Trustee Quarterly Update - September 2019

Further hearing in Lloyds Bank GMP equalisation case

In a statement on its website, the trustee of the Lloyds Bank pension schemes has announced that there will be a further court hearing in the Lloyds Bank GMP equalisation case which will take place at the end of April/beginning of May 2020.  The parties to the case have decided to seek a ruling on the extent of the trustee's obligation to revisit past transfers out of the scheme.  

For other developments relevant to GMP equalisation, see "GMP equalisation developments" below.

Box Clever appeal dismissed

In our June 2018 Update we reported on the judgment in the Box Clever case in which a tribunal ruled that when deciding whether to issue a financial support direction under its "moral hazard" powers, the Pensions Regulator is entitled to take into account actions which were taken before the moral hazard powers became law.  On 20 June, the Court of Appeal dismissed an appeal in the case.

Unlawful to refuse survivor's pension to unmarried partner married to someone else

In the case of Langford v Secretary of State for Defence, the Court of Appeal has held a rule of the Armed Forces compensation scheme to be in breach of the European Convention on Human Rights and Fundamental Freedoms (ECHR) where the rule denied a survivor's pension to a member's cohabiting partner on the grounds that the partner was still married to someone else.

The scheme member and his partner had lived together for 15 years prior to the member's death.  The partner had been estranged from her husband for 17 years, but they had not divorced.  The scheme rules provided for a dependant's pension to be paid to a cohabiting partner who had been in a "substantial and exclusive relationship" with the deceased, but stipulated that a relationship would not qualify as "exclusive" if one of the partners was married to someone else.

The Court of Appeal held that excluding partners by reason of their marital status in this way was in breach of the ECHR.  It rejected the government's argument that the exclusion was a proportionate means of achieving the legitimate aim of parity of treatment between married and unmarried partners, saying that in reality such parity was achieved by requiring the demonstration of a substantial and exclusive relationship, not by excluding those married to someone else.  With regard to possible "double recovery" (ie a person being entitled to two dependant's pensions from a public service scheme due to having been legally married to one person, but cohabiting with another), the court held that this could have been achieved through a much more narrowly drafted rule rather than a blanket exclusion which amounted to "a sledgehammer to crack a nut".

Our thoughts

This judgment will generally only be relevant to public sector schemes, as the obligation to act in a way compatible with the ECHR applies to "public authorities".  The court in this case made clear that its ruling related to the specific case before it, and did not rule out the possibility that a different public service scheme might be able to justify a rule of the type at issue here.

Supreme Court refuses permission to appeal in BT RPI/CPI case

We have previously reported on the case of British Telecommunications plc v BT Pension Scheme Trustees Limited in which the court held that that the employer was not allowed to substitute a different cost of living index for RPI where the pension increase rule allowed this if RPI "ceases to be published or becomes inappropriate".  The Court of Appeal dismissed BT's appeal.  In July 2019, the BT Pension Scheme reported on its website that an application by BT for permission to appeal to the Supreme Court had been unsuccessful.

Supreme Court appeal denied in judges' and firefighters' pension cases

In our March 2019 Update, we reported on the Court of Appeal's ruling that transitional measures put in place in relation to judges' and firefighters' pension schemes which benefited those closest to retirement gave rise to unlawful age discrimination.  On 27 June 2019, the Supreme Court refused the government permission to appeal.  In a written statement on 15 July 2019, the government said that as "transitional protection" was offered to members of all the main public service schemes, the government believes that the difference in treatment will need to be remedied across all those schemes.

Scheme administrator liable for negligent mis-statement re tax consequences of benefits

In the case of Corsham v Police and Crime Commissioner for Essex, the court has held that a police authority was liable for negligent mis-statement where it told members their retirement lump sums would be tax free in circumstances where it knew that scheme members were being re-employed by a related employer immediately following retirement and should have been aware that this would cause the members to lose their protected pension age, meaning that their scheme benefits would be taxed as unauthorised payments.  The circumstances of this case were relatively unusual in that the police authority was both the scheme administrator for Finance Act 2004 purposes and also the employer by whom the members were to be re-employed following retirement.  Nevertheless, the case highlights the need to take care when issuing member announcements which make generalised statements regarding the tax consequences of taking particular benefits.

Statement of investment principles: new requirements from 1 October 2019

From 1 October 2019, new requirements relating to a scheme's statement of investment principles will come into force.  Some of the changes stem from regulations made in 2018 on which we reported in our December 2018 Update.  In June 2019, the Government made additional regulations extending the requirements.  For details of the combined effect of both sets of regulations, see our e-bulletin.  

CMA issues order requiring compulsory competitive tendering for fiduciary managers

On 10 June 2019, the Competition and Markets Authority (CMA) issued its final form order which from 10 December 2019 will require pension scheme trustees to run a competitive tender process in respect of the appointment of fiduciary managers.  The requirement applies where 20% or more of a scheme's assets will be subject to one or more fiduciary management agreements.  Broadly, "fiduciary management" for the purposes of the order covers the scenario where the same service provider (including another company in the same group) carries out a discretionary fund manager role and also provides investment advice.  The definition of "competitive tender process" requires the trustees to use reasonable endeavours to obtain bids from three or more unrelated fiduciary management providers.

