Pensions Snapshot - September 2018
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of August 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 August 2018 in relation to occupational pension schemes. The topics covered in this edition are:
- STOP PRESS: CJEU rules members entitled to compensation of at least 50% on employer's insolvency
- Death benefits and the importance of clearly communicating benefit options
- Mr Y (PO-13540)
- Mr R (PO-17639)
- Fetter results in a royal mess
- Regulator urges schemes to review ‘generous’ transfer values
STOP PRESS: CJEU rules members entitled to compensation of at least 50% on employer's insolvency
As reported in our May edition of Snapshot, the Advocate General had provided an opinion in the case of Hampshire v PPF which confirmed that individual members of occupational pension schemes are entitled to at least 50% of the total value of their accrued rights on an employer's insolvency. On 6 September, the Court of Justice of the European Union (CJEU) reached the same conclusion. The Pension Protection Fund (PPF) will therefore now need to ensure that it meets this minimum level.
Under current PPF Rules, benefits for members of schemes which enter the PPF who are below their scheme's normal pension age are capped at 90% of £39,006 i.e. £35,106. If this amounts to less than 50% of a member's original entitlement, the CJEU's judgement will render it illegal.
The CJEU stated that "Article 8 of [the Insolvency Directive] must be interpreted as meaning that every individual employee must receive old-age benefits corresponding to at least 50% of the value of his accrued entitlement under a supplementary occupational pension scheme in the event of his employer's insolvency."
The judgment will clearly have an impact on the level of PPF compensation which some members may be entitled to and could be good news for, for example, high earners whose schemes have entered the PPF and who, at the time, would have been subject to potentially significant benefit cuts.
The Government and the PPF will now need to review compensation levels and consider how schemes should calculate their section 179 position (essentially, the cost of insuring benefits at PPF funding levels). As we mentioned in our May Snapshot, this is likely to require the UK to amend primary legislation to make the PPF compliant, with the upshot being that employers' levy payments will increase.
The judgment also leaves trustees facing the dilemma of what to do if they need to secure benefits outside the PPF given that the legislation provides for a tranche of benefits which must mirror PPF benefits. Trustees may need to decide whether they follow the legislation (which, in light of the judgment, is probably no longer "fit for purpose") or take the view that they should be following the CJEU's approach. Given the obvious uncertainty, we can only hope that the Government will legislate urgently to address the issue – notwithstanding Brexit.
Death benefits and the importance of clearly communicating benefit options
The Pensions Ombudsman (PO) has recently upheld two separate complaints in relation to the payment of death benefits from pension schemes. Both determinations highlight the importance of clearly communicating death benefit options where a member is in ill-health.
The first case, concerning Mr Y, has implications for employers regarding the scope of their duty to advise employees and dependants on death benefit options. The second, in relation to Mr R, has implications for trustees regarding the information they provide in relation to death benefit options where they are on notice that a member is terminally ill.
Mr Y (PO-13540)
Mr Y was employed by Belfast City Council (the Council) and was a member of the Northern Ireland Local Government Officers Superannuation Committee (NILGOSC). He was diagnosed with cancer in late 2012 and was recommended for early retirement on grounds of permanent ill-health by the Council in May 2013. Mr Y's notice period was scheduled to end on 17 August 2013, following which he would become a retired member of NILGOSC.
Mr Y was told that his wife (Mrs Y) would receive significantly more benefits from NILGOSC if he died in retirement, rather than in service. He was told to contact the Council if his condition worsened so that his notice period could be brought forward. Mr Y subsequently died, in service, on 14 August 2013.
Mrs Y complained to the PO about the handling of Mr Y's retirement. She submitted that the Council had reason to bring forward Mr Y's retirement date so that he died in retirement. If this had happened, Mrs Y would have received greater benefits from NILGOSC.
Mrs Y's complaint focused on a phone call she made to the Council on the same day that Mr Y learned his diagnosis was terminal (the Call). Mrs Y submitted that she told the Council during the Call that her husband's condition was terminal and enquired about the option of bringing forward his NILGOSC benefits. The Council told her that it would not be possible to bring forward benefits and that Mr Y would need to wait until his termination date.
The Council disagreed with this account of the Call and submitted that Mrs Y had not enquired about waiving Mr Y's notice period and bringing forward his benefits. She had only asked about the early payment of some of his benefits to pay for a family holiday.
In the absence of call recordings or call notes, the PO determined that "on the balance of probabilities" Mrs Y had confirmed to the Council on the Call that Mr Y's condition was terminal and had sought early access to his benefits. This information was sufficient to mean the Council "reasonably ought to have enquired" as to whether Mr Y wished to waive the remaining notice period in order to bring forward payment of his benefits. Had it done so, it was likely that Mr Y would have taken up the option and ultimately died in retirement.
The PO directed the Council to pay the difference between the death benefits paid to Mrs Y to date and those that Mr Y and Mrs Y would have received had Mr Y's service been terminated two days after the Call.
