Pensions Update
July 2012

News

Auto-enrolment: DWP publishes guidance on the certification of schemes for auto-enrolment purposes

Starting from 1 October 2012, (or from 1 July 2012 for those who wish to auto-enrol employees earlier on a voluntary basis), employers will be required by law to auto-enrol their eligible jobholders into a qualifying pension scheme. A qualifying scheme is one that meets certain standards and satisfies minimum requirements in accordance with scheme type.

The Department for Work and Pensions (DWP) has published a detailed guide for employers (and a separate one for actuaries) on the certification of existing defined benefit (DB) and hybrid pension schemes for auto-enrolment:

Automatic enrolment: Guidance for employers on certifying DB and hybrid pension schemes

The guidance on the certification of money purchase schemes has also been updated:

Automatic enrolment: Guidance on certifying money purchase schemes.

The DWP has also published the Government’s response to the consultation on career average revalued earnings (CARE) schemes as qualifying schemes for auto-enrolment purposes. Proposed amendments to secondary legislation will allow more flexibility for CARE schemes to be used as qualifying schemes. The amended regulations are expected to come into force on 1 November 2012, although some respondents to the consultation had commented that the amendments should come into force earlier than that proposed date to ensure that all employers, including those who choose to bring forward their staging dates, will benefit from the amendment.

Auto-enrolment: HMRC confirms compatibility of salary sacrifice and auto-enrolment

Salary sacrifice arrangements will be able to meet the auto-enrolment requirements, according to HM Revenue & Customs’ (HMRC) updated salary sacrifice guidance which includes a new section on auto-enrolment.

A question had arisen on whether auto-enrolment and salary sacrifice were compatible as, under auto-enrolment, jobholders who have been automatically enrolled will have a statutory right, within prescribed time limits, to opt out of the scheme they join. The concern was that this might be incompatible with the general requirement that, in order to be effective, salary sacrifice arrangements must not permit the employee to revert to the original salary within a 12 month period. The issue was significant as many defined contribution arrangements set up in recent years have included a salary sacrifice option.

HMRC has now amended its guidance and added pension contributions to the list of salary sacrifice schemes which allow employees to opt out and revert to a higher cash salary at any time. HMRC confirms that it is not necessary to stipulate a period for which the arrangement must be entered into or to set out “lifestyle changes” in relation to salary sacrifice for workplace pension schemes.

View the updated guidance.

Auto-enrolment: Pensions Regulator publishes template letters to workers

In preparation for the introduction of auto-enrolment from 1 October 2012, TPR has published template letters to help employers communicate with their employees about the new regime. The letters include information on key topics that research has identified workers are likely to ask about.

There are several versions available depending on the type of scheme, whether the employer is choosing to postpone the auto-enrolment date of a worker and the type of worker the employer is addressing. To help employers find the letter that suits their circumstances, the Pensions Regulator (TPR) has developed an “employer letter template tool”.

View TPR’s templates.

Auto-enrolment: TPR publishes strategy and policy papers for tackling employers’ non-compliance with new duties

TPR is responsible for ensuring that employers comply with the new auto-enrolment obligations which were introduced with effect from 1 July 2012 (see legislation section below). It has now published its detailed strategy, accompanied by a policy paper, on how it will carry out this role. The key points are:

• TPR’s main objective will be to set up and maintain a “pro-compliance culture”, recognising that employers need support to understand how to comply with the law. In this vein, TPR has issued detailed guidance notes on various aspects of the employer duties;
• monitoring measures will include facilitation of whistle-blowing and pro-active investigation such as targeted visits to employers at high risk of non-compliance. Templates for regulatory requests for documents and information are included in the policy document;
• as for enforcement, in line with its risk and proportionality approach, TPR will regard as a higher priority those breaches which are persistent, intentional, wilful or dishonest. A detailed framework for investigation and enforcement is set out in the policy document, including how employers may appeal and how compliance action may be published; and
• TPR aims to:
  • maximise deterrence by communicating and setting appropriate sanctions;
  • detect non-compliance swiftly and investigate breaches fairly, objectively and professionally;
  • take enforcement action through appropriate civil and criminal sanctions, including escalating daily fines in certain circumstances; and
  • implement a “robust registration system” to prevent employers from avoiding their duties.

