Pensions snapshot - October 2016
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of September 2016 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 September 2016 in relation to occupational pension schemes. The topics covered in this edition are:
- Compulsory clearance mooted again following Bernard Matthews' pre-pack
- VAT deduction resolution stymied by Brexit
- PPF Long Service Cap - "in place" from April?
- Pensions Ombudsman determination: Mr N (PO-9507) - employer did not have duty to tell member about less generous death benefit on leaving pensionable service
Last month we reported the Pensions Regulator (tPR) had suggested that the clearance regime could be tightened up in light of the recent BHS collapse, with the possibility of compulsory clearance for certain corporate transactions. Since then another household name, Bernard Matthews, entered a pre-pack administration which means that the Pension Protection Fund (PPF) may well be left to pick up the pieces of the Bernard Matthews Pension Fund. The trustees of that defined benefit scheme were advised on the pre-pack by the Pensions team at Stephenson Harwood.
In a letter responding to the Rt Hon Frank Field's questions about the Bernard Matthews Pension Fund, tPR's CEO, Lesley Titcomb, confirmed that tPR has opened a case on the matter to "consider whether the use of any of [tPR's] powers may be appropriate in the circumstances."
Ms Titcomb repeated her suggestion that there are areas where the regulatory framework might be improved; including the possibility of making clearance mandatory in certain circumstances. In relation to pre-pack administrations more specifically Ms Titcomb stated that they are "an example of a situation where tPR may be interested in looking at the circumstances of a sponsor insolvency more closely."
In addition she noted that:
"tPR would expect the trustees…to take professional advice and carefully consider the potential detriment to members of the scheme if they became aware of an impending pre-pack. We would expect the trustees to consider whether the proposed transaction represents a better outcome for members than the alternatives (e.g. company liquidation), whether all creditors are being treated fairly in the context of agreed creditor priority rankings, and to act in the best interests of members…Where the trustees have concerns over a transaction from their analysis we would expect them to notify tPR."
Since 2014, HMRC has been trying to clarify its position on how it will permit employers to deduct VAT incurred on defined benefit pension administration and investment management expenses in the wake of the, now aging, PPG case decided by the European Court of Justice in 2012.
Various position statements have been issued by HMRC over the last few years, including guidance that states that the employer must be a recipient of the services it is seeking a VAT deduction on. However, a number of uncertainties arise in relation to documenting the relevant service agreement arrangements to reflect this.
In 2015, HMRC stated that it would issue further guidance to clarify matters but, to date, that guidance has not been forthcoming. In the meantime, a transitional period has been in force that allows employers to claim VAT deductions on certain pension scheme expenses on the same basis that HMRC had permitted prior to the PPG case.
Last month HMRC extended that transitional period by a further year to the end of 2017 and stated that it would consider a further extension along similar lines next year. With Brexit in focus, the position on this VAT issue seems increasingly blurred.
On 15 September the Department for Work and Pensions (DWP) published its formal consultation on the long service element of the PPF compensation cap and indicated its intention for regulations to come into force on 6 April 2017. The extension to the PPF compensation cap for those with extended pensionable service was first announced by the then-Pensions Minister, Steve Webb, on 4 December 2012 but has never been brought into force, even though it forms part of the Pensions Act 2014.
The PPF currently provides compensation based on 90% of an individual's accrued pension if an individual is below the scheme's normal pension age when the employer becomes insolvent. The compensation available is subject to a cap – the current maximum compensation equates to £33,678 per annum, at age 65. The government recognised that individuals who had worked for a particularly long time for one employer would suffer disproportionately as a result of an employer insolvency as the lost pension is likely to represent a very large proportion of their retirement savings. As a result, the long service extension to the cap was proposed, which would allow higher compensation for those with more than 20 years' service. The long service cap would increase the standard cap by 3% for each full year of pensionable service above 20 years, subject to a new absolute maximum of double the standard cap.
The DWP has stated that the consultation is only in relation to whether the draft regulations achieve their intended purpose and not on whether, when or how the cap should be brought into force. This would seem to indicate that the long service extension should be in force from April 2017 as set out in the consultation. However, the new Under Secretary of State for Pensions, Richard Harrington, has elsewhere referred to having to make a decision on "whether" he will present the regulations to Parliament, so the position remains somewhat unclear. Another case of watch this space…
In August 1971 Mrs N became employed by Dundee City Council (Council) and joined the Scottish Teachers' Superannuation Scheme (Scheme). She decided to leave the Scheme in November 2012 having completed 40 years' pensionable service, which she believed was the maximum period permitted. Mrs N completed an "Opt out" form (Form) in which she declared she had read the guidance in the Form and knew the potential benefits available to her as a Scheme member. A section of the Form headed "Why should I be a member of the scheme?" stated that the Scheme will "…pay a death grant if you die before you retire and may also pay children and dependants' pensions subject to qualifying service…".
Mrs N died whilst employed by the Council on 17 October 2013 and the Scheme administrator (Administrator) paid her husband a lump sum death benefit of £67,453 from the Scheme. This benefit had been calculated in accordance with the Teachers' Superannuation (Scotland) Regulations 2005 (Regulations), which provided for the payment of a death benefit equal to 3/80ths of pensionable salary multiplied by reckonable service on the death of a deferred member like Mrs N. The death benefit payable under the Regulations had Mrs N been an active member would have been £132,063.
Mrs N's husband, Mr N, complained that the Form had led Mrs N to believe that the death benefit would remain the same if she opted out and that she would not have become a deferred member if the Council or the Administrator had told her that doing so would substantially reduce the death benefit. Mr N also submitted that the Council had breached its duty of care towards Mrs N as outlined in the case of Scally v Southern Health and Social Services Board  1 AC 294. (Broadly speaking, this case relates to an employer's implied duty to take reasonable steps to inform an employee about a contractual right in order that the employee can take advantage of that right).
The Ombudsman dismissed the complaint, noting that the Administrator had paid Mr N the correct benefit under the Regulations and so had fulfilled its duty to administer the Scheme in accordance with the Regulations. Both the Council and the Administrator had satisfied the statutory requirements for supplying information in relation to the Scheme and it was clear from the Form that the more generous death benefit would not be paid on the death before retirement of a deferred member.
Turning to Scally, the Ombudsman stated that, assuming the option to opt out of the Scheme is a contractual right, the next step is to consider whether Mrs N could reasonably have been expected to know about the consequences of opting out unless it was brought to her attention by the Council. The Ombudsman concluded that the information which explained the consequences of opting out was readily accessible on the Administrator's website and in the Scheme booklet and the Council had no need to bring it to her attention. Whether or not Mrs N accessed this information or fully understood the implications was not the fault of the Council or the Administrator and so the Council had not breached its Scally duty.