Trustee Quarterly Update - September 2020

Corporate Insolvency and Governance Act receives Royal Assent 

The Corporate Insolvency and Governance Act 2020 received Royal Assent on 25 June 2020. As reported in our last Update, the Act brings in some major changes to the insolvency regime which are potentially relevant to scheme trustees seeking to enforce their rights against sponsoring employers, in particular:  

• the ability for a struggling company to apply for a 20 business day moratorium against creditors enforcing debts; and
• a new type of scheme of arrangement ("restructuring plan") which the court will have the power to sanction despite it not having been approved by 75% in value of a class of creditors.

Since our previous update, some important changes have been made to the legislation as regards how it applies in relation to defined benefit pension schemes. Specifically:

• the PPF (as opposed to the scheme's trustees) has been given the power to exercise certain creditor rights on behalf of a pension scheme where a moratorium is in force in relation to the scheme's sponsoring employer, though the PPF is required to consult the scheme trustees before exercising those rights; and
• the PPF has been given the power to exercise rights on behalf of the pension scheme where a restructuring plan is proposed in respect of the sponsoring employer, though the PPF must consult the scheme trustees before exercising voting rights.

Our thoughts

Unless they have been granted security, trustees of defined benefit schemes in deficit are unsecured creditors of the sponsoring employer.  The pre-insolvency moratorium could make it even more difficult for scheme trustees to recover contributions from struggling companies.  Where trustees are entering into funding agreements which are triggered on employer insolvency, trustees should be mindful that traditional definitions of insolvency proceedings may not catch a moratorium.  

When the Bill was first published, it appeared that the new restructuring process would result in the PPF having less say than would have been the case on a company voluntary arrangement, so the changes allowing the PPF rather than the scheme trustees to exercise certain powers are significant.  

Pension Schemes Bill: latest developments

The Pension Schemes Bill continues to progress through Parliament.  As previously reported, the Bill provides for a major extension of the Pensions Regulator's powers, including: new criminal offences which are very broad in scope, eg acting without reasonable excuse in a way which detrimentally affects the likelihood of accrued scheme benefits being received; new information gathering powers; and a new power to impose financial penalties of up to £1 million.  The Bill also contains the legislative framework for a revised defined benefit funding regime, though for practical purposes, much of the detail of the funding regime will be contained in the Regulator's new DB funding code of practice.  A recent House of Lords amendment, if included in the final version of the Bill, would require any future scheme funding regulations to be drafted in consideration of the different funding requirements of closed and open defined benefit schemes.

Since the Bill was first published, the Government has tabled amendments to allow it to impose new requirements on trustees in relation to securing effective governance of pension schemes with respect to the effects of climate change.  The latest amendments to the climate change-related provisions of the Bill (tabled in June) include a requirement that the regulations must ensure trustees take account of international climate change treaties to which the UK is a signatory, including the 2015 Paris Agreement on climate change.  The regulations may require the trustees to adopt prescribed assumptions about the steps that might be taken for the purpose of achieving the Paris Agreement goal or other climate change goal.

Other changes tabled by the Government include requiring the Money and Pensions Service (MAPS) to provide information about members' scheme benefit entitlements by means of a pensions dashboard service, and allowing regulations to require trustees to check before making a transfer that the member concerned has obtained information or guidance from MAPS.

Court of Appeal rules on interaction between UK legislation and EU case law on equalisation

In a judgment that will have surprised many pension lawyers, the Court of Appeal has ruled in Safeway v Newton that section 62 of the Pensions Act 1995 (which came into force on 1 January 1996 and provided that occupational pension schemes which did not contain an "equal treatment rule" should be treated as including one) effectively closed the "Barber window" for any schemes to which it applied by levelling up benefits for the disadvantaged sex.  The "Barber window" refers to the period after the date of the Barber judgment but before measures are taken to equalise benefits for men and women.  During this period, benefits automatically accrue on the basis enjoyed by the advantaged sex.

The significance of the Court of Appeal ruling is broadly that from 1 January 1996 when the relevant section of the Pensions Act 1995 came into force, the validity of equalisation amendments only needs to be considered by reference to UK domestic law requirements rather than the requirements of EU law.  This was important in the Safeway case because the scheme amendment was made in a way which complied with English law requirements at the time (ie a deed with retrospective effect reflecting the terms of an announcement made years earlier in accordance with the terms of the Safeway scheme's amendment power), but did not comply with EU law.

