This month our reported items include:
- the Pensions Regulator’s publication of scheme principles for defined contribution schemes, and auto-enrolment assistance for employers and trustees;
- the new Code of Good Practice on Incentives Exercises for Pensions, which will be of interest to all employers with defined benefit schemes;
- Bradbury v British Broadcasting Corporation  - a recent High Court decision in which a cap on pensionable pay was achieved by extrinsic contract.
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TPR publishes section 89 report on Regulated Apportionment Arrangement
On 31 May 2012, the Pensions Regulator (TPR) published details of its decision in the recent case of the British Midland Airways Limited Pension and Life Assurance Scheme (the Scheme).
The Scheme has approximately 3,700 members and its estimated funding deficit is approximately £450 million on a ‘buy-out’ basis (the amount it would cost to secure members’ benefits by purchasing annuities) and £230 million on the Pension Protection Fund’s (PPF) s179 measure, according to the most recent figures available at the date of the clearance application.
The report (PDF) sets out that TPR received an initial proposal which would have involved the Scheme’s liabilities being transferred to a shell company within the Lufthansa group, LHBD Holding Limited (the holding company of the BMI Group), as the sole sponsoring employer. Lufthansa, which would not have had any statutory obligation to fund the Scheme, had committed to provide a conditional and capped level of support on a voluntary basis over a 25-year recovery plan.
The future contributions proposed were insufficient in isolation to prevent a deterioration in the Scheme’s funding position. The proposal was therefore almost wholly reliant upon investment outperformance to reduce the existing funding deficit and limit further deterioration.
In TPR's view, the proposal posed unacceptable risks to members’ benefits and PPF levy payers. It therefore declined to provide clearance but worked with the parties involved, their advisers and the PPF to explore alternatives.
Following further discussions, TPR issued a clearance statement for a second proposal which involved a controlled entry to the PPF via the rarely used mechanism of a Regulated Apportionment Arrangement (RAA). Under the RAA, the Scheme (and therefore the PPF) received £16 million, significantly more than would have been received from the insolvency of British Midland Airways Limited (BMAL), the Scheme’s statutory employer. In addition, Lufthansa provided a further voluntary contribution of £84 million to top up members’ benefits outside the PPF. Whilst TPR was aware of the proposed voluntary payment, it did not form part of TPR’s consideration as to whether approval of the RAA was appropriate.
TPR will only approve a RAA if it believes it would be reasonable to do so. In the specific circumstances of this case consideration was given to:
- whether insolvency of the employer would be otherwise inevitable or whether there could be other solutions (including funding options for the scheme) which would avoid insolvency
- whether the scheme might receive more from an insolvency
- whether a better outcome might otherwise be attained for the scheme by other means (including through the use of the regulator’s powers where relevant
- the circumstances of the rest of the employer group, and
- the outcome of the proposal for other creditors.
RAAs are extremely uncommon. However, in the specific circumstances of this case, TPR concluded that a RAA was an appropriate and reasonable course of action. TPR and the PPF worked together to form a common view of whether the proposed level of mitigation was appropriate.
TPR’s report, published under section 89 of the Pensions Act 2004, also explains that TPR’s ‘moral hazard’ powers (Financial Support Directions and Contribution Notices) were not available in this case because, in TPR’s view, not all the relevant legal tests were met (although the report does not go into detail on this point). Amongst other issues, consideration was given to the benefit received by BMAL in view of the significant funding provided by Lufthansa during the period of its ownership that had enabled BMAL to continue as a going concern and pay contributions to the Scheme.
TPR sets out DC scheme principles and assistance for assessing existing schemes for auto-enrolment purposes
ON 13 June 2012, TPR published online materials on its view of the six key principles to be taken into account by employers for good defined contribution (DC) scheme provision in relation to auto-enrolment. Each of the features sits beneath one of TPR’s six principles for the good design and governance of DC pension provision, which were first published last year. The features have been developed following a series of discussions with the pensions sector during the early part of 2012.
