Pensions and Employment: Pensions Bulletin

Transcription

1 slaughter and may Pensions and Employment: Pensions Bulletin ISSUE 19 Legal and regulatory developments in pensions In this issue Cases Pension schemes investment in PFI LLP: ability to bring claim against manager Failure to offer option to have pension paid in Euros Points in Practice Test-Achats: deadline looms Response to HM Treasury consultation on fair deal Reinvigorating workplace pensions: DWP proposals for defined ambition There is no Employment Bulletin this week Ensuring equity markets support long-term growth: Government response to Kay review In the in-tray Back issues can be accessed by clicking here. To search them by keyword, click on the search button to the left. Find out more about our pensions and employment practice by clicking here. For details of our work in the pensions and employment field click here. For more information, or if you have a query in relation to any of the above items, please contact the person with whom you normally deal at Slaughter and May or Rebecca Hardy. To unsubscribe click here.

2 Cases Pension schemes investment in PFI LLP: ability to bring claim against manager Overview On 16th November, 2012, the High Court (Cooke J) gave judgment in a preliminary hearing relating to a claim brought by pension fund trustee investors in a PFI LLP 1. The case concerned the ability of the pension fund trustees to bring derivative claims on behalf of the partnership against the general partner and the manager in respect of loss they claimed was caused by the LLP investing outside its investment objectives. The Court held that: the claimants could bring derivative claims against the manager, but they would then be taking part in the management of the partnership business and so would be liable to the extent of the general partner s liability i.e. they would lose their limited liability status, they could not be indemnified for their costs out of the LLP s assets in respect of the derivative claims, and 1 Partners in Henderson PFI Secondary Fund II LLP v. Henderson PFI Secondary Fund II LLP and Henderson Equity Partners Limited. in any event the LLP s investment in John Laing PLC did not breach the investment objectives of the LLP. The claimants are separately pursuing the general partner in their individual capacities. Facts A number of pension funds, including those of the BBC, Tesco and BAE, had invested in the Henderson PFI Secondary Fund II LLP (the LLP ), an LLP regulated by a partnership agreement dated 12th September, 2006 established to invest in private finance initiative and public private partnership concession companies. The LLP was marketed as a private equity fund, available only to sophisticated institutional investors. In December, 2006, the manager caused the LLP to acquire equity interests in subsidiaries of John Laing PLC, a listed company which specialised in PFI projects. The claimants argued that the manager and general partner of the LLP had not caused the fund to invest in a portfolio consisting exclusively or principally of PFI concession companies, as it was required to do, but had instead used the capital advanced by investors to acquire a corporate group. The claimants sought: a declaration from the Court that pursuit of derivative claims against the general partner and the manager would not constitute taking part in the management of the partnership business such that the claimants would be liable for the debts and obligations of the LLP, and a costs order that they be indemnified out of the LLP s assets in respect of the legal costs of the derivative claims. The judge refused both. Derivative action The defendants argued that the derivative action against the general partner should not be permitted since the claimants had all agreed to the structure of the partnership and the restrictions on their role as limited partners. The claimants could have removed the general partner by a 75% majority vote and appointed another and then brought proceedings in the ordinary way through the replacement general partner. The Court accepted this. But the Court also accepted that the general partner had an irreconcilable conflict of interest in relation to bringing a claim against the manager. This conflict amounted to a special circumstance which would SLAUGHTER AND MAY 2