Our thoughts

The conclusion that the Court reached on the interaction between UK legislation and EU case law on equalisation is likely to have surprised most pension lawyers, but the judgment is unlikely to have significant implications for most schemes in practice.  If a scheme had already effectively equalised before 1 January 1996 (the date the relevant legislation came into force) the case will have no practical relevance.  Even if the scheme equalised later than that, this judgment is unlikely to alter the position if the document formally amending the scheme was executed on or after 6 April 1997 when section 67 of the Pensions Act 1995 (which generally prevents retrospective amendments to accrued rights) came into force.  The crucial factors for the Safeway scheme were: (a) that it had an amendment power which allowed retrospective benefit amendments to be made with effect from the date the change had been announced to the members; and (b) that the formal deed of amendment was executed after 1 January 1996, but before 6 April 1997.  Not many other pension schemes are likely to be in that position.

Court orders rectification of scheme documents where RPI pension increases "hard wired" into scheme rules

In the case of Univar v Smith, the High Court has ordered rectification of a scheme's trust deed and rules where a scheme documentation consolidation exercise carried out in 2008 had the effect of "hard wiring" an entitlement to pension increases based on RPI into the scheme rules where the previous trust deed and rules had simply provided for pension increases to be provided in accordance with statutory requirements.

Rectification is a legal remedy whereby the court can order that the wording of a document should be altered if it concludes that the existing wording has failed to express the intention of the parties.  The judge in the Univar case found, based on documentation prepared at the time and oral evidence of the then trustees, that it was clear that the trustees' intention had been to produce a new trust deed and rules to consolidate the scheme's existing governing documentation and that there had been no intention to make a change of substance to the scheme's pension increase provisions.  A particularly key piece of evidence was a schedule of changes prepared by the solicitors drafting the documentation.  This had referred to the pension increase rules, but had not addressed the change that was in fact made, which was to "hard wire" a right to RPI-based increases into the scheme's benefit structure.

Our thoughts

The documentation at issue was adopted in 2008.  At that time, statutory pension increases were based on RPI, so the introduction of an express reference to RPI in the pension increase rule may have appeared inconsequential.  However, the switch from the use of RPI to CPI for statutory pension increases which took effect from 2011 meant that the question of whether scheme rules conferred a right to RPI-based pension increases or simply increases in accordance with legislation became very important.  

There have been a number of cases where employers or trustees have sought a court ruling on whether the wording of a pension increase rule permits a switch away from RPI.  The courts have been mindful of the effect on member benefits and have tended to construe rules as requiring continued use of RPI in cases where the wording of the rule means the issue is not clear cut.  The Univar case was different.  The wording of the 2008 pension increase rule was unambiguous, but the employer sought a court order that the rule should be rewritten on the grounds that it made a benefit change that the parties had no intention of making.

Where schemes have RPI "hard wired" into their pension increase/revaluation rules, but a previous version of the rules only conferred a right to statutory increases without providing for these to be in line with RPI, trustees may need to consider whether the amendment which "hard wired" a right to RPI increases into the scheme rules reflected the intention of the parties at the time or whether the intention was simply to reflect the statutory requirements in relation to increases. If the latter, it may be appropriate to consider applying to court for rectification.

PPF compensation cap found to be age discriminatory

In the case of Hughes v PPF, the High Court has held that the cap on the maximum PPF compensation that can be paid amounts to unlawful age discrimination.  Under PPF compensation provisions, members who have reached their scheme's normal pension age before the scheme enters a PPF assessment period generally receive 100% of their pension entitlement, whereas for members who have not reached normal pension age, compensation is capped at a level of 90% of a statutory compensation cap and adjusted to reflect the member's age.  

Because the measures involved differential treatment on grounds of age, the court had to consider whether (a) the measures had been adopted in pursuit of a legitimate aim, and (b) if so, whether the compensation cap was an appropriate and necessary means of achieving that aim.  The court held that the test in (a) was satisfied.  Not providing 100% compensation in all cases so that decision-makers had an incentive to fund the scheme properly involved the pursuit of a legitimate aim, and it was also legitimate to have regard to cost considerations.  However, the compensation cap was not an appropriate and necessary means of achieving those aims.  It only applied to a small proportion of persons whose schemes transferred to the PPF, but could have very significant financial consequences for that small group.

The DWP has launched an appeal against the ruling that the compensation cap is unlawful.  The PPF is seeking leave to appeal some other aspects of the judgment which dealt with the PPF's approach to calculating compensation following the ruling by the Court of Justice of the European Union in Hampshire v PPF in 2018 which held that EU law entitles each individual member to PPF compensation of at least 50% of the value of their accrued entitlement.

CJEU ruling on standard contractual clauses and EU/US privacy shield

In its "Schrems II" judgment on data protection issues, the Court of Justice of the European Union (CJEU) has ruled that the EU Commission's decision on controller to processor standard contractual clauses is valid, but that the Commission's decision on the adequacy of the protection provided by the EU-US Privacy Shield is invalid.  