TPR has identified the following high risk areas for non-compliance:

• failure to comply with automatic enrolment at the appropriate staging dates (including challenges posed by reliance on a payroll provider to support administration);
• failure to plan effectively for the required record-keeping and administration of benefits;
• unpaid contributions;
• failure to meet qualifying scheme requirements; and
• incorrect advice to employers about their duties due to lack of regulation of pensions advice.

View TPR’s compliance and enforcement strategy document - this provides a framework for TPR’s regulatory approach, and explains the various options available to maximise employer compliance.

View TPR’s compliance and enforcement policy document - this explains TPR’s approach to minimising non-compliance with the duties and safeguards, and associated legislation.

View TPR’s overview of employer duties - this is a summary of the compliance and enforcement strategy outlining TPR’s regulatory approach and legal powers.

Auto-enrolment: NAPF publishes further guidance leaflets for employers

On 7 June 2012, the National Association of Pension Funds (NAPF) published two further leaflets in its series “New rules for pension saving made simple” which aim to give employers straightforward information on implementing auto-enrolment.

The first four leaflets, “What are the new rules?”, “What do I need to think about?”, “What are my pension scheme options?” and “Will I need to change how I do things?” are available here, and the final two leaflets will be available on the same website at the end of July 2012.

Actuarial Profession: new conflicts of interest standards and guidance

Following a consultation process in late October 2011, a working party within the Actuarial Profession has published new materials on conflicts of interest. Those who participated in the consultation included external regulators (including TPR and the FSA), actuaries and users of actuarial services.

The material is intended to supplement the Actuaries' Code and, in respect of pensions, comprises:

• a revised mandatory standard APS P1, which will be amended to discourage scheme actuaries from advising on scheme funding and factors. There will be a rebuttable presumption that this would give rise to an irreconcilable conflict of interest, which would prevent the actuary from acting for the employer in this regard. Actuaries should depart from this only in exceptional circumstances. This reflects a principles-based approach, rather than prohibiting scheme actuaries from giving such advice as had been proposed, allaying concerns raised during the consultation about a ban's adverse impact on smaller firms. Early adoption of the revised standard is encouraged, but it does not come into force until 1 July 2013; and
• new non-mandatory guidance. To fill a perceived gap, there is a new substantial guidance note for actuaries covering regulatory provisions, legal matters and practical advice on how to identify and manage potential conflicts. After consultation, certain sections have been improved including a more detailed discussion on the use of Chinese Walls. There is also a separate guidance note aimed at helping trustees in understanding actuaries' obligations, the areas of conflict of interest faced by actuaries and how to manage relations with a scheme actuary. This has been designed to assist actuaries in explaining their professional position to trustees.

TPR publishes updated guidance on multi-employer schemes and employer departures

On 16 July 2012, TPR published its update guidance on multi-employer schemes and employer departures from defined benefit schemes. The guidance includes updates on the amendments to the Occupational Pension Scheme (Employer Debt) Regulations which came into force on 27 January 2012. These include:

• the introduction of flexible apportionment arrangements: a new mechanism which allows an employer to depart from a multi-employer scheme and without the section 75 debt being due. This includes where the scheme is closed to future benefit accrual; and
• changes to the ‘period of grace’ conditions. The default length of a period of grace is 12 months from the date the employer ceases to employ any active members. However, the trustees may agree in writing, before the period expires, to extend the period to a date which is more than 12 months, but less than 36 months from the applicable date.

Also included is further guidance on the factors trustees should take into account when identifying the scheme’s statutory employers - that is, who is responsible for supporting their multi-employer scheme, including the potential implications of recent court cases.