The CMA's order will also affect existing fiduciary management appointments covering 20% or more of a scheme's assets if the appointments were made without a competitive tender process.  In such circumstances, trustees will be required to run a competitive tender process within five years of the commencement date of the first fiduciary management agreement.  Where that five year period had already expired by 10 June 2019 (the date of the order) or expires within two years of that date, the trustees will be required to carry out a competitive tender process by 10 June 2021.

In addition to the competitive tender requirements, the order will from 10 December 2019 also prohibit trustees from obtaining investment consultancy services unless they have set strategic objectives for the provider of such services.  The term "investment consultancy services" is broadly defined and covers advice on investments, matters on which the trustees are required to seek advice in relation to the scheme's statement of investment principles, strategic asset allocation and manager selection.

In the longer term it is intended that the trustee obligations currently contained in the CMA's order will instead be covered by regulations made by the DWP, with the Pensions Regulator taking on responsibility for compliance.  The DWP has consulted on the terms of such regulations which it intends will take effect from 6 April 2020.  The regulations will give the Regulator the power to impose financial penalties for non-compliance and provide for new questions to be added to the scheme return in order to flag up instances of non-compliance.  The Pensions Regulator is also consulting on a series of guides relating to various aspects of compliance.  The consultation closes at midday on 11 September 2019.

Extension to exemption from clearing requirement for OTC derivatives

We have previously reported on provisions to exempt pension schemes from the requirement which would otherwise apply under the European Market Infrastructure Regulation (EMIR) to clear over-the-counter derivative transactions.  The exemption technically expired on 16 August 2018, but an EU regulation known as "EMIR Refit" which came into force on 17 June 2019 retrospectively provides for an exemption from the date the previous one expired until 18 June 2021.  The Government has published draft regulations designed to address how EMIR will operate in the UK post-Brexit.  These regulations provide for the exemption to continue until 18 June 2023.

Existing codes of practice to be consolidated into single shorter code

The Pensions Regulator has announced that it is reviewing its codes of practice over the next year and expects this to involve combining the content of its 15 current codes of practice to form a single, shorter code.  The Regulator says its early focus will be on the codes most affected by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018.  (See our December 2018 Update for a summary of those regulations).  The Regulator says the first codes to be reviewed will be Code 9 (internal controls) and Code 13 (defined contribution code) as well as content from Codes 14 (public service schemes) and 15 (master trusts).

Future of trusteeship and governance consultation

The Pensions Regulator is consulting on the future of trusteeship and governance.  The consultation focuses on three key areas:

• trustee knowledge and understanding (TKU);
• scheme governance; and
• driving consolidation of schemes, particularly DC schemes.

For more information, click here. 

Pensions Ombudsman early dispute resolution and widening of jurisdiction – Government consultation response

The Government has published its response to its consultation "The Pensions Ombudsman: dispute resolution provisions and widening of jurisdiction".  It supports the Pensions Ombudsman's office having an early resolution function in relation to disputes (similar to the function performed by TPAS before its dispute resolution function transferred to the Pensions Ombudsman).  The Government envisages that this would be available at any stage of the internal dispute resolution procedure (IDRP) process, but expects that the majority of cases seeking early resolution will be before the dispute has been through the scheme's IDRP.  It does not intend to give any special legal status to agreements which are reached via the early resolution route, ie if the parties want the agreement to be legally binding they will need to enter into a legally binding settlement agreement between themselves, as the Ombudsman will not have the power to give such an agreement a legally binding status.

In most cases the Government expects complaints to have gone through the IDRP before going through the formal investigation and determination route.  However, it is willing to consider "some flexibility" to bypass the IDRP where all parties agree to this.  The consultation response gives the example of multiple complaints which raise an identical issue where one of the complaints has already been through the IDRP.

Currently the law does not allow an employer to bring a claim to the Ombudsman on its own behalf against the provider or administrator of the employer's GPP.  The Government says it is keen to allow employers to bring such complaints where they are disputes of law or complaints relating to maladministration.

The Government says it will be seeking to bring forward legislation to provide the framework for the above proposals "in due course".

Member awarded £1000 for distress and inconvenience where not told that buy-in would nullify transfer value quotation

In the case of Mr N (PO-15840) the Deputy Pensions Ombudsman (DPO) has awarded a member £1,000 for distress and inconvenience where a member was provided with a transfer value quotation with a specified guarantee period, but subsequently informed part way through the guarantee period that the amount quoted was no longer available because a buy-in had "nullified" the transfer value quotation.  The member subsequently decided to proceed with the transfer (notwithstanding that recalculation of the value originally quoted led to a significant reduction) but did not return the completed forms in full until after the guarantee date.