The GDPR requires that where personal data is being transferred outside of the UK and EU, unless the European Commission has decided through an "adequacy decision" that the country to which data is transferred has adequate data protection principles enshrined its law, the data controller must ensure that appropriate data protection safeguards are in place.  The EU-US privacy shield is an arrangement which imposes stronger obligations on US companies to protect the personal data of EU citizens and includes written commitments and assurances from the US regarding data protection measures. However, the CJEU has held that the EU Commission's decision that the EU-US privacy shield provided adequate protection was invalid.

Another way of providing for appropriate safeguards is through the use of standard contractual clauses adopted or approved by the Commission.  There are different types of clauses for different situations.  The Schrems II decision related to "controller to processor" clauses.  The CJEU held the Commission's decision approving controller to processor standard contractual clauses was valid, but that it is still necessary for data controllers making transfers to consider whether the clauses provide an adequate level of protection for the transfer in question.

The CJEU's decision is potentially relevant to any trustees who transfer personal data to the US who will need to consider whether their legal basis for transferring data outside the UK to a non-EU country remains valid.  Where standard contractual clauses are relied on, the trustees need to consider whether an adequate level of protection is provided.

Updated guidance on reporting duties and enforcement activity

In our last update we reported on the Pensions Regulator's April announcement regarding its decision to adopt a more flexible approach to reporting breaches in the law due to the Covid-19 situation.  On 16 June the Regulator updated its guidance to say that most reporting requirements would resume as normal from 1 July 2020, including for:

• suspended deficit repair contributions - trustees will need to submit a revised recovery plan or report of missed contributions;
• late valuations and failure to agree a recovery plan;
• delays in cash equivalent transfer quotations and payments;
• failure to prepare audited accounts;
• master trusts.

Trustees of money purchase schemes will continue to have 150 days to report late payment of contributions where the Regulator would normally require information on late payments within 90 days.  The Regulator will review this easement again at the end of September.

The Regulator will continue not reviewing any chair's statements (applicable to schemes that provide money purchase benefits unless the only money purchase benefits are from AVCs) that it receives until after 30 September 2020.  It says that any chair's statements it receives (including in relation to master trusts) will be returned unread.  This should not be taken as any indication that the statement in question complies with the requirements.

The Regulator says that it will take a "pragmatic" approach to late preparation of audited accounts and will accept delays to 30 September, but that the legislation on chair's statements does not give it any discretion about imposing fines where the trustees have not prepared the chair's statement on time.  Where a chair's statement is required, it must be included in the annual report and accounts, though the statement itself can be signed off separately.

The Regulator says it does not expect to take regulatory action if a review of a statement of investment principles (or statement in relation to any default arrangement) is not delayed beyond 30 September 2020.

Where a scheme is in relationship supervision with a named supervisor, the Regulator says it will focus more on near-term risks rather than the standard activities in its supervisory cycle.

Guidance on superfunds interim regulatory regime

In June the Pensions Regulator published guidance aimed at those running a defined benefit superfund.  A DB superfund is an arrangement incorporating an occupational pension scheme which allows an employer to sever its liability to fund a DB scheme by transferring the assets and liabilities of the scheme to a superfund.  Instead of a conventional employer covenant, the scheme's "covenant" is a "capital buffer" provided by external investors who expect a return and/or by the fee paid by the employer divesting itself of its defined benefit liabilities.  The capital buffer sits within the superfund structure, but is not part of the occupational pension scheme.

In December 2018 the government consulted on a new legislative framework for authorising and regulating superfund consolidation vehicles, but no response to that consolidation has yet been published.  The Regulator is conscious that superfund models could begin operating under existing legislation and has therefore published the guidance to set out the standards it expects during the "interim period" before specific legislation regulating superfunds is in place.  The guidance sets out detailed standards which the Regulator expects to see in relation to governance, systems and processes, financial sustainability and capital adequacy.  Reflecting the position taken by the government in its earlier consultation, the Regulator says it does not expect a superfund to accept a transfer from a ceding scheme that has the ability to secure its liabilities through a buy-out or is on course to do so in the foreseeable future.

Corporate plan

In June the Pensions Regulator published its Corporate Plan 2020-21.  Having re-thought its plans due to COVID-19, the Regulator sets out its priorities as including:

• to support workplace pension schemes to deliver benefits through the COVID-19 pandemic;
• to protect pension savers across all scheme types through proactive and targeted regulatory interventions;
• to provide clarity to, and promote the high standards of trusteeship, governance and administration it expects;
• intervene where appropriate so that DB schemes achieve their long-term funding strategy and deliver on pension promises; and
• to ensure jobholders have an opportunity to save into a qualifying workplace pension through automatic enrolment.

GAD additional modelling document on setting long-term objective

As part of its defined benefit funding consultation, the Pensions Regulator has published modelling by the Government Actuary's Department (GAD) to assess the implications of setting the long-term objective (LTO) at various levels.  The Regulator says it has commissioned further modelling work to cover the period prior to reaching the LTO and this will be published with its second consultation.

