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1 19 December 2008 Pensions a glance is a free publication from the Pinsent Masons LLP Pensions Group. It summarises important legal issues from the past month that affect pension schemes. Do forward this publication to your colleagues or let us know their address so we can send them a copy direct. This month's pensions a glance is edited by Simon Tyler. It does not constitute legal advice. You should take specific legal advice before acting on any of the topics covered. If you would like more detail on these or other current legal topics, please contact your usual Pinsent Masons LLP adviser or pensionslaw@pinsentmasons.com Some of the articles include links to further information via a hyperlink. Just click on the link to go direct to the relevant website page. CONTENTS Page LEGISLATION 1 Further discussion paper on employer debt changes 1 Miscellaneous amendment regulations 1 REGULATORY 2 Consultation paper financial support directions and notifiable events 2 Response to consultation on flexible retirement 2 Draft Code of Practice on the material detriment test 3 Update on the operation of the Open Market Option 3 Personal Accounts Delivery Authority seeks views 4 Government calls a halt to risk sharing proposals 4 Pensions Regulator publishes analysis of recovery plans and clearance applications 5 PPF 5 PPF confirms that it has no intention to reduce members' benefits 5 PPF updates its online service 6 FINANCIAL ASSISTANCE SCHEME 6 Financial Assistance Scheme eligibility loophole plugged - the Financial Assistance Scheme (Amendment) Regulations EUROPE 6 Cross-border schemes: European Commission asks the UK to take action 6 CASES 7 Confirmation that members who have accrued service with more than one normal retirement date have the right to draw pension at the earlier date 7 PENSIONS OMBUDSMAN 8 Rapidly moving markets cause loss, and the Ombudsman criticises trustees for not doing more to pursue a third-party claim (27252/1) 8 PINSENT MASONS 8 20\ \ITH

2 LEGISLATION Pensions Act 2008 The Pensions Bill received Royal Assent on 26 November The Act covers a number of disparate areas. To recap, the most significant are: Employers will be required automatically to enrol employees aged at least 22 (but under state pension age) and earning over approximately 5,000 into the personal accounts scheme from For more details, see our Pension Bites "Personal Accounts what you need to know". The Pensions Act 2008 extends the Pensions Regulator's powers in relation to contribution notices and financial support directions (the anti-avoidance powers). The Government's main concern had been "the emergence of new business models which, among other features, may reduce the security provided by the pension scheme's sponsor employer", in other words non-insured alternatives to traditional buy-outs. For more details, see the October 2008 edition of pensions a glance. See also this edition for the Regulator's draft Code of Practice. Safeguarded rights (ie the contracted-out rights of a member's former spouse following a pension-sharing order on divorce) will be abolished. The statutory cap on revaluation of deferred benefits will be reduced from 5% to 2.5% in respect of accrual from 6 April The requirement to designate a stakeholder scheme will be removed (although employers must facilitate the payment of contributions for employees who are members of a stakeholder scheme). The method of calculating additional state pension (ie Graduated Retirement Benefit, SERPS and S2P) will be simplified for those reaching state pension age after 5 April Complex provisions allow sharing of rights to PPF compensation on divorce or dissolution of a civil partnership. The Act allows the Regulator to make an appointment where it is "reasonable" to do so, rather than only where it is "necessary". Further discussion paper on employer debt changes In the last edition of pensions a glance we set out the options for reform that the DWP was considering to the employer debt legislation for multi-employer schemes. The DWP has since published a discussion paper on technical amendments to that legislation. Those amendments are aimed at clarifying the policy intention and making the regulations easier to apply. The DWP intends to issue draft regulations for formal consultation in relation to both the reform proposals and the technical amendments early in The DWP aims to bring these changes into force in October Miscellaneous amendment regulations The DWP has published a draft set of miscellaneous amendments (the Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009). Those regulations will: Enable trustees to amend their scheme rules by resolution to reduce the scheme's revaluation cap and the annual rate of increase to pensions in payment. The consent of the employer is not required. Trustees will be able to take advantage of the reduction in the revaluation cap to 2.5%, recently introduced by the Pensions Act 2008, and also the reduction in the statutory rate of pension increases to 2.5%. 20\ \ITH 1

