Pensions Update

This month we include reports on:

• the Pensions Regulator’s recently published statement on its intended approach to issuing Financial Support Directions in insolvency situations;
• HM Revenue & Customs (HMRC) updates to its online guidance in respect of pension draw down and short service refund lump sums; and
• a Privy Council decision confirming that trustees should be clear on the authority they delegate to scheme administrators.

Pensions Regulator publishes statement on Financial Support Directions and Insolvency

In our Stop Press of October 2011, we reported on the case of Bloom and Others v The Pensions Regulator and Others [2011] in which the Court of Appeal had upheld a High Court decision that, where a Financial Support Direction (FSD) is issued after a company goes into liquidation, the debt is an expense payable by the administrators or the liquidators. This means that such an expense is paid before the unsecured creditors, giving the FSD “super-priority” status. Permission to appeal to the Supreme Court has been granted but it is unlikely this decision will be available before the end of 2012.

The Court of Appeal decision was clearly disappointing for the companies and their administrators, as the position of pension fund trustees was strengthened in restructurings by the “super-priority” status of the obligation imposed by an FSD and, if the FSD is not complied with, the liability created by a CN. However, the result was unsurprising. When the High Court judgment was handed down in December 2010, the judge stated that a legislative change would be required before a different decision could be reached, and the Court of Appeal upheld that view.

On 26 July 2012, the Pensions Regulator (TPR) published a statement on “Financial Support Directions and Insolvency” which sets out how TPR’s intended approach in relation to FSDs in insolvency situations and its obligation to ensure that its regulatory powers are used reasonably in the interests of both schemes and the Pension Protection Fund (PPF).

The key points made in the statement are:

• TPR is aware of the importance of an effective restructuring and corporate rescue culture and does not intend to frustrate its proper working. It recognises that obstructing administrators would not be constructive for any creditors, including pension schemes and the PPF.
• TPR recognises that issuing an FSD can be a lengthy process and has no intention of deliberately delaying such issue until after an insolvency event in order for the FSD to be treated as an expense of the administration, so that it takes advantage of the post insolvency priority ranking.
• Where an FSD is issued after an insolvency event but arises from circumstances which occurred before insolvency, a relevant factor in assessing the financial support will normally be the position under insolvency law had the FSD been issued before the insolvency event. A key consideration will be the amount the scheme would receive under an FSD if the trustees of the scheme were an unsecured creditor, as they would be had the FSD been issued before the insolvency event.
• In assessing whether the issue of an FSD is reasonable, TPR will have regard to the creditors’ claims, including the return that unsecured creditors would receive had the FSD been issued prior to the insolvency event. TPR expects this to achieve broad equity between the trustees of the scheme and unsecured creditors of the FSD recipient.
• The current legal position is that FSD liabilities rank as an expense of the administration, and TPR cannot change the order of priority ranking. However, TPR states that, in most circumstances, it would not object to a subordination of the FSD liabilities behind the administrator’s reasonable remuneration where a court application is made to vary the priority order of administration expenses to further the purpose of the administration.

Comment: this statement may offer some comfort in relation to TPR’s approach in the period before any decision is reached in the Supreme Court. However, the statement also highlights that it does not override legislation or provide a definitive interpretation of the current position. TPR emphasises that the use of its powers will depend on the facts of each case and that the statement should not be construed as limiting its powers or its discretion to take appropriate action.

View the Statement. (pdf 61.09kb)

PPF publishes levy guidance

The PPF has updated its online invoice-related pages prior to sending out invoices for the 2012/13 Pension Protection Levy in early September 2012.

The online guidance provides information on who has to pay the levy, how it is calculated, how schemes can reduce their levy, and the invoicing process.

The PPF's new levy framework comes into effect in from 2012/13. In a significant break from the past, when the PPF changed the way the levy was calculated every year, these new rules are intended to be fixed for three years. This means that levy bills will be more predictable than before and schemes can expect that if their risk falls over the three years, then so will their levy. The rules are also designed to make the levy more stable.