FCA confirms ban on contingent charging for pension transfer advice

In its Policy Statement PS20/6 published on 5 June, the FCA has announced its intention to proceed with a ban on contingent charging for advice on pension transfers (subject to limited exceptions).  "Contingent charging" refers to the practice whereby an adviser only charges where a transfer proceeds. 

The FCA is concerned that the number of people taking transfers from defined benefit to money purchase arrangements indicates that a significant proportion of such individuals are transferring when it is not in their interests to do so, and that the practice of contingent charging leads to advisers having a conflict of interest.  To address this, unless an exception applies, advisers will be required to charge the same monetary amount for advice to transfer as advice not to transfer. The ban will take effect on 1 October 2020 subject to transitional arrangements where the adviser has started work before that date. There are some limited exceptions in relation to members in serious ill-health or serious financial difficulty. 

FCA consultation sparks concern that transfer value information could amount to advice

A number of pension industry bodies have written to government ministers to express concern at comments made by the FCA in its Guidance consultation "Advising on pension transfers".  The guidance is mainly aimed at financial advisers giving advice on transfers from defined benefit schemes.  However, it suggests that if trustees give scheme members illustrative figures that compare the outcomes a member might get by either keeping the defined benefit or transferring or converting it into money purchase benefits, this could steer the member towards a specific course of action and therefore amount to regulated advice for which FCA authorisation is required.  

The bodies that have signed the letter to ministers are the Association of Consulting Actuaries, the Pensions Administration Standards Association, the Pensions Management Institute and the Society of Pension Professionals.  They are apparently concerned that the FCA's stance could lead to a "significant minority" of schemes needing to change their retirement process, leaving scheme members with less information with which to make informed decisions about their pension benefits.

The FCA's consultation closes on 4 September 2020.

HMRC publishes guidance on GMP equalisation and lump sums, but not GMP conversion

On 16 July HMRC published guidance on the tax treatment of lump sums where benefits are adjusted for the purposes of carrying out GMP equalisation measures.  Key points of note include:

• Lump sums with a requirement for extinguishment of rights: there are a number of lump sums where the legislation requires that payment of the lump sum must extinguish the member's rights under the scheme or the arrangement.  HMRC says that the reference to extinguishing entitlement to benefits is to all the benefits that could reasonably have been known about at the time of the payment, and that the lump sum will not stop being an authorised payment purely because, due to GMP equalisation, further entitlement is later identified which the scheme administrator could not reasonably have known about at the time of the lump sum payment;
• Payment limits: For some types of lump sum the legislation imposes a limit on the amount of the payment.  For "small lump sums", winding-up lump sums, trivial commutation lump sum death benefits and winding-up lump sum death benefits, HMRC says that as long as a previous lump sum payment did not exceed the limit which applied at that time, the lump sum will not stop being an authorised payment purely because, due to GMP equalisation, further entitlement is later identified.  However, it says that the position is different for a trivial commutation lump sum, as in that case the limit is based on the value of the member's pension rights under all registered pension schemes on the "nominated date".  HMRC says that because GMP rights accrued before 6 April 1997, the value of the member's pension rights on the nominated date includes the "equalised GMP" rights.  If GMP equalisation measures take the value of the member's rights on the nominated date over the relevant limit, this could result in the trivial commutation lump sum being an unauthorised payment;
• Future lump sum payments: where a "top up" payment to a previous lump sum is made, it must satisfy the payment conditions in force at the time the payment is made and will be taxed in respect of the year that it is actually paid.

The guidance suggests that HMRC will not be issuing any guidance on GMP conversion for the foreseeable future, saying that HMRC is unable to provide supplemental guidance on conversion as more detailed work needs to be done on the wider issues associated with that methodology.

Draft Fifth Money Laundering Directive legislation contains Trust Registration Service exemption for pension schemes

In our March Update we reported that the Government had consulted on extending the Trust Registration Service as part of its implementation of the EU's Fifth Money Laundering Directive (MLD 5) into national law. There had been concerns that the regulations implementing MLD 5 might require pension schemes to register with the Trust Registration Service, but the draft regulations published for consultation contained an exemption for registered pension schemes. The government published its response to the consultation in July along with regulations that have been laid before Parliament. As expected, the regulations do not require registered pension schemes or life assurance schemes (whether or not registered) to register with the Trust Registration Service.  

Employer-funded retirement benefit schemes (EFRBS), ie unregistered pension schemes, will be required to register with the Trust Registration Service by 10 March 2022.  Previously, an EFRBS only had to register if it fell within the definition of a "taxable relevant trust".  EFRBS which are already registered with the Trust Registration Service will be required to provide some additional information by 10 March 2022, including the country of residence and nationality of persons classed as "beneficial owners" under the legislation.

