Pensions snapshot - July 2020
This edition of snapshot looks at the latest legal developments in pensions.
This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:
- Latest on the Pension Schemes Bill 2019-20
- High Court finds PPF compensation cap unlawful
- Mr S (PO-26563) and Mr N (PO-25138): unpaid contributions warrant timely action
- Consolidation - what will happen to DB superfunds now?
- TPR’s COVID-19 response: update
Latest on the Pension Schemes Bill 2019-20
The Committee stage of the Bill in the Lords was concluded on 4 March 2020 with the next stage being the Bill report stage in the Lords on 30 June 2020.
The amendments that were tabled in advance of the report stage were:
- In relation to trustees’ governance duties regarding climate change risk, clarifying the ways in which new powers may be used by trustees when they are required to take into account matters such as the 2015 Paris Agreement on climate change and other climate change goals.
- Requiring the Money and Pensions Service (MaPS) to provide information about members' entitlements under occupational and personal pension schemes by means of a pensions dashboard service.
- Amending the Bill's regulation-making powers concerning collective money purchase schemes so that most regulations must be made under the affirmative resolution procedure.
- Incorporating amendments requiring, in prescribed cases, members to provide evidence to the trustees or manager that they have obtained information or guidance from MaPS before acting on a transfer.
High Court finds PPF compensation cap unlawful
The High Court has found (Hughes and others v The Board of the Pension Protection Fund) that the PPF’s compensation cap on deferred members’ benefits amounts to discrimination on the grounds of age. The PPF’s compensation structure treats younger members differently to those who have reached normal pension age before their scheme’s PPF assessment period started, and the High Court has found this could not be objectively justified.
For members below normal pension age, the PPF compensation is capped at 90% of a statutory compensation cap (£41,461 at age 65 from 1 April 2020). Members above their scheme’s normal pension age when the assessment period starts receive 100% of their pension entitlement (although pension increases are based on a statutory formula and not the original scheme’s rules).
A very small number of members are subject to the cap, but those who are affected can face a significant reduction to their benefits. In this case, one claimant, Mr Hughes, had taken early retirement in 2003 on an annual pension of £66,245. In 2005 his employer became insolvent and his pension scheme entered a PPF assessment period. His PPF compensation was capped because he had not reached normal pension age at that time, leaving him with an annual pension from the PPF of £17,481. Mr Hughes calculated that by 2018 his original scheme pension should have been £112,958.64 per year but his PPF compensation was £21,719 per year.
The PPF has announced it will work closely with the DWP to understand the government’s response. In the meantime, it will continue to pay current levels of compensation.
Mr S (PO-26563) and Mr N (PO-25138): unpaid contributions warrant timely action
Both complainants were employees of Border Steelwork Structures Ltd (BSSL) and members of the Scottish Widows Group Personal Pensions Plan (the Plan).
Mr S joined the Plan in 2012 and, in June 2015, was informed by BSSL of problems regarding irregular employer and employee contributions since his membership had begun. The employer assured Mr S that any pension arrears would be satisfied by 14 October 2015. In July 2017, Mr S contacted the Plan administrators who confirmed that the problems resulted from BSSL’s failure to make employer contributions and to pass on employee contributions. Although Mr S notified BSSL of his intention to retire in June 2018, he was unable to take his pension due to the inaccuracies.
Mr N received his contract of employment in 2009 which stated that BSSL was required to contribute 8% of his pensionable salary into the occupational pension scheme at the time. In 2012, Mr N became a member of the Plan and BSSL began to experience problems which resulted in irregular employer and employee contributions. Mr N was informed of the issue in June 2015 and was assured that any pension arrears would be satisfied by 14 October 2015.
The problems continued past October 2015 and both members complained to the Pensions Ombudsman.
The Pensions Ombudsman’s early resolution service attempted to resolve the issues, but BSSL failed to respond to both attempts. The matter was then passed to the Ombudsman who determined that both financial and non-financial injustice had occurred. Contributions had been either “significantly delayed or missed entirely”, resulting in maladministration and rendering both complainants’ plans inaccurate. Additionally, despite being given numerous opportunities to provide a response and rectify the situation, BSSL had impeded any chance of early reconciliation. The employer’s “error and inaction” in this respect meant that both Mr S and Mr N had suffered “exceptional distress and inconvenience”.