The PPF has produced a booklet, “Introduction to the New Pension Protection Levy for 2012/13”, which it hopes will help levy payers prepare for the changes. The booklet is available online and in hard copy from the PPF. Also available is a webcast in which PPF Chief Policy Advisor, Chris Collins, explains the new framework.

View the updated guidance. (pdf 227.77kb)

View the web cast.

HMRC updates its online guidance on pension drawdown

In our update for July 2012, we noted that HM Treasury had finalised its proposals for implementing the decision in the Test-Achats case, in which the European Court of Justice held in March 2011 that insurance premiums and benefits should be gender-neutral.

HMRC has now updated its guidance on pension drawdown. For calculations of maximum drawdown pensions from 21 December 2012, annuity providers will have to use the same rates from the Government Actuary Department’s tables for men and women. For individuals who have opted for drawdown pensions, this change will affect the maximum drawdown pension they are entitled to take each year. The impact of this change on annuity pricing is uncertain.

The guidance states that, until annuity providers establish how to apply the judgment in practice, the maximum drawdown pension for both men and women aged 23 and over should be calculated using the higher male rates in Table 1 from 21 December 2012.

View the guidance. (pdf 23.34kb)

NAPF publishes final auto-enrolment guidance leaflets for employers

In our update for July 2012, we noted that the National Association of Pension Funds (NAPF) had published two further leaflets in its series aiming to give employers straightforward information on the implementation of auto-enrolment. The final two leaflets in the series have now been published and are available on the NAPF website.

View “What do I need to tell my employees?” which advises employers on planning their publicity campaigns and details the information which will be available in the national press and on Government websites.

View “Things to look out for” which includes advice on dealing with pensions as part of the contract of employment, tips on using salary sacrifice, combining auto-enrolment with flexible benefits and enhanced/fixed protection issues.

The Registered Pension Schemes (Authorised Payments) (Amendment) (No.2) Regulations 2012 - short service refund lump sums

In our June 2012 update, we reported that a pre-condition for a refund of member contributions to qualify as a short service refund lump sum is that it extinguishes all of the member's entitlement to benefits from the pension scheme. Prior to 6 April 2012, legislation did not allow protected rights to be refunded to early leavers. However, schemes which were contracted-out on a protected rights basis were able to take advantage of an exception in the Finance Act 2004 which allowed them to pay a partial contribution refund, while retaining the protected rights element, and for it to still qualify as an authorised payment.

Since the abolition of contracting-out on a defined contribution basis on 6 April 2012, the law relating to the treatment of protected rights has been repealed and the restriction on the refund of protected rights no longer applies. However, trustees who have yet to amend scheme rules to allow what were formerly protected rights to be refunded risk such payments being treated as unauthorised.

HMRC recognised this issue and in June published for comment draft regulations allowing schemes with a rule which prohibits a full payment in respect of a member's scheme benefits (which was made when the statutory restriction on such payments was in force) to pay partial short-service refunds without incurring unauthorised payment charges.

The final regulations have now been published and came into force on 8 August 2012. They will be effective for payments made on or after this date.

View the regulations.

HMRC has issued draft guidance on part refund payments relating to short service which can be viewed here. A key point highlighted in the new guidance concerns the requirement that a partial short-service refund lump sum paid under regulation 20 must not exceed "an amount equal to the aggregate of the member's contributions under the pension scheme".

HMRC confirms that for this purpose the "member's contributions" include minimum payments paid by the employer to the scheme (representing the flat-rate National Insurance rebate), to the extent these payments are recovered by the employer from the employee. In 2011/12, the employee flat-rate rebate was 1.6 per cent of earnings between the lower earnings limit and the upper accrual point. The age-related rebate paid to the scheme by HMRC also counts as a member contribution.