3 Enable the Regulator to impose a civil penalty for failure to comply with the employer consultation requirements. Make it clear that bulk transfers without consent can be made to former contracted-out schemes in line with policy intention. The DWP had suggested earlier this year that they can only be made to schemes which have active members who are contracted out. Exempt an independent trustee from the requirement to appoint member-nominated directors where the trustee sits alongside another corporate trustee. These four changes will come into force on 6 April Our comment: Many schemes have restrictive amendment powers which mean that they have been unable to take advantage of the reduction in the cap on statutory pension increases to 2.5%. These schemes may have similar problems if they want to reduce the revaluation cap. The proposed changes will remove this obstacle. However, just because the trustees will have power to amend their rules does not mean that they should necessarily do so. Trustees will need to consider carefully whether such a change is appropriate - it may be that this is the case if the scheme is underfunded and the employer has financial problems. REGULATORY Consultation paper financial support directions and notifiable events In the October edition of pensions a glance, we reported on the following two proposals: To increase the look-back period for issuing financial support directions from 12 to 24 months. To update and simplify the current notifiable events framework. The DWP has now published a consultation with proposed draft regulations (the Pensions Regulator (Miscellaneous Amendment) Regulations The draft regulations specify that the look-back period will increase gradually until it reaches 24 months by 6 April They also specify that the following events will no longer be notifiable: Changes in key posts (scheme auditor or actuary, or the employers' Chief Executive or finance director). Change in credit rating. The consultation closes on 6 February Response to consultation on flexible retirement In the October 2007 edition of pensions a glance, we reported on the Government's launch of a formal consultation on flexible retirement, which itself was preceded by a nine-month informal consultation. The consultation was launched in order to assess how the age discrimination legislation should apply to the provision of flexible retirement under an occupational pension scheme. Flexible retirement is defined to mean a reduction in hours worked, or a drop in job grade, by an employee after he has become eligible to receive some benefits under an occupational pension scheme. The Government has proposed two alternative new exemptions to the age discrimination legislation to facilitate flexible retirement arrangements: The first option is to introduce a wide statutory exemption of flexible retirement provisions under pension schemes from the age discrimination legislation. This would enable trustees to stop providing further accrual, an actuarial uplift, death in service benefits or ill-health 20\ \ITH 2

4 benefits to members in flexible retirement. However, it would not allow accrual at a lower rate during flexible retirement than beforehand. The second option is to allow occupational pension schemes not to provide death in service benefits to members in flexible retirement. Whichever approach the Government decides to adopt, it intends to bring together interested parties to produce guidance on flexible retirement. Our comment: In the spirit of Christmas, we applaud the DWP's paper. The proposals and the Government's willingness to issue guidance are most welcome. It has taken a pragmatic rather than overly technical approach: its stated aim is "to promote fairness, not set impossible standards". Either of the proposed options is an improvement on the current legislation. The first option in particular would remove uncertainty about how the age discrimination legislation applies to members who draw pension benefits while continuing to work. It would give employers and trustees confidence in implementing flexible retirement arrangements. Draft Code of Practice on the material detriment test We have published a Pensions Bite which explains the new material detriment test for the issue of contribution notices. The Regulator has now published a consultation paper setting out the proposed circumstances in which it will be able to exercise its expanded anti-avoidance power. The consultation ends on 6 February The new test will come into effect when the Code of Practice has been adopted. This will be at least 40 days after the end of the consultation period. The proposed circumstances (which are the same as those published in draft in October 2008) are: The transfer of the scheme out of the UK. The transfer out of the UK of the sponsoring employer if there is an ensuing material reduction in the level of employer support or legal and regulatory protection for members. Removing or substantially reducing employer support. The transfer of liabilities to another pension scheme that does not have sufficient employer support or is not sufficiently well funded. The creation of a financial benefit for the employer or another person where inadequate account is taken of members' interests. Update on the operation of the Open Market Option The Government has now published an update on its review of the Open Market Option (OMO), ie the selection by members of DC schemes of an annuity on the open market. This update can be found here. In particular, the update notes that: The Pensions Advisory Service (TPAS) launched a web-tool in May 2008 to help savers select an annuity. The DWP and the Treasury have formed a working group to look into OMO. The FSA has reviewed the speed with which pension providers process OMO transfers and what information they provide to savers against the principle of Treating Customers Fairly. The Association of British Insurers has produced a new Good Practice Guide called "Improving Customers' Retirement Experiences". It is also working with pension providers and the FSA to speed up OMO transfers. 20\ \ITH 3