For TPR, to be suitable for auto-enrolment, DC schemes should:
- be designed to be durable, fair and deliver good outcomes for members;
- ensure a comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent;
- safeguard that those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out;
- ensure schemes benefit from effective governance and monitoring through their full lifecycle;
- be well-administered with timely, accurate and comprehensive processes and records; and
- ensure communications are designed and delivered to members to encourage member engagement and to enable informed decision-making about retirement savings.
The first three principles are all relevant at scheme set up and therefore are most relevant to product and service providers and those advising employers on scheme selection. The last three principles cover those activities which are likely to remain relevant through the life of a scheme, and therefore could involve all parties included in scheme provision, including providers, administrators, trustees, employers and even members.
TPR believes that if schemes follow these principles in their design, set-up and ongoing operations, it will help them to deliver the following six elements necessary for members to receive good outcomes, which were previously identified in TPR’s statement of July 2011:
- appropriate decisions as regards pension contributions;
- appropriate investment decisions;
- efficient and effective administration of DC schemes;
- protection of scheme assets;
- value for money; and
- appropriate decisions on converting pension savings into a retirement income.
TPR has also published an online tool to help employers to check whether their existing DC scheme meets the minimum criteria for an automatic enrolment scheme as set out in legislation.
To support employers further the regulator has published a leaflet, ‘Selecting a good automatic enrolment scheme’, that sets out a number of questions that employers may want to ask advisers or product providers when they are selecting a pension scheme for automatic enrolment, or when assessing their existing scheme.
New publication - Code of Good Practice on Incentives Exercises for Pensions
On 9 June 2012, an Industry Working Group of various pension practitioners and industry bodies published a Code on Incentives Exercises for Pensions (the Code). The Code builds on TPR's guidance on incentives exercises, which was issued in March last year. TPR has also indicated that it is to update its own incentives exercise guidance later this year.
One of the chief challenges the Code will face will be in relation to governance, as the DWP is to monitor employers' behaviour against its principles. The Code is voluntary, although Pensions Minister Steve Webb has warned that he expects the guidelines to be “adopted as standard for all future transfer exercises, without exception”. If employers do not abide by the Code, it is likely that legislation will follow.
Seven principles are set out, together with information on how they should be applied:
- No cash incentives - cash incentives include anything which has a value to the member that is not a pension benefit arising from a UK registered pension scheme. This includes payments in cash, goods and services.
- For transfer exercises, advice is provided. For modification exercises, either advice is provided or a value requirement is complied with and guidance provided.
- Communications with members should be fair, clear, unbiased and straightforward.
- Records should be retained by the various parties involved in an exercise so that an audit trail is maintained that can be examined in future.
- Exercises should allow sufficient time for members to make up their mind with no undue pressure applied.
- Incentives exercises should only be offered to members who are over age 80 on an “opt-in” basis. Member advisers should adhere to a “vulnerable client” policy when providing advice.
- All parties involved in an incentives exercise should ensure that they are aware of their roles and responsibilities and act in good faith in the areas over which they have direct control.
One of the DWP's principal aims is to allow firms to manage their pension liabilities in a way that allows scheme members to make informed choices about their pensions. However, the recommended information to be provided to members is lengthy and some individuals may find such detailed communications off-putting.
The Code provides recommendations for the approach to be taken in respect of both enhanced transfer value offers and Pension Increase Exchange (PIE) exercises. Since interest in implementing PIE exercises is likely to increase significantly in the near future as employers continue to search for ways to limit their pension liabilities, some guidance on offering members choices in this area is welcome.
The Code applies to all circumstances where an offer is made available to a member after the date of publication of the Code. Where at the date of publication of the Code an offer has already been made to a member in writing, the exercise is outside the scope of the Code. However, employers should still consider how relevant aspects of the Code could be applied, given the nature of the offer to members and the stage the exercise has reached.
View the Code.