3 permit a derivative claim to be pursued. But the Court refused to give a declaration that the limited partners would not be liable for debts and obligations of the firm incurred in relation to the derivative claim. Costs In relation to the pre-emptive costs order, the judge noted that this case amounted to hostile litigation as between the limited partners and the general partner. Since it was not possible to say that, at the end of the trial, a court would be bound to order that costs would be payable out of the fund if the claimants failed, the judge declined to make a pre-emptive costs order. Construction of agreement The judge went on to consider the question of construction of the partnership agreement and whether the investment in John Laing PLC breached the manager s duty to manage the investments in line with the partnership s investment objectives. The judge found that, on the facts, it did not. Comment: The judgment provides a useful summary of the law permitting limited partners to bring derivative claims against the general partner or manager. The judge s decision that, if a claim is permitted, the limited partners will lose their limited liability status, means that, in practice, the likelihood of derivative claims being brought is greatly reduced. It remains to be seen whether the pension fund investors will pursue their individual claims against the manager given the judge s conclusion on the construction issue. Failure to offer option to have pension paid in Euros Overview On 17th October, 2012, the Pensions Ombudsman upheld a complaint by Mr Taylor ( T ), a pensioner member of the Reuters Pension Fund (the Fund ), who discovered after his retirement that other members of the Fund had been given the option of receiving their pensions in Euros, converted on a oneoff basis on retirement at a fixed exchange rate. The Ombudsman held that it was maladministration for an employer arbitrarily to decide to make only some scheme members aware they could request a discretionary variation of benefits while failing to do so in the case of other members. Facts T had previously worked for Reuters Limited and was a deferred member of the Reuters Pension Fund living in Belgium. His scheme pension went into payment at age 65 in 2005, with each monthly instalment converted from sterling into Euros at the prevailing rate. Following a sharp fall in sterling in 2007, T discovered that the scheme had offered some pensioners the option of receiving their pensions in the currency of their domicile, converting on a one-off basis at a fixed exchange rate at retirement, subject to a 2.5% cap on annual increases (the conversion option ). On 5th November, 2008, T wrote to Reuters asking why he had not been offered the conversion option. The trustees said they had historically granted the conversion option but that, following a recent review, they had decided to consider each application individually. T pursued his complaint through the scheme s internal dispute resolution procedure. The trustees then argued that the conversion option arose under the general power in the scheme rules to vary benefits subject to Reuters agreement. They claimed that, up to January, 2009, there was no formal policy or consistent practice about the employer informing members of the conversion option. Until that time, if the member proactively approached Reuters, the practice was to agree to the conversion option on a cost neutral basis at the date of conversion. After that time, the policy was neither to offer such conversion nor agree to it. 18 members had been offered the conversion option by Reuters, including one around the time of T s retirement. Of the 10 members who had then SLAUGHTER AND MAY 3

4 requested the conversion option, all had been granted it. T argued that the trustees and Reuters should have informed him about the conversion option before he retired and should now grant it. The decision The Ombudsman agreed, holding that, following Newey J in Prudential Staff Pensions Limited v. the Prudential Assurance Company Limited and Others [2011] EWHC 960, the arbitriariness of the employer s decision as to whether to exercise its discretion was irrational or perverse enough to destroy or seriously damage the contractual relationship of trust and confidence between employer and members. The employer had therefore breached its implied obligation of good faith. The Ombudsman directed the employer to exercise its discretion as if it had done so at the time the member s pension came into payment and bearing in mind its practice in granting the option at that time. He also directed the scheme trustees to pay 250 for the inconvenience and distress their slow and inaccurate handling of the complaint had caused. Comment 1: This decision is a reminder for trustees (or their pensions manager) to check what powers they have. In this case, until the complaint was reviewed under the scheme s IDR procedure, the trustees believed the discretion was theirs, not the employer s. Comment 2: It is also a reminder to employers that care should be taken when exercising any discretions over benefit options. That said, there is an argument that the Ombudsman has over extended the duty of good faith in this situation. Points in Practice Test-Achats: deadline looms From 21st December, 2012, insurers can no longer price annuity contracts using sex differentiated factors. This follows from the ECJ s decision in Test- Achats, in March, The decision is implemented in the UK by an order removing the insurance exemption in the Equality Act 2010 with effect from 21st December, 2012 for contracts entered into on or after that date. Although the European Commission and HM Treasury have said they do not believe the judgment extends to annuities relating to work-based pension arrangements, and some providers have said they will continue to offer sex-differentiated annuity pricing where annuities are bought in the name of the trustee of an occupational pension scheme, annuities purchased in members names under the open market option will, for contracts entered into on or after 21st December, 2012 need to be priced by insurance companies on a gender-neutral basis. See Pensions Bulletin 12/12 for further information. Response to HM Treasury consultation on fair deal On 19th November, 2012, HM Treasury published its response to its March, 2011 consultation on the Cabinet statement A fair deal for staff pensions ( Fair deal ). Background Fair deal requires provision of broadly comparable pensions where staff are compulsorily transferred from the public sector to a new non-public sector employer. It is comprised in 1999 guidance published by HM Treasury entitled Staff transfers from central government: a Fair Deal for staff pensions, as updated by a document published by HM Treasury in 2004, Fair Deal for staff pensions: procurement of bulk transfer arrangements and related issues. The Government announced in its October, 2010 spending review its intention to consult on the Fair Deal policy in response to a recommendation made in the interim Hutton report. That found that the SLAUGHTER AND MAY 4