Our thoughts

The facts of this case are somewhat unusual.  The member did not actually have a right to a statutory cash equivalent transfer value (CETV), having received a quote for a CETV within the previous 12 months and allowed the guarantee period to expire.  However, the trustees had nevertheless agreed to quote a subsequent transfer value which they had agreed would be guaranteed for a period.  The DPO declined to make an award compensating Mr N for the reduction in his transfer value on the grounds that he had not provided the necessary information to complete the transfer until after the guarantee date.  We therefore do not know what order the DPO would have made had the member completed the transfer documentation within the guarantee period.  However, the case illustrates that even when quoting a transfer value on a discretionary basis, trustees need to take care regarding the terms on which such transfer value is offered, in particular being clear as to any circumstances in which the quotation will lapse or be subject to recalculation.

GMP equalisation developments

On 16 July 2019, the cross industry GMP Equalisation Working Group (GMPEWG) launched a "Call to Action" intended for use by trustees, employers, administrators and advisers.  It is intended that the document will form part of a series designed to support the implementation of GMP equalisation in a practical way.  The document covers three key issues:

• GMP adjustment following GMP reconciliation.  The document notes that as a result of their GMP reconciliation exercise (which schemes are carrying out as a result of the end of contracting-out), trustees may identify that adjustments to benefits are necessary.  Trustees therefore need to decide whether to deal with GMP equalisation and GMP adjustments following reconciliation as a single project or two separate projects;
• Data.  The document flags that data capture and verification is an important element of any GMP equalisation exercise and identifies various actions which can be progressed by trustees now in relation to this;
• "Impacted transactions".  The document identifies various types of benefits payments/actions which trustees may currently be undertaking which will be impacted by GMP equalisation, eg transfer payments, serious ill-health lump sum payments and current buy-in/buy-out transactions.  In some cases the document suggests possible approaches to the issue.  For others it simply identifies the issue and suggests the trustees take legal/actuarial advice.

In a separate development, on 26 June 2019, HMRC published its Pension schemes newsletter 111.  This confirms that HMRC has a working group looking at the tax issues arising out of GMP equalisation, but says it is unlikely HMRC will be able to update guidance before the autumn.

ICO changes guidance on calculating time limits for DSARs

The ICO has updated its guidance on calculating the one month time limit for responding to data subject access requests (DSARs).  The guidance previously stated that a DSAR should be responded to within one calendar month, with the day after receipt counting as "day one".  The guidance now says that the date of receipt should be treated as "day one", meaning that, for example, if a DSAR is received on 3 September a response should be issued by 3 October.

FCA consults on banning contingent charging for defined benefit transfer advice

The FCA is consulting on banning contingent charging for advice in relation to transfers from defined benefit schemes, ie the practice whereby an adviser charges more where a transfer goes ahead compared to what the adviser would have charged had the transfer not proceeded.  The FCA is concerned that the conflict of interest inherent in such charging structures is resulting in unsuitable advice.  

The FCA proposes that there would be limited exceptions to the proposed ban to enable members to access advice where (a) the member has been diagnosed with a medical condition that means his/her life expectancy is likely to be lower than age 75, or (b) the member is in serious financial hardship, ie regularly unable to meet mortgage payments or rent or utility bills.  However, even where these exceptions apply, advisers will not be allowed to charge members a higher amount than would have applied to a member in respect of whom the contingent charging ban applies.

The consultation closes on 30 October 2019.

Some tax liabilities to be given preferential creditor status

The Government has announced that for insolvencies beginning on or after 6 April 2020, certain taxes owed by the insolvent business will be given a higher priority in the insolvency by reclassifying them as preferential debts.  The affected taxes are certain taxes collected and held by the insolvent business on behalf of other taxpayers, including: VAT, PAYE income tax, employee National Insurance contributions, student loan deductions and Construction Industry Scheme deductions.  In the absence of specific security arrangements, a pension scheme will be an unsecured creditor in respect of any debt owed to the scheme by an insolvent sponsoring employer, so adding other debts to the "preferential creditors" category could potentially have an adverse impact on the pension scheme as a creditor.

PASA guidance on defined benefit transfers

The Pension Administration Standards Association (PASA) has published guidance on processing defined benefit transfers in standard cases.  The guidance sets out what is meant by a "standard" case, the steps in the transfer value process and the timescale within which PASA considers the steps should be completed.  It suggests that a guaranteed transfer value quotation should be issued within seven working days of receipt of the request where there is no referral to the actuary and within eight working days when there is.  Where a correctly completed request to transfer is subsequently received, and due diligence checks do not suggest any evidence of a scam, the guidance suggests that payment should be made within nine working days of receipt of the transfer request.

The processes and timescales set out in the guidance are not legally binding.  However, PASA states that it anticipates that the Pensions Ombudsman will make reference to the guidance when reviewing complaint cases as a source of what good industry practice looks like.

The guidance is Part 1 of a series of two.  PASA anticipates that Part 2 will be published towards the end of 2019 and will cover "non-standard" cases.