5 HMRC has clarified that pension schemes offering the OMO transfers do not need to offer pensions themselves. Our comment: The choice of an annuity on retirement is a major decision: it affects directly the level of income savers will receive for the rest of their lives, and what benefits will be payable on their death. It is encouraging that the various groups involved have already made so much progress in making this important decision easier. Personal Accounts Delivery Authority seeks views PADA has issued a discussion paper entitled "Building personal accounts: securing a retirement income". It raises the following questions for consultation: are lifetime annuities the best product for the target market of the personal accounts scheme? will members need an alternative to the open market option? For members not using the open market option, how will a panel of annuity providers be established? how can the personal accounts scheme maximise the potential of electronic media? how should the personal accounts scheme deal fairly with members with small funds? The closing date for consultation is 4 March Our comment: Many of those who will save for retirement through the personal accounts scheme will be low-earners with no other pension savings. It will be quite a challenge to provide those savers with the right form of annuity in a cost-effective way. At least PADA is aware of this problem and is considering possible solutions well in advance of the launch date in Government calls a halt to risk sharing proposals The consultation paper considered two risk sharing proposals not currently allowed for by legislation: Conditional indexation schemes these are DB schemes in which revaluation and indexation could vary according to funding levels. The normal pension age could also vary (within certain parameters) to take account of life expectancy. Collective defined contribution schemes these are DC schemes into which the employer pays a fixed contribution into a collective fund. The rate of pension is calculated as in a career average scheme, but without a guarantee. Inflation protection can be reduced if the amount in the collective fund is insufficient. The DWP has now published its response. It has decided to drop those proposals on the basis that they are too complicated and there is insufficient evidence of demand from employers. Instead, the DWP will: consider with the Regulator what can be done to share information on current risk sharing practices that do not require legislative change; consult by spring 2009 on "proposals for regulations that will ensure schemes have more scope to introduce flexibility in the way pensions accrue for future service to reflect changing longevity"; gather evidence on whether the removal of statutory pension increases would "reinvigorate DB provision"; review the burdens of contracting out; and 20\ \ITH 4

6 take forward other deregulatory initiatives, such as on employer debt (for which see a separate item in this edition of pensions a glance). Our comment: The DWP is to be applauded for its stated continued desire to deregulate, but so far its enthusiasm outweighs its achievements. There is general agreement that deregulation is highly desirable - it seems at present to be the Holy Grail of pensions - but finding concrete examples that can be implemented has to date proved more elusive. Perhaps, like the Holy Grail, they can only be discerned by those utterly pure in thought and deed. If so, the quest for deregulation may be lengthy indeed. Pensions Regulator publishes analysis of recovery plans and clearance applications The Regulator's analysis of recovery plans and clearance applications can be found here: It covers valuations and clearance applications since The main points are: Longevity assumptions have been strengthened, and schemes are paying more attention to the employer covenant. Clearance applications have decreased. The Regulator attributes this both to an increasing understanding of the circumstances in which it will exercise its moral hazard powers, and to a decline in corporate transactions. There was a six-fold increase in buy-outs between the year to 30 September 2008 and the previous year. Although most of the analysis in this paper is statistical, the Regulator does include some thoughts on what it expects to see more of in the future in the light of current economic conditions: Where trustees have short-term concerns in relation to the employer's ability to afford scheme liabilities, it may be more appropriate to back-end load the recovery plan rather than extend the recovery period. However, where there is a much larger deficit, a longer recovery period may be appropriate. Trustees should consider reviewing and, if necessary, revising existing recovery plans where there is a change in the employer's covenant. The Regulator expects open communication with members where the trustees encounter funding difficulties. PPF PPF confirms that it has no intention to reduce members' benefits In its recently published "Conclusion Paper on 2009/10 Pension Protection Levy Consultation", the PPF again confirmed "that it has no intention of seeking to reduce the compensation payable to members of schemes that transfer to the PPF". In the same paper, the PPF does, however, acknowledge that the current economic climate has brought issues of affordability into sharp relief. Our comment: The PPF is likely to come under increased strain. According to a recent Standard Note prepared for Members of Parliament, by November 2008 there were already 66 schemes in the PPF, with a further 265 schemes in an assessment period. Those include some very substantial schemes with large deficits, not least the Turner and Newell scheme (over 35,000 members), the MG Rover scheme (over 6,000 members) and the Lehman Brothers scheme (around 2,400 members). Woolworths entered administration on 27 November Its scheme has around 10,000 members. In current market conditions, this list is likely to lengthen dramatically. 20\ \ITH 5