BSSL was directed to reconcile the payments and to put both members in the financial position they would have been in, had the payments been made on time. The Ombudsman further ordered BSSL to pay Mr S and Mr N an additional £3,000 each in recognition of the exceptional distress and inconvenience caused by its maladministration.
Both cases highlight the importance of resolving issues in a timely manner and engaging with the Ombudsman to resolve complaints. In this case, BSSL was required to pay £3000 to each complainant from the highest category for non-financial injustice, “exceptional”. The Pensions Ombudsman’s guidance provides that a circumstance in which a complaint will fall into the “exceptional” category includes one where there is “repeated failure” by the respondent to engage with the Ombudsman on one or more complaints.
Consolidation - what will happen to DB superfunds now?
In recent weeks, The Pension Regulator (TPR) has issued guidance for those setting up and running “DB superfunds”, including directors, senior managers and trustees.
TPR sets out guidance and the standards it expects to be met in the period before longer-term legislation is in place. This is in recognition of the fact that superfunds can be complex and include numerous entities with different flows of obligations and benefits. TPR’s guidance follows on from the DWP’s consultation and TPR’s response. It recognises the unconventional structures which may be put in place to support the replacement of an employer’s covenant e.g. capital buffers and control of the investment strategy and/or the assets in the capital buffer (in an employer’s section).
Some of the notable points include:
- Superfunds (and trustees) will be put through an initial assessment where they will have to explain how they meet the expectations in TPR’s guidance. They will be subject to ongoing supervision and have scrutiny over any transfers both in and out of a pension scheme.
- Having people that are “fit and proper” to run a superfund will be crucial so assessments of fitness and propriety will be carried out.
- Superfunds will need to demonstrate that trustee boards are well-governed with appropriate checks and balances in place. In addition, in order for a superfund to run effectively, there will need to be robust and effective administrative systems and governance processes in place. Clearly, IT will need to be enabled to support this unique business model which will deal with the administration, payroll and tax functionality as well as deal with member data including complaints etc.
- Superfunds will need to have detailed and costed plans for winding up for all the likely scenarios and robust business plans and strategies to deal with capital buffers and corporate financial sustainability.
Subsequent to TPR’s guidance, Andrew Bailey, the central bank governor, wrote to the work and pensions secretary, Therese Coffey, to criticise the superfunds framework. There are concerns that this could, in turn, derail the launch of superfunds (following a two year battle to get to this point and notwithstanding previous endorsements by Guy Opperman, the pension minister, who had said that the superfunds were “a big step towards a healthier and stronger pensions landscape”).
Mr Bailey’s worry is that, by not adhering to the standards aligned with the EU’s Solvency-II framework for insurance companies, there could be a risk to financial stability with pension consolidators benefitting from a more lenient regulatory framework when compared to their insurance rivals (resulting in so-called “regulatory arbitrage”). This point has not been lost on insurance companies to date. All of this at a time when the DWP is developing an authorisation and supervision framework to safeguard the benefits of members moving into superfunds.
For now, the future looks unclear. Ultimately, the key hurdle to overcome will be ensuring that members’ benefits are protected to a high degree of certainty. Until that happens, the status of how superfunds will assist in any de-risking journey remains to be seen.
TPR’s COVID-19 response: update
TPR has published an update on the easements it announced in response to COVID-19, which we covered in the April 2020 snapshot. Most reporting requirements that were paused will resume from 1 July. This includes reporting late valuations and recovery plans, delays in transfer quotes and payments, and failures to prepare accounts. Where deficit repair contributions have been suspended, trustees will need to submit a revised recovery plan or report missed contributions.
TPR announced it will continue to assess breaches of administrative and compliance requirements on a case-by-case basis and respond pragmatically where these breaches are COVID-19 related. Trustees and employers will, of course, need to consider whether there are also consequences under scheme rules or related agreements (such as guarantees or other security arrangements) in the event of any breach.