Trustees, employers and advisers may find this guidance useful where they are involved with a multi-employer scheme and wish to understand available options including criteria TPR expects in situations where an employer departs from a multi-employer scheme.

View the guidance.

TPR shortens guidance on incentives exercises

TPR has replaced its December 2010 guidance for trustees and employers on incentive offers made to members of defined benefit schemes to transfer out of their scheme or give up some of their rights. The guidance has largely been superseded by the new industry code of practice unveiled in June 2012 and on which we reported in our June 2012 update.

In place of the previous guidance, TPR has issued a short-form statement endorsing the new code of practice and confirming that it will have regard to the code in any regulatory action concerning incentive exercises. The statement also reiterates the existing five high-level principles by which TPR will judge an incentive exercise:

• an offer must be clear, fair and not misleading;
• an offer must be open and transparent, so all parties are aware of the reasons for the offer;
• conflicts of interest should be identified and managed appropriately;
• trustees should be consulted from the start of the process; and
• independent financial advice should be freely available to all members. In most cases, members should be required to obtain advice as a condition of an incentive offer.

TPR warns that it may intervene in an incentive exercise if it has cause for concern; for example, if it suspects members are being coerced to accept offers or if one group of members is being unfairly advantaged.

View TPR’s statement.

TPR publishes annual report and accounts

TPR has published its annual report and accounts for 2011/2012. The report notes that the last 12 months have seen the continuation of the difficult economic climate, which has placed considerable pressure on the funding of final salary schemes.

TPR also highlights its communications programme in relation to the employer compliance regime for auto-enrolment and recognises that it is of the utmost importance to assist employers in understanding their new duties and to minimise employee opt-outs from pension arrangements.

As TPR notes that many employers will comply with their auto-enrolment duties using money purchase schemes, TPR says it is keen to drive up standards in such schemes, and that it has published extensive guidance during the year on scheme design and governance.

For a summary of an independent review on TPR’s success or otherwise in meeting its objectives, see the item on the NAO report below.

View the report and accounts.

Takeover Panel consults on pension protection measures during acquisitions

The Takeover Panel has published a consultation setting out the proposed changes to the Takeover Code. If implemented, the changes would enable pension scheme trustees to obtain information about a bidder’s intentions towards the target company’s pension scheme. From a better informed position, trustees would then be empowered to represent scheme members more effectively. The proposals are expected to take effect from 2013. We will be publishing a briefing on the consultation shortly.

The consultation period ends on 28 September 2012.

View the consultation paper.

NAO publishes report: “Regulating defined contribution pension schemes”

On 11 July 2012, the National Audit Office (NAO) published the above Report which examines the effectiveness of the regulation of defined contribution (DC) schemes and how well TPR’s objective to protect members’ benefits is being realised.

Key findings

These were:

• the tax payer has a substantial interest in the regulatory system being effective. The estimated increase in DC savings following the introduction of auto-enrolment will save an estimated £1 billion in income-related benefits by 2050;
• TPR is increasing the proportion of its resources devoted to regulating DC schemes. However, as the market is changing and a majority of DC scheme members now belong to contract-based schemes, a different regulatory approach may be needed;
• TPR adopts a sound approach of aiming to regulate in a targeted, proportionate and risk-based way, although the nature of the market makes this difficult to implement effectively. TPR has difficulty in reaching those employers and trustees who are less engaged and where the risks to individual member outcomes are likely to be greatest;
• TPR’s evidence base is improving, and its knowledge of schemes is improving. It is working with the pensions industry to establish a shared understanding of the most important technical issues where regulatory intervention might be effective;
• TPR’s performance measurement system has limitations, as it tends to measure processes or actions undertaken, rather than outcomes from regulatory action. Regulatory activities change over time, and do not always provide a stable basis for measurement, making it difficult to assess progress;
• one of the problems in measuring performance is that it is not fully clear how TPR’s objective to protect members’ benefits relates to its roles and responsibilities where regulatory responsibilities for contract-based schemes are shared with the Financial Services Authority (FSA), which has its own objectives. There are no overarching objectives against which overall regulatory action on pensions can be assessed;
• there is no single public body leading on the regulation of DC schemes and which is ultimately accountable for the delivery of regulatory objectives. The DWP oversees the work of TPR and the Treasury is responsible for setting the overall legislative framework within which the FSA operates. However, none of these four bodies is accountable for the regulatory system as a whole, as regards setting clear system objectives or monitoring performance against them, nor is there a joint risk register;
• the shared regulatory responsibilities require TPR to work together with the FSA but there are no overarching objectives and no common framework across the regulatory system for making evidence-based assessments of risks to members. Without a more integrated framework, it is difficult to assess whether there are any gaps in the current arrangements;
• as there is insufficient clarity regarding regulatory objectives and risk assessment, it is unclear whether TPR has an appropriate level and range of powers. TPR has no powers regarding the providers of contract-based schemes but it has the statutory objective to protect members’ benefits in these schemes;
• outcomes for DC scheme members can vary considerably, even if factors outside the control of regulation are held constant, such as investment performance and contribution levels. Choices made by, or for, members can impact substantially on obtaining good outcomes. For instance, the size of final pension pots in high- or low-charging schemes where members contribute the same amount and experience the same stock market performance, can vary by an estimated 17 per cent, but members have no information by which they can assess whether the charges they pay represent value for money;
• effective governance arrangements can help protect members but they can vary considerably across different schemes. In contract-based schemes the individual employee holds a contract directly with the scheme provider, which is regulated by the FSA. However, there is no equivalent representation to that of trust-based schemes where trustees have a statutory responsibility to act in the interests of all members. It is unclear how far regulation should intervene to protect members; and
• the impact of regulation in reducing unwarranted variation in outcomes for pension scheme members is unclear, as there is an inherent difficulty for any regulator to measure what would happen in the absence of regulatory action.

Conclusions on value for money

The NAO concludes that TPR has achieved value for money with regard to its statutory objective to promote, and improve understanding of, the good administration of schemes. However, the current system of performance management does not make it possible to judge whether TPR is achieving value for money with regard to its wider strategic objective of protecting member benefits.

The NAO also notes that TPR’s system for regulating DC pension schemes as a whole lacks clear, overarching objectives for what regulation seeks to achieve. The lack of a single body with overarching responsibility for the delivery of regulatory objectives means there is insufficient accountability to ensure that the system delivers value for money to the tax payer.

Recommendations

The NAO makes the following recommendations to TPR:

• TPR should develop new approaches specifically to address those segments of the market it finds more difficult to reach. TPR should think creatively to reach less engaged trustees and employers so that they may be educated in a cost-effective way;
• TPR should conduct an independent, comprehensive review of capabilities to examine what skills it may need to meet its objectives; and
• TPR should strengthen its framework for measuring performance by using performance measures of regulatory activities which focus on outcomes, and introducing a set of overarching indicators that cover the factors affecting DC scheme members.

It also makes the following wider recommendations to the DWP, TPR, the FSA and the Treasury on working together in the following ways:

• to establish overarching objectives for the regulation of DC pensions;
• to develop a more integrated, evidence-based framework for assessing risks to member outcomes; and
• to develop an integrated framework for measuring performance against objectives across the whole regulatory system.

Industry comments

The NAO’s report has been recognised as highlighting the confusion created by the current regulatory structure, as no one entity has overall responsibility for DC pension schemes, resulting in insufficient focus on protecting members’ pensions. The NAPF’s view is that TPR should be responsible for all DC pension schemes, both trust- and contract-based, and regulation of insurance companies and pension providers should remain with the FSA.

TPR’s response

In its published response to the Report, TPR says it welcomes the NAO’s review and that it is developing new long-term performance measures which will be confirmed once the consultation process on TPR’s regulatory approach has been concluded.

