Pensions Snapshot - May 2018
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of April 2018 in relation to occupational pension schemes.
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of April 2018 in relation to occupational pension schemes. The topics covered in this edition are:
- GDPR looms large….….there's still time for trustees to take action!
- Burgess & Others v Bic: Powers under a trust deed give effect to an earlier decision granting pension in payment increases
- tPR Publishes Guidance on Cyber security principles for pension schemes
- Hampshire v PPF: members entitled to compensation of at least 50% on employer's insolvency
- Dr S - Pensions Ombudsman (PO) directs trustees to make good lost investment performance
GDPR looms large….….there's still time for trustees to take action!
The European General Data Protection Regulation (the GDPR) comes into force in less than a month and will herald a step change in data protection (DP) law in the UK. With "GDPR-Day" (25 May 2018) looming large, we thought it would be useful to remind trustees of some of the actions which they should be considering taking to ensure compliance with the new DP regime.
As mentioned in our GDPR alert last year, the starting point for ensuring compliance with the GDPR is a data audit (otherwise known as a data-mapping exercise). This will go some way towards satisfying the new requirements and help trustees identify what other actions they need to take. Ideally, trustees should have completed the audit by now or at least be at an advanced stage in the process.
In helping our trustee clients to undertake an audit this has, time and again, thrown up a number of key actions:
- adopt a DP policy which sets out a framework for how the trustees collect, store, process and protect personal data
- issue members/beneficiaries with a revised scheme privacy notice in order to satisfy new obligations in relation to the provision of fair processing information
- review the legal bases for processing personal data – member consent will generally become more difficult to obtain and so alternatives might need to be considered
- write to former trustees and former third party service providers to request that they return or destroy personal data they hold in relation to the scheme
- review trustee liability protection in light of the harsher penalties that may apply for non-compliance with DP legal requirements
- review third party service provider agreements to ensure they are compliant with the new DP requirements
We can help with all of the above. Please feel free to get in touch if you would like to discuss what you might need to do to ensure you comply with GDPR.
It is still not too late for trustees to take action – but the clock is ticking!
Burgess & Others v Bic: Powers under a trust deed give effect to an earlier decision granting pension in payment increases
In Burgess & others v Bic, the Trustees were successful in arguing that pension in payment increases referable to pre-April 1997 pensionable service had been validly granted. The sponsoring employer had sought to challenge the increases, primarily on the basis that the requisite formalities under the scheme documentation had not been complied with in providing these increases.
The reasoning employed by the judge demonstrates a common sense and practical approach to the interpretation of pension scheme documents, construing various powers under a 1993 trust deed and rules as being capable of giving valid effect to a decision taken in 1991, in relation to the granting of the pension in payment increases.
As the Trustees won on the main issue and it was confirmed that the increases had been validly granted, the issue of recovering any overpaid amounts from members did not arise. For completeness, however, the judge did deal with the issue and re-affirmed the principle that equitable recoupment – whereby future pensions instalments are reduced to make good any overpaid amounts a member owes to the scheme – would not be subject to a limitation period.
The judge also noted that the County Court (and not the Pensions Ombudsman) could act as the “competent court” to make an order enforcing the obligation to allow for recoupment. The Trustees were represented by Stephenson Harwood LLP.
tPR Publishes Guidance on Cyber security principles for pension schemes
In April 2018, the Pensions Regulator (tPR) published its Guidance for trustees on Cyber security principles for pension schemes (the Guidance). Cyber risk is defined within the Guidance as the "risk of loss, disruption or damage to a scheme or its members as a result of the failure of its information technology systems and processes". Cyber risk can include risks to information (data security) as well as risks to assets. It also extends to both internal risks (e.g. risks posed from staff) and external risks (e.g. risks posed from hacking).
The Guidance sets out good practice for trustees when considering the cyber risk posed in relation to their pension schemes. Regardless of the size or structure of the schemes that they manage, all trustees should be alert to cyber risk.
Importantly, however, trustees are not expected to implement all of the recommendations in the Guidance if it would be onerous for them to do so. The Guidance makes it clear that the recommendations within it "can be adopted proportionately to the profile of …[the] scheme". It would be sensible for trustees to maintain records which document their thought processes and which explain why the measures taken are proportionate given the profile of their scheme.
TPR's recommendations are delivered against the backdrop of a "Cyber risk assessment cycle", which illustrates what tPR sees as the ongoing and continuous nature of cyber risk assessment. tPR's message is that pensions trustees have an ongoing duty to consider whether their scheme meets, or should continue to meet, the recommendations in the Guidance. This approach should be familiar to trustees. According to the Guidance, in addressing cyber risk, trustees should:
1. Monitor and report
- Ensure that controls, processes and response plans are regularly tested and reviewed.
- Be clear on how and when incidents should be reported to them or to other parties (such as tPR, the Financial Conduct Authority and the Information Commissioners Office).
- Ensure they receive regular updates on cyber risks, incidents and controls. The trustees should consider the likelihood of breaches occurring and whether their scheme is susceptible to a particular type of breach.
- Ensure they keep up-to-date with information and guidance on threats. Regular training of trustees (and relevant staff) can help them to demonstrate that this requirement is met. The training should include awareness around cyber risks and how to report incidents.