New LGPS proposals finalised
The Local Government Association and trades unions have announced the results of negotiations on changes to the Local Government Pension Scheme (LGPS). The new scheme is to apply from 1 April 2014.
The key changes to the current benefit structure will include:
- a switch to a career average revalued earnings (CARE) scheme for future accrual on a 1/49th accrual rate. This replaces the current 1/60th final salary basis.
- the current normal pension age of 65 will be replaced by each member's State pension age.
- average member contributions will be set at 6.5 per cent of actual pay. The revised contribution rates will mean that lower paid members will pay the same or less than their current contributions. The contribution bands will be expanded so higher earning members will pay higher contributions.
- members who have, or are considering, opting out can elect to pay half the member contribution rate in return for half the pension, but still retain other benefits in full. This is known as the 50/50 option.
- benefits accrued prior to 1 April 2014 (when the changes are scheduled to come into force) will be protected, including the “rule of 85”.
Those involved in public to private sector outsourcings should note that the proposals confirm the continuation of the admitted body arrangements. However, employees transferred as part of an outsourcing will be allowed to remain as active members on the first and subsequent transfers, rather than having the transferee employer elect to enrol them in its own “broadly comparable scheme”.
The proposals have been passed to members and employers for consultation. If successful, a formal government consultation will follow in the autumn.
View the LGPS 2014 website.
HMRC publishes newsletter no. 54
HMRC’s June 2012 publication includes the following items:
- fixed protection - HMRC has processed all applications for fixed protection and individuals should receive their certificates by 19 June 2012. HMRC also warns those with fixed protection to opt out of the auto-enrolment regime, or fixed protection will be lost. The same warning applies to those with enhanced protection.
- The Registered Pension Schemes Manual (RPSM) has been updated, as have the FAQs in relation to QROPS. The long-term project to re-write the RPSM will begin in September 2012 and is expected to take about a year.
View the newsletter.
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Finance Bill 2012: Government amendments to asset-backed contribution measures
Measures to restrict tax relief available for employers using asset-backed contribution (ABC) arrangements in relation to registered pension schemes are included in Schedule 13 to the Finance Bill currently before Parliament. Broadly, upfront relief will be available in future only if an ABC arrangement falls within the structured finance regime under the Corporation Taxes Act 2010.
In May 2012, the Treasury announced two minor amendments to the provisions, designed to avoid unintended consequences:
- for ABC arrangements where a contribution was paid before 22 February 2012, the time allowed for the first payment to the scheme will be extended from one year to 18 months after the day on which the advance was paid; and
- for ABC arrangements where a contribution is paid after 22 February 2012, the period within which regular payments to the scheme must be made for upfront relief to be available is clarified as being no more than one year to the next working day. This will mean the transitional rules in Part 4 of Schedule 13 will not apply in relation to arrangements with the contribution made before 22 February 2012 where these payments are made on the first possible working day after 12 months.
On 13 June 2012, HMRC published updated draft guidance on ABCs.
The Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) (No. 2) Regulations 2012
The above Regulations are made under section 292A of the Pensions Act 2004, which allows regulations to be made exempting European employers from automatically enrolling “dual status” workers. They come into force on 2 July 2012.
The Occupational Pension Schemes (Cross-border Activities) Regulations 2005 allow schemes to accept sponsorship from employers located in other European Economic Area (EEA) states, as required under the IORP Directive.
For the purposes of meeting this requirement, UK legislation defines a European employer as a person who employs a “qualifying person” and makes or intends to make contributions to a pension scheme in respect of that employee. A qualifying person is defined as an individual employed under a contract of service and whose place of work under that contract is sufficiently located in an EEA state other than the UK, so that the relationship with the employer is subject to the social and labour law relevant to the field of occupational pension schemes of the other EEA state.
Under the Pensions Act 2008 (PA 2008), a duty is introduced on all employers to enrol ‘jobholders’ into a workplace pension scheme automatically. The PA 2008 defines a jobholder as an individual aged at least 16 and under 75, earning more than the lower limit of the qualifying earnings band and “who is working or ordinarily works in Great Britain under the worker’s contract”.