7 In March 2004, when Malcolm Wicks explained the relevant legislation to Parliament, he stated that the PPF could make recommendations to the Secretary of State to reduce the level of compensation paid to members. However, this power was to be exercised "in extremis" only, and Mr Wicks could "foresee no realistic circumstances in which it would be necessary". But then most pension scheme trustees and their advisers never quite predicted the recent extreme collapse in market confidence. Although PPF compensation levels may appear more reliable than actuaries' recommended funding levels before the PPF was introduced, very little in this world is guaranteed. Trustees should bear this in mind in their communications to members. PPF updates its online service The PPF has launched an updated version of its online service, Exchange. Schemes will now be able to submit all voluntary certificates for contingent assets, deficit reduction contributions and block transfers online. FINANCIAL ASSISTANCE SCHEME Financial Assistance Scheme eligibility loophole plugged - the Financial Assistance Scheme (Amendment) Regulations 2008 The Financial Assistance Scheme was established to assist DB schemes that entered winding up on or after 1 January 1997 but before 6 April The Pension Protection Scheme was established to assist DB schemes which entered winding up, and whose sponsoring employer became insolvent, after 5 April This left certain schemes falling between the two, namely those which did not start to wind up until after 5 April 2005, but whose employer became insolvent before 6 April The new regulations have now plugged that gap. They ensure that the following schemes will be eligible for assistance by the Financial Assistance Scheme: schemes (i) which entered winding up after 5 April 2005, but before 23 December 2008, (ii) whose employer became insolvent before 6 April 2005; and (iii) in relation to which there has been no insolvency event that would allow the scheme to qualify for entry into the Pension Protection Fund. EUROPE Cross-border schemes: European Commission asks the UK to take action UK legislation does not always allow UK workers to deduct pension contributions to overseas pension schemes for tax purposes. In particular, the tax deduction is only allowed if the overseas scheme provides certain information to HMRC. The European Commission has found that this is in breach of European legislation governing the free movement of workers in the EU. The Commission's press release on this can be found here. Our comment: Many European employers have long wished to establish a cross-border pension scheme for all their European employees, but frustratingly there are still a number of barriers. Employers will welcome the Commission's intervention here. Once the relevant UK legislation is amended, we are one step nearer to a true cross-border scheme. This should also open up the possibility for UK employers to establish schemes outside the UK for their UK employees, in an environment free of much of the regulatory red tape that constricts pension provision in the UK. 20\ \ITH 6

8 CASES Confirmation that members who have accrued service with more than one normal retirement date have the right to draw pension at the earlier date Foster Wheeler Limited v Andrew John Hanley and others Winding-up; equalisation of normal retirement dates In the November 2006 edition of pensions a glance, we considered the case of Hodgson v Toray Textiles Europe Ltd. In that case, the judge ruled that where, as a result of the Barber judgment, a man had accrued some of his pension with a normal retirement date of age 60, then he had the right to start drawing the whole of his pension from that age (despite later accrual of pension with a normal retirement date of age 65). Even though the rules required consent to retirement before age 65, the Barber judgment effectively gave the member an absolute right to retire from age 60. In accordance with the scheme rules, pension accrued in respect of pensionable service outside the Barber window (ie before 17 May 1990 or after the date of equalisation of normal retirement dates at age 65) would be subject to an actuarial reduction. The Foster Wheeler case has confirmed that decision and provided additional reasoning. The Foster Wheeler Pension Plan is a scheme in winding up with a deficit of approximately 100 million. In the light of the Barber judgment, normal retirement date was equalised at age 65 with effect from 1 June Company consent was required for early retirement between ages 60 and 65, but if consent was granted, no early retirement reduction was to be applied. The judge, following the Toray Textiles case, concluded that a man, with service before the date of equalisation, could withdraw his entire pension from age 60. As a result of the wording of the scheme's early retirement rule, no actuarial reduction would be applied to any part of his pension taken from that age. We understand that this judgment is to be appealed. Our comment: Some pension lawyers have characterised this case as a radical departure from earlier cases. They claim that the judge, instead of granting men the right to take their entire pension early from age 60, should have split the pension and treated each segment separately. However, that approach would have involved a radical re-writing of the scheme rules, and would not have reflected the way the scheme was in fact amended following the Barber judgment. Nor would that approach have tied in with the fact that before 6 April 2006 the Revenue did not allow pension payments to be split in this way. The more interesting question was the significance of the scheme's own early retirement rule. The Toray Textiles case had made it clear that, where a man had accrued benefits partly with a normal retirement date of 65 and partly (as a result of the Barber judgment) with a normal retirement date of 60, he had an absolute right to draw the whole of his pension from age 60, despite any requirement for consent in the scheme's early retirement rule. In the Toray Textiles case, the early retirement rule provided for an actuarial reduction on early retirement. The question in this case was: if the early retirement rule provided for consent, but no actuarial reduction, should an actuarial reduction be applied where consent was deemed as a result of the Barber judgment, or did it apply only where actual consent had been given? The former interpretation would arguably be fairer to members (avoiding any windfall increase for men retiring before age 65 without actual consent), but it would have ignored the wording of the scheme's own early retirement rule. The judge in this case opted for the less fair interpretation, by implying as few changes into the scheme rules as possible while bringing them into line with European case law. That conclusion may represent a significant cost to the scheme, but it should not have come as too great a surprise. 20\ \ITH 7