Managing pension schemes service newsletter: timescales re future developments 

In July HMRC published their latest Managing pension schemes service (MPS) newsletter with an updated timescale due to Covid-19 issues. They are planning to deliver practitioner registration and reporting for practitioners in mid-2021, so that new practitioners can register on the service. Existing practitioners that are registered on the Pension Schemes Online service will also be able to enrol on the Managing pension schemes service. Practitioners registered on the service will be able to create, compile, submit, view and amend the Accounting For Tax return for a scheme and view the financial information for the scheme. Scheme administrators will be able to authorise and de-authorise practitioners through the service. 

Protected pension age easement extended to 1 November 2020

In our previous Update we reported on HMRC's Pension schemes newsletter 119 which announced the suspension of tax rules which could otherwise result in loss of "protected pension age" (ie a pre-A-day right to retire before age 55) where a public sector worker returns to work to support the Government's response to Covid-19.  The newsletter was updated on 2 June 2020 to say that the protected pension age easement has been extended up to 1 November 2020.  Since then the protected pension age easement for the period up to 1 November 2020 has been enshrined in law by the Finance Act 2020.

Corporate Plan 2020-2023

The Pensions Ombudsman has published a Corporate Plan for 2020-2023.  The plan says that a customer portal is due to be launched later this year which will transform the way in which customers contact the Ombudsman's office by facilitating the completion of online forms which will be directed to the relevant team for action.  Following the departure of Deputy Pensions Ombudsman (DPO) Karen Johnston, for an interim period there will not be a standalone DPO.  This reflects a decrease in the number of complaints requiring an Ombudsman's determination.  In the event that the Ombudsman is unavailable to make a determination, contingency plans have been put in place providing for the Legal Director at the Ombudsman's office to act as a DPO and make determinations.  The situation is to be kept under review over the coming year.

Norton Motorcycles: Ombudsman upholds complaint against scheme trustee

In an extreme case which has received considerable media attention, the Pensions Ombudsman has upheld a complaint against the trustee of several pension schemes of Norton Motorcycles.  The schemes' sole trustee was also a director of their principal employer who invested the schemes' funds wholly in Norton Motorcycles Holdings Ltd preference shares.  When members requested transfer values, these were not paid.  The Ombudsman found the trustee to have breached various legal duties in connection with the operation of the scheme, including a breach of the trustee's investment duties.  The Ombudsman held that the trustee could not rely on the scheme's exoneration clause to escape liability, as under section 33 of the Pensions Act 1995, trustees cannot exclude or restrict liability to take care or exercise skill in the performance of their investment functions.  The Ombudsman also held that where a member has acted dishonestly, it is against public policy to give effect to an indemnity clause.  Thus the trustee was personally liable for any loss suffered by scheme members as a result of breach of the investment duties.

The Ombudsman directed the scheme trustee to pay into the schemes a "restorative amount" equal to the funds that had been used to purchase the preference shares in Norton Motorcycles, including simple interest at 8% per annum from the date of investment.  He also ordered him to pay £6000 to each complainant in recognition of the exceptional inconvenience caused by his maladministration.

HMRC GMP data proved deferred pension liability in absence of scheme transfer records

In her determination in the case of Mr N (PO-25899), the Deputy Pensions Ombudsman (DPO) relied on GMP data held by HMRC to determine which pension scheme was liable to pay the member a pension in respect of the period from 1975 to 1986. 

Read the article

Mr S (PO-21047): AVCs: consistent incorrect information on deferred member's ability to use AVCs to purchase additional pension amounted to maladministration

The Pensions Ombudsman has upheld a complaint by a member who transferred almost £17,000 from his free standing AVC arrangement into the Local Government Pension Scheme in 2002 having been wrongly informed that the funds could be applied to purchase additional pension on retirement at pre-determined rates.  It was only in 2017 that the member was informed that this information had been incorrect.  The member complained that had he been informed of the correct position he would have transferred £10,000 from the redundancy payment which he received in 2002 into his AVC fund to ensure he had sufficient benefits to meet his needs on retirement.  He also said that he would have considered transferring the AVC fund to another provider to ensure he was getting the best possible return.

The Ombudsman awarded £1000 to the member for distress and inconvenience.  He also ordered that the member should make a single contribution, including any tax relief due, of no more than £10,000 to the Council responsible for his section of the Scheme.  The Council should then perform a profit and loss calculation to determine the loss that Mr S had suffered as a result of the contribution not having been invested in 2002, and make a payment to the AVC fund provider to redress this loss.