It is possible that a small number of individuals will have ‘dual-status’ – being both a qualifying person and a jobholder simultaneously. This overlap means that while an employer has a duty to enrol the jobholder automatically, there are consequences for any scheme that wants to accept such jobholder as a member, and there is no obligation for them to do so.
The Regulations exempt European employers from automatically enrolling ‘dual-status’ workers.
View the Regulations.
The Automatic Enrolment (Offshore Employment) Order 2012
This Order comes into force on 1 July 2012 and extends the auto-enrolment regime to workers who work, or ordinarily work, in the territorial sea of the UK or the UK sector of the continental shelf, where the employment is connected with the exploration of the sea-bed or its subsoil, or the exploitation of their natural resources.
TPR is expected to issue guidance about the circumstances in which a seafarer or offshore worker is likely to be held to be “ordinarily working in the UK” and so liable to be auto-enrolled. For the time being, the DWP says the following factors are likely to be relevant in assessing whether a worker falls within the scope of auto-enrolment:
- where the worker begins and ends his tour of duty; and
- where the worker is subject to income tax and National Insurance contributions.
The DWP confirms that a worker's nationality and the location where a ship is registered are not likely to be relevant to this test.
View the Order.
Abolition of protected rights: HMRC publishes draft Registered Pension Schemes (Authorised Payments) (Amendment No.2) Regulations 2012
As we reported in detail in our Stop Press of May 2012, a pre-condition for a refund of member contributions to qualify as a short service refund lump sum is that it extinguishes all of the member's entitlement to benefits from the pension scheme. Prior to 6 April 2012, legislation did not allow protected rights to be refunded to early leavers. However, schemes which were contracted out on a protected rights basis were able to take advantage of an exception in the Finance Act 2004 which allowed them to pay a partial contribution refund, while retaining the protected rights element, and for it still to qualify as an authorised payment.
Since the abolition of contracting out on a defined contribution basis on 6 April 2012, the law relating to the treatment of protected rights has been repealed and the restriction on the refund of protected rights no longer applies. However, trustees who have yet to amend scheme rules to allow what were formerly protected rights to be refunded risk such payments being treated as unauthorised.
HMRC recognised this issue and confirmed that it would publish regulations to address the problem, and has now published for comment the draft Registered Pension Schemes (Authorised Payments) (Amendment No.2) Regulations 2012. The draft regulations allow schemes with a rule which prohibits a full payment in respect of a member's scheme benefits (which was made when the statutory restriction on such payments was in force) to pay partial short-service refunds without incurring unauthorised payment charges. This will give schemes time to amend their rules to remove the restriction. HMRC will accept comments on the draft regulations until 27 June 2012.
View the draft regulations.
Draft Financial Assistance Scheme Regulations 2012, May 2012 - Government response on consolidating regulations
The DWP has published the government's response to the June 2011 consultation on consolidating the regulations governing the administration of the Financial Assistance Scheme (FAS).
The response confirms that the proposals published in its June 2011 consultation will form part of the final regulations. The key provisions will:
- expand the scheme qualifying conditions for FAS;
- reflect the implementation of a pension sharing order during the winding up process;
- remove the age limit for payments to certain surviving dependants;
- avoid excess payments to those in receipt of payments on ill-health grounds;
- provide the FAS scheme manager with additional powers; and
- enable the PPF Ombudsman to investigate complaints against the FAS scheme manager.
The response also deals with the treatment of underpin benefits in FAS valuations, and the DWP has updated its FAS valuations guidance on this point.
View the response.
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Bradbury v British Broadcasting Corporation  - High Court accepts cap on pensionable pay achieved by extrinsic contract
The High Court’s decision in this case was handed down on 23 May 2012. It was held that if an active member of a scheme accepts a pay rise on the basis that only part of it is to be pensionable, this forms a binding agreement, subject to the breach of any implied duty of trust and confidence or good faith.