TPR acknowledges that smaller schemes demonstrate weaker governance and engagement than larger, and states that it has provided guidance to smaller employers, and will continue to use a wide range of communication tools tailored to the needs of such groups.

TPR states that there is already a considerable degree of co-ordination between the four bodies which the NAO recommends should work more closely together. TPR has, it says, already taken a significant step towards a more integrated approach by its recent publications of principles and features for DC schemes as they apply to trust- and contract-based arrangements. However, if the Government decides to review its approach to DC regulations, TPR will play a full role in supporting such an exercise.  

View the executive summary of the Report.

View the full Report.

Occupational pension schemes and gender-neutral pricing - HM Treasury finalises proposals for implementing judgment in Test-Achats case

In our update in January 2012, we reported that the European Commission (EC) had published guidelines to assist the insurance industry in the implementation of unisex insurance pricing with effect from 21 December 2012. This was the effective date for the equal treatment of men and women in relation to insurance benefits and premiums as a result of the judgment of the European Court of Justice (ECJ) in the Test-Achats case.

HM Treasury's proposals for implementing the ECJ decision in the UK have been finalised following a consultation exercise. In March 2011, the ECJ ruled that the Gender Directive requires insurance premiums and benefits to be gender-neutral. The existing derogation permitting gender-sensitive pricing will become invalid from 21 December 2012.

In its response to the consultation, the Treasury confirms that the exemption in the Equality Act 2010 corresponding to the derogation will be repealed by statutory instrument with effect from 21 December 2012. The response also highlights three further points about pensions and annuities:

• EC guidance suggests that where an annuity purchased using funds held in a work-based pension scheme is purchased without the involvement of the employer of the scheme, the purchase would fall within the scope of the Gender Directive and would therefore be subject to the ECJ judgment. While acknowledging the disparity between the Gender Directive - which applies to pensions that are “separate from the employment relationship” - and the Equal Treatment Directive, which applies to occupational pension schemes and does not require gender-neutrality, the Treasury rules out aligning the position for all types of pension scheme in the UK for the time being. It adds that any ambiguities arising from the disparity can only be clarified by the courts;
• concerns were raised by some respondents that a two-tier annuity market will develop, depending on which type of scheme is the source of an annuity purchase. The Treasury promises to monitor the situation, but has no plans to intervene; and
• the Government will publish proposals for dealing with the pension drawdown tables issued by the Government Actuary’s Department (which are gender-sensitive) before 21 December 2012.

View HM Treasury’s response.

Pensions Ombudsman and PPF Ombudsman publish 2011/12 joint report

The Pensions Ombudsman and the PPF Ombudsman have presented their joint annual report and accounts for 2011/2012, together with their corporate and business plan to March 2015. For the Pensions Ombudsman, the number of enquiries is up, but there has been a higher incidence of early resolution by “informal” intervention by investigators. In contrast, the PPF Ombudsman has seen a fall in the number of referrals, no doubt due to the low success rate of levy-related complaints made to date.

The report includes commentary on the most common issues arising in complaints during the year and the plan highlights future contentious areas, particularly auto-enrolment, DC pensions, public-sector pension changes and the fallout from the economic downturn. Administrative issues are also covered, with information about performance against budget, timescales for complaint handling and the forthcoming merger of the two offices.

View the report.

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Legislation

Finance Act 2012 receives Royal Assent

Following completion of its Parliamentary passage on 17 July 2012, the Finance Act 2012 has received Royal Assent. Provisions restricting tax relief for asset-backed pension contributions are contained in section 48 of (and Schedule 13 to) the Act.

These measures were originally published in draft form on 29 November 2011. Since then, the Government has introduced a series of amendments to the draft legislation, the latest of which we reported on in our June 2012 update.