Our thoughts

It is understandable that the Ombudsman felt sympathy for the member who had on more than one occasion been given wrong information which fundamentally influenced his retirement planning.  However, the determination appears to be very favourable from the member's point of view, as it does not appear to take account of the fact that because the member did not invest £10,000 in his AVC fund in 2002, that sum of £10,000 was available to him to invest elsewhere.

Changes to CPI-based indexation permitted despite historic communications referencing RPI increases 

In his determinations in the cases of Mr N (PO-21816) and Mr L (PO-26878) the Pensions Ombudsman has dismissed complaints from members relating to member communications which, though accurate at the time, indicated that pension increases would be based on RPI when the rules in fact allowed for the possibility of a different index being adopted in future.  

In Mr N's case, the booklet which he had received referring to pension increases being increased in line with RPI had been issued in 1992 when it could not reasonably have been in anyone's contemplation that there would be a switch to CPI.  The booklet was therefore reasonably accurate at the time.  Moreover, the booklet had been designed to be read in the context of a Member's Guide which explained the rules on pension increases in more detail.  Mr N had argued that his decision to remain in his current section of the scheme rather than opting to switch sections had been based on the pension increase rule.  However, the Ombudsman noted the decision to remain in the existing section had not necessarily been to the member's detriment, as the existing section provided uncapped increases based on CPI.  In the other section which the member could have joined, although increases were based on RPI they were capped at 5%.

Mr L had received a certificate in 2005 setting out his deferred benefits under the scheme.  The certificate said that his pension in excess of GMP was guaranteed to increase in line with RPI subject to a 5% cap.  The Ombudsman found that the certificate correctly reflected the basis for pension increases applicable at the time it was issued.  He found that, based on the specific wording of the scheme rules, it was permissible for the scheme trustees to switch to basing increases on CPI.  Mr L had argued that in reliance on the pension increase information he had chosen to take all his benefits in pension form rather than commuting part for a lump sum.  However, the Ombudsman pointed out that it was not obvious that Mr L would have been any better off opting to take a lump sum, as that would ultimately depend on the benefits Mr L received over his full lifetime.

Our thoughts

These determinations suggest that the Ombudsman will not be inclined to uphold complaints based on member communications which accurately described the pension increase position as at the date when they were issued, but which referred to RPI increases when the rules allowed for the possibility of an alternative index being used in future.  They also highlight that it will often be difficult for members to show that they have relied to their detriment on an announcement which referred to RPI increases.

Recovery of overpayments: expenditure exceeding amount of overpayment and annual pension income did not amount to change of position

In the case of Mrs N (PO-20306), the Ombudsman has not upheld a member's complaint that the scheme trustee was barred from recovering an overpayment of pension from her because she had changed her position in reliance on the original level of pension being correct.

Following legal advice, the trustee concluded that Mrs N's normal retirement date under the scheme rules was 65.  As her pension had been calculated based on a normal retirement date of 60, this had resulted in her being overpaid.  The trustee sought to recover an overpayment of £5243.53 over a period of 10 years (the same length of time as the overpayment) by making deductions from Mrs N's future pension payments.  Mrs N argued that in reliance on the original figure being correct, she had spent over £8000 on a "holiday of a lifetime" to New Zealand.  However, as the difference between Mrs N's incorrect annual pension and her corrected pension was £616.80 per annum, the Ombudsman concluded that Mrs N had not shown, on the balance of probability, that she would not have taken the trip anyway had she known the correct pension figure.  The Ombudsman did award Mrs N £500 in respect of maladministration causing the length of time of the overpayment.

Ombudsman rejects member complaint re provider due diligence shortly after Regulator warning

The Pensions Ombudsman has rejected two similar complaints by the same member against two different pension providers who processed the member's request to take a transfer value to a small self-administered scheme (SSAS) in 2013, shortly after the Pensions Regulator had published its guidance on pension liberation fraud setting out increased levels of due diligence required of trustees and administrators when processing a transfer request (Mr Z PO-27889 and PO-27901).  The member's funds were lost or misappropriated following the transfer and the member complained that the pension providers should have carried out increased due diligence.  In support of his claim, the member also pointed out that two of his four pension providers refused to carry out the transfer as they had concerns about the SSAS. 

Read the full article

Scheme manager liable after failure to inform members about impact of re-employment on protected pension age

In the case of Mr H (PO-15168) and Mr N (PO-15171), the Pensions Ombudsman has upheld complaints by two members of the Firefighters' Pension Scheme that the organisation which both employed them and acted as scheme administrator should have warned the members that being re-employed as retained firefighters shortly after retiring as full-time firefighters would cause them to lose their right to a protected pension age of 50 and result in benefits paid before age 55 incurring penal tax charges due to being unauthorised payments.  The Ombudsman rejected arguments that the members should themselves have been aware of the position as a result in it having been covered in a circular issued by their union, the FBU.  The circular had been issued more than two years before the members retired and the Ombudsman held it was not reasonable to expect them to have searched through historical FBU circulars without having been given any indication of the risk of an unauthorised payment occurring.