The High Court heard an appeal brought by Mr Bradbury against a determination of the Pensions Ombudsman (PO). He complained that the BBC, his employer, had offered him a salary increase on the basis that the increase in his pensionable pay (that is, the element of his salary that is pensionable) would be limited to 1 per cent each year. The cap was not brought in by way of an amendment to the BBC Pension Scheme (the Scheme) rules. Instead, the BBC sought to implement it by reaching a contractual agreement with employees that future pay rises would be paid on condition that only 1 per cent of any increase in pay would be pensionable.
Mr Bradbury claimed that:
- the 1 per cent cap was inconsistent with the Scheme rules;
- the cap contravened the inalienability provisions of section 91 of the Pensions Act 1995 (Section 91); and
- the employer had breached the implied duties of trust and confidence and good faith owed to its employees.
The BBC argued that the cap was imposed so as to tackle the scheme’s substantial funding deficit. It relied on the decision in South West Trains v Wightman  which held that a collective agreement reached on behalf of members by their union could override the provisions of a pension scheme deed. It followed, the BBC argued, that an express agreement made with an individual member accepting the cap on pensionable pay would be binding. It also argued in the alternative that, under the scheme’s rules, it was entitled to determine what part of an employee's remuneration counted as pensionable salary.
Warren J found that on the facts of this case, an extrinsic agreement with the member could be effective to impose the 1 per cent cap, despite the scheme definitions, and even where the employee’s agreement was not confirmed in writing. However, he disagreed with the BBC's interpretation of the salary definitions in the scheme trust deed and rules, saying that very clear wording would be required to convey the wide discretion sought to exclude part of basic salary from pensionable salary. He also rejected Mr Bradbury's argument that the agreement would be contrary to the inalienability provisions under Section 91.
The Court was unwilling to consider Mr Bradbury's arguments about any breach of the implied term in the employment contract of trust and confidence or the implied duty of good faith (together the Implied Duties) because those matters had not been dealt with by the PO, and so could not be raised for the first time on appeal to the High Court. The judge invited the parties to reach agreement on the Implied Duties and to submit that to the Court for approval, or, alternatively, to present further argument at a later date.
Comment: Subject to the good faith issue which may be examined as part of a future claim to either the Pensions Ombudsman or the Court, the High Court has decided that, where there are clear communications in respect of the effect on pension benefits, a contractual agreement to cap pensionable pay is binding on employees.
Warren J distinguished the 2009 High Court judgment in the IMG case, which concerned the purported conversion of a scheme from final salary to money purchase, and which we examined at length in our November 2009 briefing. Instead, he largely upheld the decision in the 1998 case of South West Trains, in which it was held that an extrinsic contract could override a scheme’s trust deed in order to establish the level of pensionable salary, as the trustees would need to look outside the scheme for these purposes in any event.
The BBC decision will be welcomed by employers sponsoring occupational schemes and seeking ways to limit their pension liabilities.
We will be publishing a stop press analysis of this case shortly.
The Trustees of the Olympic Airlines S.A. Pension and Life Assurance Scheme v Olympic Airlines S.A.  - PPF entry - High Court has jurisdiction to wind up Greek company in liquidation
The High Court has held that it has jurisdiction to wind up Olympic Airlines in England under European insolvency legislation, notwithstanding that the company was already in liquidation in Greece.
Olympic Airlines, which was the principal employer of the Olympic Airlines S.A. Pension and Life Assurance Scheme, went into liquidation in Greece in October 2009. The Greek liquidation did not trigger a PPF assessment period since foreign liquidation proceedings do not count as “qualifying insolvency events” for the purpose of section 127 of the Pensions Act 2004. Therefore, in July 2010 the trustees presented a petition to the High Court to wind up the company on the basis of its inability to pay the section 75 debt, estimated to be in excess of £15 million.