Auto-enrolment: key provisions come into force

The key auto-enrolment provisions of the Pensions Act 2008 and Pensions Act 2011 have been brought into force by the Pensions Act 2011 (Commencement No.3) Order 2012 and the Pensions Act 2008 (Commencement No.13) Order 2012. Provisions which came into force on 30 June 2012 include:

• the requirement that an employer must ensure that a jobholder becomes an active member of an auto-enrolment scheme with effect from the automatic enrolment date;
• the jobholder's right to opt in to or out of a qualifying pension scheme;
• the different quality requirements for money purchase and defined benefit schemes; and
• the sections of the Pensions Act 2008 which set out the regime for ensuring compliance with the automatic enrolment duties, including TPR’s power to issue compliance and unpaid contribution notices.

Although the employer auto-enrolment duties do not generally take effect until 1 October 2012, large employers have been able to bring their staging date forward to 1 July 2012.

Of particular interest to those advising employers involved in planning how to meet their auto-enrolment duties are the provisions which prohibit an employer from offering an inducement to an individual to opt out of active membership of a qualifying scheme. These apply from 30 June 2012, and are therefore effective before an employer has reached its staging date.

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012

The above Order came into force on 15 June 2012. It confirms that:

• the earnings trigger, which is the level of qualifying earnings that an eligible jobholder must earn in a pay reference period to be auto-enrolled, will be set at £8,105. This aligns the trigger with the PAYE threshold;
• the lower end of the qualifying earnings band, used for calculating minimum contributions, will be set at £5,564. This equates to the lower earnings limit for paying National Insurance contributions (NICs); and
• the upper end of the qualifying earnings band will be set at £42,475, the upper earnings limit for paying NICs.

As the Order is now in force, it provides employers with the certainty they need for planning their auto-enrolment strategy.

The Occupational Pension Schemes (Disclosure of Information) (Amendment) Regulations 2012

These regulations ensure that the requirements for disclosure of information in relation to occupational pension schemes dovetail with those related to auto-enrolment provision.

The regulations have two purposes:

• to ensure that prospective and new members of occupational pension schemes receive basic scheme information before the end of the auto-enrolment opt-out period, where this applies, as far as this is practicable; and
• to ensure disclosure requirements regarding the contents of the basic scheme information cover the full range of circumstances by which workers may join or be enrolled in occupational pension schemes.

The regulations come into force on 1 October 2012.

The Employers’ Duties (Implementation) (Amendment) Regulations 2012

These regulations provide that employers with fewer than 50 workers are not required to auto-enrol their workforce into a workplace pension scheme until June 2015 at the earliest.

There has been a minor change to the draft regulations published for consultation earlier this year as some respondents complained that the definition of small employer by reference to full-time equivalent workers was overly complex and burdensome. The final regulations require small employers to establish the number of workers in their PAYE scheme on 1 April 2012, rather than the number of full-time equivalent workers they employed at that time. This amendment will continue to allow small employers who share PAYE schemes with larger employers to delay their staging date but will also benefit employers whose PAYE scheme contains 50 or more persons, rather than workers.

The regulations also confirm the one-year extension of the transitional period for phasing in minimum employer contributions to defined contribution schemes, and for employers using defined benefit and hybrid schemes.

The regulations come into force on 1 October 2012.

The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) (Amendment) Regulations 2012

The Finance Act 2011 (FA 2011) amended the Finance Act 2004 (FA 2004) so as to remove the restrictions on paying lump sums and drawdown pensions that previously applied from the age of 75. Further reforms permit an individual, with a minimum secure pension income of at least £20,000 a year, to draw unlimited amounts from their drawdown pension fund (“flexible drawdown”) if certain conditions are met.

These regulations ensure that the FA 2011 reforms work properly in connection with members of foreign pension schemes where such schemes contain funds that have received UK tax relief. These changes have retrospective effect to 6 April 2011, the date when the relevant FA 2011 reforms came into force. They ensure that the tax rules applying to such members and schemes are compliant with EU law.

The regulations come into force on 1 August 2012.