5 Fair Deal policy, coupled with current public service pension structures, created a barrier to the plurality of public service provision. New Fair Deal On 4th July, 2012, the Government confirmed in a ministerial statement that the overall approach to fair deal will be retained but that this will be delivered by offering access to public sector schemes for all transferring staff. The response to consultation sets out the Government s position in more detail and summarises the response to the March, 2011 consultation. It also contains draft guidance setting out how the Government s preferred approach will work in practice. New fair deal will apply to: staff transferred from the public sector for the first time, staff working for a contractor who are transferred to a new contractor or back into the public sector, and staff working for a contractor who remain employed by it following a re-tender. Employers will make contributions to the public sector scheme equal to those made by the public sector employers participating in that scheme. The consultation response states that transfers from local government will continue to be outside fair deal. The Government confirms that the existing fair deal policy will continue until the start date for the new policy is announced. Re-tendered staff The response paper also consults further on the treatment of those that have already been compulsorily transferred out of the public sector under existing fair deal and whose contracts are retendered under the new fair deal policy. The Government intends to allow employers the option of: providing broadly comparable career average ( CARE ) schemes, or providing access to a public service pension scheme. According to the consultation paper, this will ensure that such employees pensions will be as good as they would have been had they stayed in public service. Any accrued rights transferred from the old private sector scheme will be protected, necessitating a bulk transfer into the new pension arrangement (whether that is the new private sector scheme or the public sector scheme) unless the employee chooses to become a deferred member of the old scheme. Employees who transfer their rights to a public service scheme or broadly comparable CARE scheme will be able to maintain their final salary link to any previous service accrued in the old final salary schemes. But employees who deferred their pension when they originally left the public service scheme will be treated in the same way as other deferred members when returning to a public service scheme i.e. they will not benefit from the final salary link upon taking their pension if they do not return to the public service scheme within 5 years of leaving. The consultation paper, on which responses are invited by 11th February, 2013, is on HM Treasury s website. Comment: Beyond setting out the position on re-tendering exercises, the consultation response adds little to the July, 2012 ministerial statement. In SLAUGHTER AND MAY 5

6 particular, it does not address how funding deficits will be calculated on cessation of participation, which is currently a deterrent to private sector participation in the LGPS. Note that Section 75 of the Pensions Act 1995 does not apply to public sector schemes 2. But there are likely to be equivalent provisions in schemes governing documentation that will require careful consideration. Reinvigorating workplace pensions: DWP proposals for defined ambition Overview On 22nd November, 2012, the DWP published a paper, Reinvigorating workplace pensions, containing its ideas for risk sharing and proposals for helping people get the most out of their pension savings. According to the DWP, the paper draws on extensive discussions with pension providers, actuaries, investment firms and lawyers, including with an industry working group led by Andrew Vaughan, Chair of the ACA. It is not a formal consultation, although it does highlight a number of issues for further examination. 2 Regulation 4 of the Occupational Pension Schemes (Employer Debt) Regulations 2005 The paper sets out the key issues which the Government believes need to be tackled to reinvigorate workplace pensions and achieve its objectives. It sees these objectives as: increasing the amount people are saving in pensions, increasing the amount people receive for their savings, enabling industry innovation and development of new products including those which will give people more certainty about their pensions and encourage more risk sharing, increasing transparency and building trust, confidence and engagement in pensions saving, and ensuring the sustainability and stability of the UK pension system. The paper looks at how existing schemes can be reinvigorated, and also addresses defined ambition ( DA ) schemes, looking at models already available and models that will need legislative change. Defined benefit schemes The Government accepts that there is likely to be a limited amount that can be done to revive defined benefit schemes in their pure final salary form. But it says it is keen to look for opportunities to help employers manage their defined benefit commitments and the ongoing costs, and notes its recent examination of private pensions regulation through the red tape challenge, the results of which have yet to be announced. Defined contribution schemes The paper notes that the Regulator intends to translate its 6 principles for DC schemes published in 2011 into a code of practice and guidance for trustbased DC schemes, setting out what is expected of those running DC schemes and how they can demonstrate how the features in the code of practice apply in their schemes. Although this code will not create new legal requirements, it will, according to the DWP, clarify how existing duties should be addressed in the auto-enrolment world. So far as master trusts (i.e. multi-employer schemes with non-associated employers) are concerned, the DWP, in conjunction with the Pensions Regulator, is considering how to ensure appropriate governance for such schemes, particularly addressing conflicts of interest and other risks applicable to such schemes. SLAUGHTER AND MAY 6