The Court held that Olympic Airlines had an establishment in England on the date of the petition due to the fact that the company remained in possession of its London office and had retained the services of two employees on an ad hoc basis. Further, there was no reason why the Court should not exercise its discretion to make the order since, in the circumstances, only a winding up order would suffice.
View the judgment.
Urenco UK Ltd v Urenco UK Pension Trustee Company Ltd & Anor  - pensions protection for Nuclear industry employees
On 31 May 2012, the High Court handed down judgment in the case of Urenco UK Limited v Urenco UK Pension Trustee Company Limited and Others . The claim concerned the position of nuclear industry employees who were transferred in 2008 to the private-sector Urenco UK Limited Pension Scheme, under a sale and purchase agreement and statutory protection in Part 4 of Schedule 8 to the Energy Act 2004.
The court was asked whether the proposed cost-saving measures, including increasing members' contributions and decreasing the maximum rate of increase to pensions in payment, were permitted under the scheme's power of amendment. The judge (Warren J) held that the statutory protection and contractual constraints meant that the amendment power could not be exercised so as to vary detrimentally the members' future service benefits and, therefore, the changes were not permissible.
The judgment mentions that these issues are relevant to a large number of employees in the nuclear industry.
We will publish a stop press article on this decision shortly.
View the judgment.
Tribunal allows appeal against HMRC refusal to accept late registration for protection from lifetime allowance charge - Irby v Revenue & Customs 
The First-tier Tribunal (Tax Chamber) (the Tribunal) has held that a retired corporate financier who attempted to register for enhanced protection against the lifetime allowance charge 17 months after the April 2009 deadline had passed, had a reasonable excuse for late notification.
Allowing an appeal against a decision by HM Revenue & Customs (HMRC) to refuse to accept late notification, the Tribunal held that the appellant had relied on his financial adviser to notify HMRC in time on his behalf and that such reliance was reasonable. The Tribunal directed HMRC to consider the information provided in the appellant's late notification.
The Tribunal found that Mr Irby had a reasonable excuse for the late notification since he had relied on UBS to notify HMRC in time on his behalf and that such reliance was reasonable. The Tribunal accepted that a “more prudent” person could (and would) have made himself aware of the deadline and chased his financial advisers for a response following the January 2009 meeting, and that would have been reasonable conduct.
However, the Tribunal ruled that “the categories of reasonable conduct encompass more than one course of action”. The Tribunal's task was “not to identify a reasonable course of action which Mr Irby did not take and deduce from the fact that he did not take it that he had no reasonable excuse for the course of action that he did take”, but to “examine what Mr Irby did and determine whether what he did was the action of a reasonable person”.
This decision is the latest in a number of cases concerning HMRC's refusal to accept registration for protection from the lifetime allowance charge after the April 2009 deadline. What marks this case out from others is that the appellant was successful in arguing that he had a reasonable excuse for late notification. The Tribunal accepted Mr Irby's argument that it was reasonable for him to rely on his advisers to make the application for protection on his behalf, but it is important to note that the Tribunal appeared to accept that Mr Irby did not have any expertise in pensions or personal finance.
View the tribunal’s determination.
McKinney - scheme administration: compensation due for loss of enjoyment of underpaid pension
If a pensioner is underpaid scheme benefits over many years due to maladministration, this may cause non-financial injustice at the higher end of the scale if the pensioner should have received the correct benefits at an age when he or she enjoyed a more active lifestyle.
The Deputy Pensions Ombudsman (DPO) partially upheld a complaint by the wife of a deceased member whose widow's pension was underpaid from 1991 to 2008, by which time she was over 70 years old. The DPO held that, although this was maladministration, there was no further financial loss beyond that already redressed by the scheme trustees. However, the DPO directed the trustees to pay the widow £1,000 for the loss of enjoyment of her entitlement at a younger age when she was more active. She also directed the trustees to pay the widow a further £500 for the distress and inconvenience of having to negotiate with HMRC over the tax liability arising from the payment of her benefit arrears as a lump sum.
View the Determination.
To view this update as a pdf.
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