The Ombudsman ordered the members' employer to meet the tax liability that had resulted from the members' benefits being classed as unauthorised payments and to pay the members £2000 each for distress and inconvenience.

PPF offers option of allowing up to 90 days to pay levy invoice without incurring interest charge

In July the PPF announced that schemes struggling to pay the levy could apply to have up to 90 days within which to pay it without incurring an interest charge.  Trustees wishing to take advantage of this option will need to complete the PPF's online COVID-19 notification form on receipt of the levy invoice, explaining how COVID-19 has negatively impacted the scheme or employer's business with the result that they will have difficulty paying the levy within 28 days.  If the PPF is satisfied with the application, it will confirm that the scheme has up to 90 days to pay the levy without incurring interest.

Consultation on mandatory governance and reporting requirements in relation to climate change

On 26 August 2020, the government published a consultation seeking views on requiring trustees of large occupational pension schemes, authorised master trusts and authorised schemes providing collective money purchase benefits to have effective governance, strategy, risk management and accompanying metrics and targets for the assessment and management of "climate risks and opportunities".  The government proposes to require affected schemes to disclose these in line with the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).  The government proposes that the governance requirements will apply to schemes with assets of more than £5 billion and to authorised master trusts and authorised collective money purchase schemes from 1 October 2021, and to schemes with assets of more than £1 billion from 1 October 2022.

It is proposed that among the activities required would be calculating the 'carbon footprint' of pension schemes and assessing how the value of the schemes' assets or liabilities would be affected by different temperature rise scenarios, including the ambitions on limiting the global average temperature rise set out in the Paris Agreement. 

The consultation proposes that the government will "take stock" in 2024 and consult more widely before extending the requirements to schemes with assets of less than £1 billion.

The consultation runs until 7 October 2020.

Call for evidence re addressing discrepancy in treatment of low earners under net pay arrangements and relief at source

As announced in the Budget, the government has published a call for evidence on the operation of pensions tax relief.  The government is concerned about the potential for a low earner's take home pay to be affected by the method of pensions tax relief operated by their pension scheme.  The main methods of administering pension tax relief (a) are net pay arrangements under which pension contributions are made through payroll before tax is calculated, and (b) relief at source (RAS) under which an individual's contribution is treated as if an amount equal to basic rate tax has been deducted from it, and the scheme administrator claims this amount from HMRC and adds it to the member's pension pot (regardless of the member's actual tax rate).  If an individual has sufficient income to pay at least basic rate income tax, both methods give the same outcome.  However RAS is more favourable for individuals who do not earn enough to pay income tax at the basic rate.  The call for evidence seeks views on how the differences in outcomes might be addressed.  The call for evidence closes at 11pm on 13 October 2020.

DWP call for evidence "Review of the Default Fund Charge Cap and Standardised Cost Disclosure"

The government has consulted on a review of the charge cap which applies where individuals are automatically enrolled into a pension scheme.  The consultation sought views on the level and scope of the charge cap, the appropriateness of permitted charging structures and the extent to which they should be limited, and options to assess take up and widen the use of standardised cost disclosure templates.  The government intends to publish the findings of the call for evidence by the end of 2020. 

Parliament Work and Pensions Committee call for evidence on pension scams

Parliament's Work and Pensions Committee has called for evidence for the purposes of its investigation into pension scams in the first strand of a three part enquiry into the impact of the introduction of pension freedoms five years on.  The Committee asks about the prevalence of pension scams, current trends, what more can be done to prevent scams, what role the pensions industry should have in preventing scams, and whether HMRC's position on the tax treatment of pension scam victims is correct.  The deadline for submissions is 9 September 2020.

Parliament Work and Pensions Committee seeking views from industry on potential ways to consolidate small and dormant workplace pension pots

Parliament's Work and Pensions Committed has written an open letter seeking views on consolidating small pension pots as a means of reducing the total cost to individual scheme members.  The Committee is particularly concerned about the impact of flat fee charging on small pots and urges those responding to the call to propose workable solutions for consolidating very small pension pots.

PLSA DC decumulation call for evidence

In July the Pensions and Lifetime Savings Association published "DC Decumulation: Call for evidence" recommending that the government should introduce a new regulatory regime including a new statutory obligation for schemes to support their members with making decisions about how to take their benefits.  The closing date for responses is 4 September 2020.

GMP Equalisation Working Group Guidance on Data

In July 2020 the cross-industry GMP Equalisation Working Group published guidance on the data aspects of GMP equalisation.  This technical guidance includes sections on:

• practical issues which may arise when seeking to obtain the necessary data;
• possible different approaches to calculating the relevant comparator pension when a pension is already in payment;
• potential data issues and workarounds; and
• data potentially needed for a GMP equalisation project.