The Occupational and Personal Pension Schemes (Prescribed Bodies) Regulations 2012

On 2 July 2012, the Board for Actuarial Standards (BAS) was dissolved. Responsibility for issuing and maintaining technical actuarial standards has passed directly to the Financial Reporting Council (FRC) under government plans to streamline the FRC's structure.

Regulations coming into force on 9 August 2012 will amend references to the BAS in nine sets of existing pensions regulations so that in future these regulations will refer to FRC Limited.

Some pension scheme trust deeds may refer to the BAS, for example, in the context of setting out the scheme actuary's role in making calculations under a scheme apportionment arrangement. Pension scheme documentation should be checked to confirm whether any changes are needed.

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Case Law

Rectification of pension scheme rules by way of summary judgment on an expedited basis

Industrial Acoustics Company Limited (IAC), the principal employer of the Industrial Acoustics Company Limited Retirement Benefits Scheme (the Scheme) has successfully obtained an order for rectification by way of summary judgment to resolve a £3 million administrative error affecting the Scheme. Norton Rose LLP acted for the Claimant and instructed Richard Hitchcock and James Rickards (Outer Temple Chambers).

A resolution passed in 1995 (the 1995 Resolution) equalised the Normal Retirement Dates (NRD) of Scheme members at age 65 in accordance with European law. Contrary to the intention of IAC and the Scheme trustee, rules introduced in 1998 by way of a resolution (the 1998 Rules) and amended by resolution in 1999 (the 1999 Resolution) defined the NRD of female members who joined the Scheme on or before 17 May 1990 as age 60 and reversed the effect of the 1995 Resolution.

Having reviewed all relevant documentation and taken relevant witnesses statements, IAC issued a claim form and particulars of claim on 21 March 2012. The application for summary judgment (therefore avoiding the need for a full trial) was unopposed by the respondents, the current trustees and a representative beneficiary. On 1 May 2012, IAC issued an application for summary judgment and applied for an order seeking to expedite the summary judgment application.

At the expedition hearing on 3 May 2012, the court considered the legal principles relating to expedition as summarised in CPC Group Limited v Qatari Diar Real Estate Investment Company [2009]. Having considered these principles, the court considered that the case was suitable for expedition and an order was granted.

During the summary judgment hearing on 15 May 2012, Vos J acknowledged that it was necessary for him to consider the recent case law as it applied to a pension case, particularly as regards the requirement for a continuing common intention. He applied the legal test of rectification in Daventry District Council v Daventry & District Housing Limited [2011] and held that:

• the parties had a continuing common intention at all times after the 1995 Resolution was passed that it should continue to apply;
• the continuing common intention existed at the time of execution of the documents sought to be rectified;
• the objective observer would have no doubt that, after looking at the actions after the adoption of the 1998 Rules and 1999 Resolution, the continuing common intention prevailed and that it had been the intention of the parties that the 1995 Resolution remain effective, notwithstanding the mistake made in relation to the 1998 Rules and 1999 Resolution; and
• the mistake in the 1998 Rules and the 1999 Resolution did not reflect that continuing common intention.

Vos J found that the continuing common intention had prevailed in 1998, 1999 and up until the present day, and rectification was both warranted and justified. He also noted that although there was no legal requirement, it was preferable to notify all Scheme members about the proceedings as soon as possible. As every step had been taken to ensure that the representative beneficiary had access to all relevant materials and that his counsel and solicitors had considered that detail, it was not seriously expected that any further arguments could have been put forward.

IAC obtained the rectification order just seven months after its new advisers, Norton Rose LLP, discovered the error, and within eight weeks of the commencement of the court proceedings. Cases typically take up to two years to resolve. Few pension cases have been suitable for rectification by way of summary judgment and it is rare, if not unprecedented, for such cases to be dealt with on an expedited basis. This case therefore highlights the possibility of obtaining rectification extremely quickly and provides a useful summary of the legal principles applicable to rectification of pension scheme rules. The Court’s speedy disposal of this matter is to be welcomed.