7 For single employer schemes, the Government is exploring with the Pensions Regulator a lighter touch approach, based on encouraging schemes to report to their members on how they are addressing the Regulator s code and guidance. On charges in DC schemes, the DWP welcomes recent initiatives by the NAPF and the ABI, noting that these will complement its guidance on default funds for DC automatic enrolment schemes. This guidance includes disclosing a breakdown of overall charges and making clear the effect the charges will have on member outcomes. The DWP notes that disclosure of charges will include the effect of consultancy charges (charges paid by or on behalf of members to an IFA or other intermediary in respect of advice given to the employer or employee in connection with a GPP). The DWP expects that a consultancy charge should only be applied where advice on a scheme leads to a tangible benefit for its members. The DWP says it is monitoring charges, including consultancy charges, very closely and will take prompt action if it sees evidence that charging structures are being used inappropriately or if charge levels are excessive. It has power to stop a scheme from being used for automatic enrolment if its fees are too high or if members are required to pay for anything which does not deliver them a pension benefit. Defined ambition pensions The aim of a DA pension is to create greater certainty for members about the final value of their pension pot than is provided by a pure DC pension but with less cost volatility for employers than pure DB pensions. Defined benefit models: The paper identifies DA models already available, including CARE schemes and cash balance schemes, schemes using longevity adjustment factors, and other risk management options such as buy-outs, buy-ins, longevity swaps and reinsurance. Possible new options currently being explored are: schemes with conditional or optional indexation, removal of spouses benefits, or conversion of DB benefits to DC at the point the member leaves the scheme, retires or dies, fluctuating pensions (where schemes provide pensions that fluctuate in payment according to the financial status of the scheme), and linking scheme retirement age with changes to state pension age, both for future pension rights and those accrued from the date new legislation is introduced. Defined contribution models: Models already possible include DC schemes with bonuses on top of the basic minimum, deferred annuities, and targeted or managed DC. New options being explored include money back guarantees, offered by employers, insurers or a PPFstyle protection fund, funded by a levy on members funds. Collective DC schemes: Under these schemes ( CDCs ), common in the Netherlands and Denmark, the employer pays a fixed rate of contributions and risk is shared between the members. An expected benefit is calculated but not promised so pension in retirement is not certain. The fund is collective so can stay invested in risk-seeking assets for longer than any individual member could do in a typical DC arrangement. The DWP examined the issues around CDCs in 2008/09. Their findings highlighted limited demand from employers and that some of the CDC features were not permissible under UK legislation. The Government says it is looking again at whether elements of CDCs could inform the development of DA pensions. It needs to review the legal framework within which CDCs might operate as there is currently a risk that they would fall under the regulatory regime that applies to DB pensions. SLAUGHTER AND MAY 7

8 Next steps: The DWP indicates that its consultation paper will be followed by a publication outlining a framework for DA pensions, possibly jointly with the pensions industry. Any proposals for legislative or regulatory change will be subject to a formal impact assessment and consultation. Provision of information The DWP has set out its key principles for provision of pension information: giving people control so they know they have choice, focusing on the benefits to individuals, not their responsibilities, making it relevant now, giving real examples to help people understand the context, keeping the presentation simple and letting the facts speak for themselves, and building understanding of basic concepts but tailoring the level of information to the individual. The DWP has reviewed existing legislation on disclosure of information as part of the red tape challenge and says it will be: consolidating the main disclosure of information requirements into one statutory instrument, streamlining them where possible to achieve consistency, simplifying terminology and removing overlaps with the FSA s conduct of business sourcebook for personal pensions, reviewing the statutory money purchase illustration ( SMPI ) provisions in the context of the post-auto-enrolment pensions landscape, and aligning other legislation which contains disclosure requirements with the provisions introduced in December, 2010 which allow schemes to communicate with members electronically. The DWP aims to bring forward draft disclosure regulations for consultation early next year. Additionally, the DWP is considering bringing forward best practice guidance to help schemes produce communications that are clear, consistent and which meet the needs of members, as well as meeting the requirements of the disclosure and SMPI regulations. The paper is on the DWP website. Comment: The paper was welcomed by industry bodies such as the NAPF and the ACA. The sections on reinvigorating existing DB and DC models, and on disclosure, contain helpful suggestions. But it is hard to detect much enthusiasm within Government for the more radical DA models outlined in the paper. The new models, requiring, as they do, primary legislation, are unlikely to be available for a number of years, by which time the shift to DC is likely to be irreversible. But, with rumours circulating ahead of the Autumn Statement on 5th December, 2012, that the tax relief on pensions contributions will be further restricted, the paper is a timely reminder of the need to rebuild confidence in pensions. As Andrew Vaughan, ACA Chairman and Chair of the DA Industry Working Group, noted: Government should be under no illusion that there remains a pressing need to ensure people understand the importance of retirement saving and it will need to provide incentives (e.g. tax reliefs) to help employers and employees alike to find the extra cash needed to finance adequate provision. SLAUGHTER AND MAY 8