Mr R (PO-17639)
Mr R was a deferred member of the Simons Group Ltd Pension & Life Assurance Scheme (the Scheme). He was diagnosed with terminal cancer in November 2012 and contacted the Scheme administrator to discuss his benefit options in April 2016. The administrator provided Mr R with his options in a letter dated 18 April 2016 (the Letter). Mr R did not act on those options and died in August 2016.
Mr R's widow (Mrs R) was subsequently informed that she was entitled to Scheme benefits which were significantly lower than those set out in the Letter. Mrs R was told that the options set out in the Letter were only available had they been acted upon during Mr R's lifetime. Mr R had not acted on those options and so the death benefits were calculated on the deferred member basis.
Mrs R complained to the PO that the Scheme trustees had failed to inform Mr R that the Scheme benefits payable on his death would be considerably lower if he did not take benefits during his lifetime. The Letter did not mention what would happen where Mr R did not take benefits during his lifetime. Consequently, Mr R took no further action on the basis that the options set out in the Letter remained available after death.
The trustees argued that Mr R had only asked for details of his "early retirement options" and that it was unreasonable to assume that the options set out in the Letter would apply after Mr R's death.
The PO determined that the Trustees had failed to take adequate measures to ensure Mr R understood the significance of the options in the Letter. In particular, they had failed to explain that, if Mr R did not take the benefits before his death, the benefits actually payable on his death would be significantly lower. The trustees knew (or ought to have known) that Mr R had terminal cancer and they had a fiduciary duty to provide him with all the relevant information to enable him to make a fully-informed decision about his benefit options. The trustees had breached this duty as they had failed to mention that the benefit options in the Letter were dependent on him making a choice in his lifetime. The PO also held that the trustees should have satisfied themselves that Mr R had received the Letter and understood its contents.
The PO therefore directed the trustees to calculate the amount of lump sum which Mr R's estate would have received (had he applied for the second option in the Letter during his lifetime) and to pay this to Mr R's estate. The trustees were also directed to calculate the difference between the spouse's pension which Mrs R was receiving and which she would have received had Mr R applied for the second option. The difference was then to be paid to Mrs R.
The PO also awarded Mrs R £500 for distress and inconvenience.
Fetter results in a royal mess
The Deputy Pensions Ombudsman (DPO) has upheld a complaint against Royal London Group (Royal London) for its failure to consider any or all potential beneficiaries of a lump sum death benefit, as required under the applicable scheme rules.
The complaint was brought by the father of a deceased member who learned from Royal London that the death benefit lump sum of around £25,000 would be paid to Ms D, a former girlfriend of the member. The father alleged that the couple were only briefly "an item" and that the relationship had ended more than six years before the member's death.
Royal London stated that the member had nominated Ms D and that it had a legal duty to follow that nomination, regardless of any moral argument that the payment should not be paid to Ms D.
The DPO disagreed with Royal London, saying that it had misdirected itself. She considered that the relevant scheme rules required the scheme administrator, in its absolute discretion, to decide on the distribution of the lump sum to one or more of the member's potential beneficiaries. The DPO saw no requirement that permitted that discretion to be fettered in the event a nomination form had been submitted.
The DPO directed the scheme's administrator to retake the decision but only once it had identified and considered all of the member's potential beneficiaries. The DPO commented that Royal London would need to consider whether its payment to Ms D was recoverable but that this should not prejudice the outcome of its decision.
The DPO awarded the father £500 in compensation. She also directed that simple interest should be added to the lump sum to the extent Royal London did ultimately award the father the lump sum.
This case is peculiar insofar as Royal London considered that the completion of a nomination form meant that it had no discretion to award the benefit to any other potential beneficiary of the member. Generally, benefits are always subject to a scheme trustee's discretion in order to ensure the benefit can be paid free of any Inheritance Tax. Notwithstanding Royal London's approach, the determination serves as a reminder that trustees should not follow expression of wishes forms arbitrarily and without considering other potential beneficiaries and the circumstances of the deceased.
Regulator urges schemes to review ‘generous’ transfer values
A Freedom of Information request has revealed that the Pensions Regulator has written to some 14 defined benefit pension schemes asking to review the calculation of their transfer values. This is on the basis that they were potentially too generous given the financial position of the pension schemes in question. The Regulator’s intervention seems to have been driven by its focus on ensuring that a transfer value does not lead to fraudulent pensions liberation, and in this particular case, ensuring that a transfer value which is calculated on a too generous basis is not to the detriment of remaining scheme members. The Regulator has stressed that actuarial advice needs to be obtained and in particular for a pension scheme in deficit, an insufficiency report, which will allow for a determination on the extent to which a transfer value should be reduced.
This demonstrates again, a more interventionist approach by the Pensions Regulator when there are question marks over a scheme’s sustainability. Considering the detail of a particular scheme’s calculation of transfer values demonstrates that the Regulator is willing to consider these finer points to ensure the security of benefits for members, as a whole.