanation, and allowed a further three months to make an application to take his transfer value.  Nevertheless, the DPO held that such a breach did not render the transfer value void.  She also found that the member would have gone ahead with the transfer in any event, and that the sum of £750 offered by the trustees to compensate the member for distress and inconvenience was "not unreasonable" so did not order any further compensation.

Our thoughts

This case shows that a failure to comply with the regulations governing transfer values will not necessarily result in the Ombudsman upholding a complaint against trustees.  Nevertheless, if trustees quote a transfer value and then realise that it needs to be revised, they should ensure that they comply with the relevant regulations.  In some circumstances, a failure to comply with the regulations could risk the member successfully arguing that he would not have gone ahead with the transfer at all had he received the correct information.

No obligation to pay pension to same sex partner who could not meet "Qualifying Spouse" definition

In the case of Mr Y (PO-25756), the Ombudsman has rejected a complaint from a deceased member's civil partner regarding the scheme's refusal to pay him a pension where it would have been legally impossible for him to meet the requirements under the scheme rules for entitlement to a spouse's pension.  The rules provided for a pension to be payable to a deceased member's "Qualifying Spouse", which was defined as a person who was married to or in a civil partnership with the member at the earlier of the date on which the member left pensionable service or retired.  In Mr Y's case, the member had retired in 1995, before it was legally possible for same sex partners to get married or enter into a civil partnership, so it would have been legally impossible for Mr Y to meet the "Qualifying Spouse" definition.

In rejecting the complaint, the Ombudsman followed the decision of the Court of Justice of the European Union in David L Parris v Trinity College Dublin, which had held there was no unlawful discrimination in a similar case on the grounds that EU law did not require member states to provide for legal recognition of same sex partnerships and, if they did so, it was up to the member state to decide the date from which the recognition would apply.  

Our thoughts

Mr Y had argued that his case was analogous to Walker v Innospec, in which the Supreme Court held that schemes were not allowed to limit survivor benefits for same sex spouses or civil partners to pensionable service from 5 December 2005, the date on which civil partnerships were introduced into UK law.  The key difference between the Parris case and Walker v Innospec was that the scheme in Walker v Innospec discriminated between same sex and opposite sex couples even when the marriage took place after retirement.  In the case of Mr Y and the Parris case, the question of whether a spouse's pension could be payable was fixed at the point of the member's retirement, which in each case occurred before the law changed to recognise same sex relationships.  Although the Ombudsman's decision makes legal sense, it is difficult not to feel sympathy for Mr Y in the circumstances.

Levy rules for 2019/20 confirm requirement to re-execute Type A and B contingent assets with fixed cap

On 12 December 2018, the PPF published its final form levy rules for levy year 2019/20, confirming the requirement to re-execute Type A and Type B contingent assets (broadly, guarantees or security over cash, land or securities) that are subject to a fixed cap and not already in the PPF's current standard form as published on the PPF's website on 18 January 2018.  The deadline for re-certifying current contingent assets is midnight on 31 March 2019.

Regulator updates measuring data quick guide

The Pensions Regulator has published an updated version of its quick guide to measuring pension scheme data.  The revised version specifies that the Regulator expects trustees to review their data at least once a year.

Statement on Brexit

On 24 January 2019, the Pensions Regulator published a statement on Brexit, reminding trustees and employers of the Brexit-related steps the Regulator expects them to take, as outlined in its 2016 statement.  These include:

• having an open and collaborative discussion between employer and trustees on the possible effects of Brexit on the employer's business;
• trustees considering with their investment advisers the extent to which market volatility and changing market conditions affect the longer term view of expected risk and returns and whether there is a need to reconsider the scheme's investment strategy; and
• trustees continuing to ensure that where deficit repair contributions were constrained to allow for investment in sustainable growth of the employer, that this is what happens rather than the relevant funds being diverted to pay dividends.

New mandatory competitive tendering for fiduciary management appointments

Trustees will in future be required to go through a competitive tender process before appointing fiduciary managers to their schemes under measures announced by the Competition and Markets Authority (CMA) in its Investment Consultants Market Investigation Final Report, published on 12 December 2018 and included in a draft order published for consultation on 11 February 2019.  The requirement to run a competitive tender will also apply to existing fiduciary manager appointments if the original appointment was awarded without a competitive tender process.  In such cases the competitive tender will need to be run within five years of the original appointment (or within two years of the CMA's order being made if the five year period has already expired by that date or will expire within 2 years of the CMA making its order).  

The competitive tender requirements will apply where an investment manager (or a company within the same group) has within the 12 months prior to its appointment advised the trustees on investments, investment strategy or investment management services.  The requirements only apply where at least 20% of the scheme's assets will be covered by fiduciary management agreements.

To comply with the competitive tender requirement, trustees will need to demonstrate they have used their best endeavours to obtain and evaluate bids from at least three unrelated parties.  

The CMA will also require trustees to set objectives for their investment consultant in order to assess the quality of investment advice they receive. 

The CMA's investigation was prompted by concerns about incumbent investment consultancies steering trustees towards fiduciary management services provided by the same firm.

The consultation on the CMA's draft order closes on 13 March 2019.  The CMA's statutory deadline for bringing its proposed measures into force is 11 June 2019. 

Single Financial Guidance Body launched

The Single Financial Guidance Body (SFGB) was officially launched in January 2019.  It will be responsible for the services previously provided by the Money Advice Service, Pension Wise and the part of the Pensions Advisory Service (TPAS) that did not deal with dispute resolution.  The dispute resolution function of TPAS has already transferred to the Pensions Ombudsman's office.