2. Put controls in place
- Consider whether they have sufficient controls (information technology security controls, processes and/or people) in place to minimise the risk of a cyber incident occurring. Trustees should ensure that access to data is granted at the right level and that users are regularly reviewed and access terminated if not required.
- Be satisfied that their third party provider's controls are adequate.
- Consider what standards or accreditations help the trustees or their suppliers demonstrate cyber-readiness (e.g. should the effectiveness of cyber risk management be independently assessed or specialist accreditation be sought?). Consider implementing a response plan to deal with incidents and to help the trustees safely resume operations? Examples of controls include backing-up critical data and having data processes in place to restore that backed-up data. If they have not already considered it as part of their GDPR compliance, trustees are also encouraged to have a range of policies in place around the acceptable use of devices, email and internet (including social media) etc.
3. Assess and understand the risk
- Understand the cyber risk facing their scheme (including their key functions, systems and assets as well as their cyber footprint and vulnerabilities).
- Consider adding cyber risk to their scheme's risk register and ensure it is reviewed regularly.
- Consider whether they have access to the right skills and expertise to understand and manage the risk.
Hampshire v PPF: members entitled to compensation of at least 50% on employer's insolvency
The Advocate General (AG) has given her opinion in a preliminary reference concerning a claim by a member of the T&N Retirement Benefits Scheme (1989) against the Pension Protection Fund (PPF). The member's early retirement pension was reduced by 67% when the scheme entered its PPF assessment period and the member therefore argued that the PPF compensation cap did not give full effect to Article 8 of the EU Insolvency Directive's requirements.
The AG concluded that, first, Article 8 should be interpreted in a way which ensured that each individual member was entitled to compensation of at least 50% of the total value of his accrued rights on his employer's insolvency i.e. providing an average level of protection across the membership was not sufficient. Second, the Directive aimed to ensure a minimum level of protection for all employees and that would only be possible if a minimum standard applied to each individual employee. As a result of the judgment in Robins & others v Secretary of State for Work and Pensions (Case C-278/05), the PPF should have known that it would not be permitted to use a calculation basis which resulted in certain employees receiving less than 50% of their accrued entitlements as compensation.
The AG also reached the view that Article 8 could be relied on directly by an individual against the PPF (as a State authority). Subject to Brexit, the judgment could therefore require the UK to amend primary legislation to make the PPF compliant with the consequent upshot of this being increased levy payments by employers.
Dr S - Pensions Ombudsman (PO) directs trustees to make good lost investment performance
This PO determination involved a complaint about a transfer from a defined benefit (DB) scheme to a defined contribution (DC) plan in 2012. An historic error in the DB scheme's administration meant that Dr S' transfer value had been calculated incorrectly and was less than it should have been. The error was discovered by the DB scheme trustee after the transfer had been made. To remedy the error, the trustee proposed to pay Dr S the shortfall to his receiving DC plan. However, a complaint arose about the calculation of that shortfall amount.
Dr S' complaint comprised various grounds, two of which were particularly material to the outcome of the determination. First he considered that the assumptions used to determine the shortfall amount should have been based on the assumptions applicable to the DB scheme before the error was detected and not on any subsequent set of assumptions. Second, Dr S had, in earlier correspondence with the trustee, asked that the shortfall amount be increased to take account of the investment performance he would have achieved had it been invested in his DC plan at the time he transferred out of the DB scheme.
The trustee contested the complaint. First, the trustee submitted that it had taken professional advice about the assumptions used to determine the transfer value and that this had confirmed the trustee's approach was reasonable. Second, the trustee noted that it had agreed to increase the shortfall payment to Dr S in line with investment performance and had offered this remedy to him in autumn 2014 but that Dr S had not taken up the offer. The trustee considered that it was unreasonable to have to compensate Dr S for any lost investment performance arising after autumn 2014.
In her determination, the Deputy PO (DPO) considered that:
- there was no reason to interfere with the basis on which the shortfall had been determined
- Dr S should be compensated by the trustee for investment loss up to the date the complaint was finalised (i.e. Spring 2018 and not late 2014).
The DPO's conclusion on the second point, concerning the period over which Dr S should be compensated for investment loss, is quite confusing. The DPO stated that the cut-off date for lost investment return would, ordinarily, be the date on which an adequate offer of compensation had been made before a member brought a complaint to the Ombudsman. In this case though she considered that, notwithstanding the trustee's offer in 2014, "it would be more just for investment loss to run to the date on which the complaint is finalised."
The DPO considered that, to do otherwise, would provide a "windfall" to the trustee. In the DPO's view, Dr S had not been able to benefit from the investment growth on the underpayment amount, whilst the trustee had benefitted from investment gain in relation to that amount which was "similar to that which Dr S would have achieved had the money been paid to him in 2014".
These are interesting findings for the DPO to make. You could argue that there is a “windfall” to a trustee in any case where a complainant rejects an adequate offer of compensation. In addition, it is not clear that any comparative investment performance statistics between the DB scheme and the DC plan were provided to the DPO. Therefore, it is unclear how the DPO reached a conclusion that the investment gain obtained from the DB scheme's investment strategy since 2014 could be in any way similar to the gain obtained from Dr S' strategy under his personal pension scheme.
This determination may be quite limited to its specific facts but it will be of interest to trustees dealing with complaints alleging loss of chance of investment performance.