The draft Occupational Pension Schemes (Miscellaneous Amendment) Regulations 2013

The DWP is consulting on draft regulations which will:

• clarify the policy intention in relation to former contracted-out defined benefit schemes who wish to amend their scheme rules. In future, where the reference scheme test is applied, the scheme actuary will have only to look at rule changes for benefits that are to accrue. More prescriptive requirements are proposed in relation to accrued benefits based on the provisions of section 67 of the Pensions Act 1995;
• allow bulk transfers of scheme membership of contracted-out schemes to formerly contracted-out schemes without member consent, rather than to active contracted-out schemes, as currently;
• allow both contacted-out and contracted-in schemes to make bulk transfers of scheme membership to schemes which formerly applied to employment with the same employer, but no longer do as one of the schemes has no more active members; and
• ensure that the bulk transfer of accrued rights without member consent provisions are the same for transfers to pension schemes established both in and outside the European Economic Area. This option was inadvertently removed in 2005.

The regulations are due to come into force on 6 April 2013. The consultation closes on 13 September 2012.

Jacinth Kelly and others v Michael Fraser [2012] - trustees should be clear on authority they delegate to scheme administrators

The decision by the Privy Council in respect of the Island Life Insurance Company Salaried Staff Pension Plan (the Scheme) confirms that trustees should be clear on the authority they delegate to scheme administrators. The Privy Council held that a Scheme member was entitled to rely on representations made by the Scheme’s administrator (as the trustees’ agent) confirming the approval of the transfer of his pension fund from his previous employer's pension scheme. He had relied on the representations to his detriment, so that an estoppel arose which bound the Scheme’s trustees. As such, his entitlement to a share of the surplus on the Scheme's winding up should have included the transfer value, not just the benefits accrued while he was an active member.

Background

When the member, Mr Fraser, joined the Scheme, he elected to transfer benefits from his previous employer. He received a letter confirming receipt of the transfer from the employee benefits division. Subsequent benefit statements confirmed receipt of the money and its allocation in the Scheme's funds. Following a corporate restructuring, the Scheme was wound up and the surplus distributed to members in proportion to their benefit entitlements. The trustees informed Mr Fraser that as the transfer had not been approved, it would not be reflected in his share of the surplus, and that it would only be based on the contributions he made while an active member.

Decision

The Privy Council confirmed that the trustees of a pension scheme are the "ultimate source of authority for the conduct of its affairs". However, where they had delegated certain administrative functions, that delegate was authorised to communicate to members that, for example, a transfer of contributions had been accepted, even if it did not profess to have authorised the acceptance of the transfer. In addition, even if the trustees' approval had not been given, the transfer had been accepted and acknowledged in subsequent communications. The trustees could not disclaim it.

Although the trustees claimed that the member had not established detrimental reliance, the Privy Council held that it could be inferred from the facts. The member had been led to believe that the transfer had been authorised, so any assessment by the member of what he would have done differently if the transfer had failed was, the Privy Council considered, "“a matter for retrospective and hypothetical reconstruction". His options would have been to:

• do nothing;
• ask the trustees to accept the transfer; or
• transfer the funds to a different pension scheme.

Considering it unlikely that he would have done nothing, the Privy Council stated that it was a sufficient detriment that as a result of the representations made to him, the member was, without being aware of it, at risk of having no legal entitlement to a substantial share of the funds. It was obvious that he would have acted differently. The most realistic situation was that he would have asked the trustees to regularise the transfer, and that they would have done so, as they had no rational reason to refuse. The only reason that they had not approved the transfer at the outset was that they did not know that the money was there. The trustees had never sought to suggest that they would have refused the transfer if they had known of it.

The trustees had sought to take advantage of their oversight, and that of the Scheme’s administrator, in an attempt to treat the member in a different manner to every other member of the Scheme. As such, the Scheme member was entitled to a share of the surplus based not only on his contributions paid while an active member, but also on the transfer value - significantly increasing the sum he would receive.

View the judgment. (pdf 54.41kb)

To view this Update as a pdf please click here.