GMP Equalisation Working Group Guidance on Communications

In August the GMP Equalisation Working Group published guidance on member communications.  The guidance is designed for schemes in the early planning stages of GMP equalisation.  It covers broad principles schemes can follow when planning their communications to members, answers to questions which members might ask, a checklist of communications to members which may need to be reviewed in light of GMP equalisation, and a jargon buster intended to help avoid using words and phrases members may find confusing.

PLSA GMP Equalisation Made Simple Guide

In June the PLSA published a "GMP Equalisation Made Simple Guide".  The guide includes:

• an explanation of how the issue of GMP equalisation arose;
• an explanation of the different possible methods of GMP equalisation;
• a summary of the different issues which may arise in relation to different categories of member and beneficiary;
• a summary of the data issues which may arise.

The guidance suggests that trustees' current focus should be on a really good GMP reconciliation and GMP rectification so that data is robust.  It suggests that once this is completed, trustees should then focus on improving the scheme's Pensions Regulator common and conditional data reporting scores.  The "in scope population" for GMP equalisation should then be established and segmented according to data requirements.

The guidance says that there will inevitably be gaps in historical scheme knowledge and member data and that attempting to reconstruct every pensioner record could cost hundreds of pounds per record and take years.  The guidance suggests that for those cases requiring an uplift for GMP equalisation, the typical average adjustment could be in the range of £75 to £125 per annum, and that uplifts will rarely exceed £500 per annum.  It therefore suggests that trustees may need to be pragmatic in deciding whether to use simplified assumptions and identifying those cases where detailed data could make a significant difference to a member's benefit.

PLSA Implementation Statement Guidance

In our last Update we reported on the new investment-related reporting requirements coming into force on 1 October 2020.  The PLSA has published guidance on preparing the necessary statement required to comply with the legislation (the "implementation statement") including suggestions as to what matters to cover in the statement.

PASA "COVID-19 Guidance: The Road Ahead"

In August PASA published "COVID-19 Guidance: The Road Ahead" covering issues for scheme administrators to consider as lockdown is eased.  Issues identified by the guidance include:

• the importance of schemes being visible on the internet so that members can find contact details easily;
• the importance of all data being held electronically to enable full service while remote working;
• the need to resume longer term projects which may have been put on hold during lockdown;
• where scheme administration is dealt with offshore, the need to consider how this may be impacted by a local lockdown;
• the possibility of "virtual site visits" for trustees while bans on inter-office travel and external meetings remain in place;
• how to move towards digital verification of member identity;
• the importance of maintaining up-to-date electronic signatures with all investment managers and AVC providers that trustees deal with;
• to what extent flexible working patterns will be maintained post-lockdown and how resulting issues (eg team communication) will be managed;
• what office-based working will look like in future; and
• the need to plan for possible future lockdowns at short notice.

NEST to begin divesting from fossil fuels as part of new climate change policy

In July NEST announced a new investment policy to align itself with the goals of the Paris Agreement on climate change by "decarbonising" its investment portfolio.  NEST is making a series of immediate commitments including that it will begin divesting from companies involved in thermal coal, oil sands and arctic drilling and be completely divested by 2025 at the latest, unless they have a clear plan to phase out all related activity by 2030. 

PLSA guidance on stewardship

In July 2020 the PLSA and the Investor Forum jointly published "Engaging the Engagers: A practical toolkit for schemes to achieve effective stewardship through their managers".  The guide defines stewardship as "investing pension scheme members' money in a way that preserves and enhances its value", and engagement as "purposeful dialogue with a specific and targeted objective to achieve positive change in the interests of beneficiaries, delivering good stewardship".  The guide contains suggestions as to how the concepts of engagement and stewardship might be applied across different asset classes.  It suggests there are three key stages at which pension schemes can engage: setting expectations of asset managers; appointing new asset managers; and monitoring and appraising existing asset managers.  It suggests questions to ask of fund managers at both the appointment and monitoring stages.

Accounting bodies' guidance on preparing pension scheme reports and accounts during Covid-19 pandemic

In June the Institute of Chartered Accountants of Scotland, the Institute of Chartered Accountants in England and Wales and the Pension Research Accounts Group jointly published guidance on preparing pension scheme reports and accounts during the Covid-19 pandemic.  The guidance covers:

• responsibilities for reporting to the Pensions Regulator;
• the impact of the COVID-19 pandemic on the control environment of pension schemes;
• the trustees’ report and the chair’s statement;
• going concern and the trustees’ assessment of going concern;
• accounting for scheme investments;
• events after the end of the reporting period;
• audit issues;
• the suspension or reduction of deficit repair contributions; and
• the auditor’s statement about contributions.