The Trustees of the Lehman Brothers Pension Scheme v The Pensions Regulator and another [2012] - Upper Tribunal dismisses application to strike out Regulator's reference

On 14 June 2012, the Upper Tribunal of the Tax and Chancery Chamber of the High Court (the Tribunal) rejected an application to strike out a reference by the trustees of the Lehman Brothers Pension Scheme. The trustees had referred to the Tribunal TPR’s determination to issue a financial support direction (FSD) to six companies within the Lehman group, on the basis that FSDs should be issued to 38 target companies also named in TPR's warning notice.

The Tribunal dismissed the strike out application by the target companies and held that:

• the trustees were “directly affected” persons and were able to refer the determination to the Tribunal;
• the Tribunal had jurisdiction to consider whether any target company listed in TPR's warning notice, but against whom the Determinations Panel of the Regulator determined not to issue an FSD, should be made subject to an FSD; and
• a direction by the Tribunal to include any such target company within the scope of an FSD would be effective notwithstanding that the relevant time for TPR to exercise the power to issue an FSD had now passed.

The target companies are to appeal the decision. For a full analysis of the facts and decision in this case, see our July stop press.

Comment: the judgment is complex. Employers will view with dismay the Tribunal’s decision to allow further companies to be brought within the scope of an FSD after it has been issued, particularly despite the fact that, in this case, the prescribed two year period for the issue of an FSD, which had until now been seen as a hard and fast time limit, had long elapsed.

View the determination.

Entrust Pension Limited v Prospect Hospice Limited and another [2012] - High Court rules on construction of discretionary power to award surplus

The High Court has handed down judgment in the above case, which relates to an industry-wide occupational pension scheme, and concerns the construction of scheme documentation.

Under the scheme rules, a member's annual pension was calculated by reference to his contributions (and those paid on his behalf by his employer), a guaranteed rate of interest on those contributions and:

“such an amount (if any) as in the opinion of the Trustee may properly be added thereto as representing the retiring Member's share of any actuarial surplus arising in the Fund”.

It was the extent to which there was any entitlement to a share of surplus, and how and when it should be calculated, which lay at the heart of the construction issues on which the Court was asked to rule.

Despite the unusual benefits structure, until July 2006, the scheme was administered in a way that replicated a conventional final salary scheme. Member booklets referred to the trustee's policy of providing “target benefits” based on an accrual rate, although the term “target benefits” appeared nowhere in the scheme’s rules. In July 2006, the scheme's actuarial valuation showed a deficit and the trustee decided to stop providing target benefits to future retirees.

In considering the 14 separate issues before it, the Court looked first at whether the members had an entitlement to a definable share of surplus in addition to their accrued benefits, or whether an award of surplus was purely discretionary. On balance, the Court found the arguments in favour of the discretionary approach prevailed, and that the trustee had a discretion whether or not to credit a member with a share of any surplus.

The Court considered finally the question of whether the trustee should be obliged to exercise its discretionary power with reference to the circumstances prevailing and the actuarial surplus (if any) existing:

• (a) at the time the member in question left service; or
• (b) at the date the power was actually exercised.

It was decided that if (a) applied, the present trustee would be now exercising its discretion with the benefit of hindsight, and an attempt would have to be made to reach the same decision that its predecessor would have done. These and other difficulties led the judge to conclude that the discretion ceased to be exercisable in favour of the members when there was no longer any actuarial surplus in the fund. However, if the scheme had still been in surplus, there would have been a stronger argument for the trustee doing what its predecessor should have done at the time the members left service, and awarding a share of surplus to the members. Unfortunately, the lack of surplus made all the difference and the Court held that this ruled out any remedial action by the trustee.

Comment: It is unlikely that the specific facts of this case will apply to other schemes. However, it does raise interesting questions concerning the failure of trustees to exercise a discretionary power, and whether the discretion should then be exercised by reference to the circumstances that existed when the decision should originally have been taken or by reference to circumstances as they stand now.

View the judgment.

To view this update as a pdf

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