Pensions Snapshot - November 2017
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of October 2017 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 October 2017 in relation to occupational pension schemes. The topics covered in this edition are:
- Safeway v Newton – Court of Appeal refers point of law to ECJ
- Trustees potentially required to apply for a "legal entity identifier"
- Mr T: pity the fool member who relies on his own pension calculations
- Scheme entitled to recover where overpayments did not cause Mr Y to act detrimentally
- DWP launches two new consultations
Safeway v Newton – Court of Appeal refers point of law to ECJ
The Court of Appeal has handed down its decision in Safeway v Newton - a case on appeal from the High Court concerning an attempt to equalise normal pension ages under the Safeway Pension Scheme (the Scheme). It had previously been argued by the employer that equalisation had taken effect from 1991 by reason of an announcement being issued (and not 1996 when a deed was actually entered into confirming 65 as the equal pension age for men and women under the Scheme). This was because the power of amendment contained a provision allowing an alteration to take effect from the date of a prior announcement. The Court of Appeal agreed with the High Court and dismissed this argument, noting the power of amendment could only have properly been exercised in 1996 as it required a deed to be executed.
Separately, however, the Court of Appeal noted that the power of amendment under the Scheme did not prohibit a retrospective amendment. This meant that the requirement of EU law prohibiting retrospective “levelling down” of benefits for the period between 1991 and 1996 (i.e. the date of announcement and the date of the deed) may not in fact apply to this case. The Court of Appeal decided to refer this question to the Court of Justice of the European Union (CJEU) and therefore did not also address the question of whether section 62 of the Pensions Act 1995 (which introduced the equal treatment rule in legislation) would have rendered the Scheme equal with effect from its introduction, in any event. The decision of the CJEU will be keenly awaited (assuming it is given) as it will shed light on whether an amendment could potentially take effect from an earlier date (depending on the terms of a scheme’s power of amendment and domestic law requirements) without breaching EU law restrictions on retrospectivity.
Trustees potentially required to apply for a "legal entity identifier"
All "legal entities" which are party to financial transactions involving, amongst other things, shares, bonds, collective investment schemes and derivatives must obtain a legal entity identifier (LEI) by 3 January 2018; a unique code which is used to identify a legal entity that is a party to a financial transaction. This is due to new reporting requirements imposed on financial institutions and investment managers under the Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II).
An LEI is designed to assist with transparency and the prevention of financial fraud in relation to financial transactions by allowing all parties participating in a transaction to be identified. An occupational pension scheme will fall within the definition of "legal entity" and so may need an LEI. Investment firms will not be able to provide investment services to a scheme that does not have an LEI (and should have one). For example, it will not be able to execute trades on behalf of a scheme from 3 January 2018.
Whether or not an occupational pension scheme needs an LEI will depend on the scheme's fund structure. Trustees should therefore speak to their investment managers to establish if the scheme already has an LEI and, if not, whether they need one. Assuming an LEI is required, trustees could ask the investment managers to help them obtain one, particularly as investment managers can make bulk LEI applications at a discounted rate. Applications must be made using the London Stock Exchange's UnaVista platform and there is a fee of £115 plus VAT.
Vast numbers of legal entities are likely to require an LEI and so the application should be made in plenty of time ahead of the 3 January 2018 deadline.
LEIs are only valid for a year and so will need to be renewed by pension schemes on an annual basis at a cost of £70 plus VAT per year.
Mr T: pity the
fool member who relies on his own pension calculations
The recent Ombudsman determination in the case of Mr T considered and dismissed a complaint involving a claim for estoppel by representation. The facts were as follows:
Mr T was a member of a final salary scheme. On leaving pensionable service, he decided to remain as a deferred member rather than take early retirement. He said he had based his decision on a scheme communication which, among other things, briefly set out how deferred pensions under the Scheme were revalued. Mr T complained to the Ombudsman that the communication misrepresented the scheme's revaluation methodology. Using the information in the communication, Mr T had developed his own methodology to project his deferred benefit at Normal Retirement Date, which had not been confirmed by the Scheme and was inconsistent with the scheme's own revaluation methodology. The Scheme's own methodology meant that Mr T's actual deferred benefit from the Scheme was significantly less than he had assumed.
Among other things, Mr T claimed that he was entitled to rely on the communication as it was specific to his situation and that he therefore expected his benefits to be revalued in line with his own assumptions.