9 PENSIONS OMBUDSMAN Rapidly moving markets cause loss, and the Ombudsman criticises trustees for not doing more to pursue a third-party claim (27252/1) The Pensions Ombudsman has found that a trustee of a SIPP (a self-invested personal pension plan) cannot be held liable for the failings of the administrator of a unit trust held as a plan investment. However, it was maladministration for the trustee not to consider trying to recoup loss apparently caused by that administrator. Winterthur Pension Trustees Limited was the trustee of a SIPP for Mr Cobbold. In April 2006, Mr Cobbold instructed the trustee to sell shares it held in a unit trust administered by DAIWA. The trustee missed the first bi-monthly processing date for DAIWA. At the next processing date, DAIWA could not implement the sale until it had received a money laundering certificate from the trustee. Although the trustee completed the certificate by return, DAIWA made a second request nine days later. As the result of a further apparent error by DAIWA, the shares were sold in two tranches up to 16 days after it had received the first certificate from the trustee. Although Mr Cobbold received more in dollars as a result of the delay, he lost out as a result of a drop in the dollar against the pound. The Ombudsman found that the delay attributable to the trustee had not caused any loss: Mr Cobbold had in fact gained as a result of the first processing date being missed. Mr Cobbold had however incurred a loss (approximately 1,000) as a result of delay caused by DAIWA. The Ombudsman had no jurisdiction over DAIWA. The trustee had not sub-contracted any services to DAIWA. Winterthur was simply a trustee of shares administered by DAIWA. The trustee was not therefore liable for any failure by DAIWA. However, the trustee had failed to consider pursuing DAIWA for the loss Mr Cobbold had incurred, and that constituted maladministration. The Ombudsman ordered the trustee to consider this, and to pay Mr Cobbold 200 for distress and inconvenience. Our comment: This case is particularly topical. It focuses on trustees' potential liability for members' losses as a result of rapidly moving markets. The problem arose because the pound soared from $1.77/ to $1.89/ within a month, just at a time when there was a delay in implementing a member's investment instructions. Trustees may have been facing similar problems as a result of sterling's recent dramatic fall or other rapid market movements. Although the Ombudsman acknowledges that he has no jurisdiction against unit trust administrators, he refuses to let the matter rest there. He has taken the unusual step of criticising the SIPP trustee for failing to consider a potential claim. Although it may be better for the trustee not to pursue that claim (for example the costs may exceed the amount of the claim, ie 1,000), it was maladministration for the trustee not at least to have considered this. The Ombudsman has indicated that he is willing to go the extra mile to help members who have lost out in this situation. Trustees should take due note. The Ombudsman is likely to receive a number of complaints over the coming months relating to loss caused by delays in processing investments while markets have been plummeting. PINSENT MASONS We are pleased to announce that Suzanne Gibson joins our London office as a solicitor this month. Suzanne was previously a solicitor at Slaughter and May. 20\ \ITH 8

10 Please Note: As with all summaries of detailed legal issues, this publication serves only as a general guide. Specific legal advice should be taken before acting on the topics covered. If you do not wish to continue receiving pensions a glance please us on pensionslaw@pinsentmasons.com or speak to your usual Pinsent Masons LLP adviser. Contact details London Christopher Berkeley christopher.berkeley@pinsentmasons.com One Ropemaker Street London EC2Y 9AH Tel: +44 (0) Fax: +44 (0) Birmingham Simon Laight simon.laight@pinsentmasons.com 3 Colmore Circus Birmingham B4 6BH Tel:+44 (0) Fax:+44 (0) Leeds Jacqui Timmins jacqui.timmins@pinsentmasons.com 1 Park Row Leeds LS1 5AB Tel:+44 (0) Fax:+44 (0) Manchester Stephen Scholefield stephen.scholefield@pinsentmasons.com 100 Barbirolli Square Manchester M2 3SS Tel: +44 (0) Fax: +44 (0) \ \ITH 9