The Deputy Ombudsman considered that the communication did not accurately reflect the Scheme's revaluation methodology. This was maladministration and so the member was awarded compensation for distress and inconvenience but only at the minimum level (£500). However, Mr T's estoppel based claim was dismissed. The Deputy Ombudsman considered that the communication was unclear about the specifics of the Scheme's revaluation methodology and so it was not reasonably foreseeable that he would have relied on the communication to assess whether to take early retirement. Furthermore, Mr T did not demonstrate, on a balance of probabilities, that he would have taken early retirement had the correct information been provided.
Scheme entitled to recover where overpayments did not cause Mr Y to act detrimentally
Mr Y was a member of the Armed Forces Pension Scheme 1975 (the 1975 Section). In 2005, he transferred his benefits in the 1975 Section to the Armed Forces Pension Scheme 2005 (the 2005 Section).
In 2010, Mr Y was discharged from the Armed Forces on medical grounds. He was told that he could choose between receiving his ill-health benefits under the 1975 Section or the 2005 Section. Mr Y elected to take his ill-health benefits from the 1975 Section as these were more generous. In fact Mr Y was only entitled to ill-health benefits from the 2005 Section. By the time the mistake was discovered, there had been a net overpayment to Mr Y of £5,745.56 which Veterans UK sought to recover.
Mr Y complained to Veterans UK through their IDRP Process and the case ultimately reached the Pensions Ombudsman.
Mr Y argued that the receipt of incorrect benefits had caused him to act to his detriment by taking a part-time job rather than a full-time job and taking out a £55,000 mortgage to make home improvements.
These arguments were rejected by the Pensions Ombudsman on the following grounds:
- Mr Y had undermined his position by stating that, in fact, he had taken on a part-time job to spend more time with his children. In any event, the Pensions Ombudsman decided that there was no clear detriment to Mr Y as, by being a part-time employee, he had saved on the childcare costs which he would have otherwise incurred as a full-time employee.
- Mr Y had failed to demonstrate that taking out the mortgage was detrimental to him. When Mr Y was in receipt of the incorrect ill-health benefits he had higher monthly mortgage repayments. Since the amount of Mr Y's benefits had been corrected, his mortgage repayments had also decreased so there was no monthly shortfall. The incorrect benefits had no bearing on Mr Y taking out a second mortgage in the first place because Mr Y would have had to make living arrangements for his family, so he would have always incurred the costs of a second mortgage.
Whilst disappointing for Mr Y, the case did not reveal any real surprises for pensions practitioners. It demonstrates the evidential hurdles faced by members who try to avoid repaying overpayments by arguing that they relied on the overpaid sum. Although the overpayment should not have occurred, the case might also be seen as a useful illustration of the steps that trustees and administrators could take to ensure that they maximise their chances of recovering the amounts overpaid. The Pensions Ombudsman was not inclined to alter Veterans UK's proposals as he considered that the offers made to Mr Y were reasonable. Veterans UK seemed to garner the sympathy of the Pensions Ombudsman by readily accepting that there had been maladministration by giving Mr Y the choice of taking ill-health benefits under the 1975 and 2005 Sections, and by offering him an interest payment of £349.72 which was offset against the amounts he owed plus a £1,000 distress and inconvenience award.
DWP launches two new consultations
The DWP launched two new consultations in October – one in relation to proposed amendments to the DC-to-DC bulk transfer without consent regime, and the other in relation to the way costs and charges information is made available to DC scheme members.
In relation to DC-to-DC bulk transfers without consent, the DWP has taken on board concerns that the current restrictions on such transfers are too complex and unduly onerous. It is therefore consulting until 30 November 2017 on proposed changes which would mean that a without-consent transfer could take place if the receiving scheme is an authorised master trust or if the trustees have consulted with an independent professional, such as an investment adviser. There would no longer be a requirement for actuarial certification. In order to provide continued protection for members, the charges cap currently in place in relation to auto-enrolment schemes will be carried across from the transferring scheme to the receiving arrangement. The DWP is also proposing to publish guidance for trustees on how the suitability of a receiving scheme should be assessed. The changes are likely to come into effect in April 2018.
In a separate consultation, the DWP is looking at how costs and charges information is made available to DC scheme members in an attempt to improve transparency. Under the proposed changes, trustees and managers of schemes with DC benefits will be obliged to report on the costs and charges for each default arrangement and each alternative fund option, rather than just reporting on the range of costs and charges – and this information would have to be available free of charge on a website. Schemes will also be required to provide, on request, an illustration of the cumulative effect of costs and charges on the value of a pension pot. The consultation closes on 6 December and the changes are likely to come into force in April 2018.