9 Ensuring equity markets support long-term growth: Government response to Kay review Overview This was published on 23rd November, 2012 and welcomes the final report of the Kay review published in July, A Slaughter and May publication analysing the report is here. The principal concern of the Kay review was to assess how well UK equity markets are achieving their core purpose of enhancing the performance of UK companies and enabling investors to benefit through returns on direct and indirect ownership of shares. The report concluded that a culture of short termism had eroded long-term stewardship relationships between companies, investors and intermediaries, undermining corporate performance and reducing investor returns. It recommended a cultural shift across the equity investment chain and put forward principles and recommendations aimed at re-establishing conditions that will support sustainable long-term value created by UK quoted companies. Government response The Government s response document sets out a detailed response to the report s specific recommendations, highlighting the steps the Government is taking and the areas in which progress is already being made. These include: development of the FRC s Stewardship Code to encompass a more expansive form of stewardship, focussing on strategic issues as well as questions of corporate governance. An updated edition of this was published in September, 2012 (Pensions Bulletin 12/16). The FRC is to produce its next report on developments in corporate governance and stewardship in December, 2012 and will consider whether further changes to the Stewardship Code may be desirable to reflect the Kay recommendations, asset holders, asset managers and directors should adopt (and further develop) the high level good practice statements set out in the report. The Government supports this recommendation, noting that, although the good practice statements do not have the force of regulation or formal guidance, they should prompt market participants to consider their current practice, and inform industry-led standards of good practice. It is asking relevant business representative groups and investment industry trade associations to review Professor Kay s good practice statements and suggest how good practice standards might be further developed, an investors forum should be established to facilitate collective engagement by investors in UK companies. The Government agrees with this proposal. Its notes that the forum would need to be relatively flexibly constituted to enable a mixture of asset managers and asset holders to be involved. It intends to ask a small group of respected senior figures from business and the investment industry to review industry progress, including that made by institutional investors, and shareholder engagement, both collectively and individually, UK and EU regulators should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others or advice on investment decisions. Although the Government accepts that there should be common minimum standards of behaviour required of all investment intermediaries, it believes describing these as SLAUGHTER AND MAY 9

10 fiduciary has the potential to cause confusion. It prefers the following principle: All participants in the equity investment chain should act: in good faith, in the best long-term interests of the clients or beneficiaries, in line with generally prevailing standards of decent behaviour. This means ensuring the direct and indirect costs of services provided are reasonable and disclosed, and that conflicts of interest are avoided wherever possible, or else disclosed or otherwise managed to the satisfaction of the client or beneficiary. This recommendation is reflected in the good practice statement for asset managers. The Government supports the approach. The Government response, which includes the good practice statements, is on the BIS website. The Government plans to publish an update in Summer 2014 on progress. Comment: For noting. Auto-enrolment begins (based on employer s staging date). Deadline for achieving Regulator s targets for accuracy of member data. Possible change in calculation method for RPI may result in 0.5% reduction In the in-tray Below are key forthcoming pensions developments that pensions managers need to have on their radars. For more information see our In the pipeline table Move to singletier state pension expected and consequent abolition of DB contracting-out DC schemes formerly contracted-out on a DC basis that wish to remove hard coded protected rights rules by trustee resolution must do so. the Law Commission should review and clarify how fiduciary duties should be applied in the context of investment. From 1st October, 2012 From 21st December, 2012 By end December, 2012 March, 2013 By 6th October, ? April, 2016 By 6th April, 2018 December, 2018 The Government accepts this recommendation and has asked the Law Commission to undertake the relevant review. It is also seeking clarification on whether the law allows for any differentiation of investment duties to reflect the different nature of particular classes of trustees, and all income from stock lending should be disclosed and rebated to investors. Gender-based insurance contracts no longer permissible Deadline for providing information about annual allowance for 2011/2012 tax year, for: members whose inputs exceed the 50,000 limit, and members who request the information Deadline for amending rules by trustee resolution to enable repayment of surplus to employers. Note: deadline previously 5th April, State pension age starts to rise from 65 to 66 affecting those born on or after 6th April, 1960; check bridging pensions. SLAUGHTER AND MAY 10

11 This Bulletin is prepared by the Pensions and Employment Group of Slaughter and May in London. We advise on a wide range of pension matters, acting both for corporate sponsors (UK and non-uk) and for trustees. We also advise on a wide range of both contentious and non-contentious employments matters, and generally on employee benefit matters. Our pensions team is described in the 2012 edition of The Legal 500 as extremely knowledgable and as having strength in depth. Our recent work includes advising: Global Infrastructure Partners, on the establishment of the Edinburgh Airport Pension Plan Unilever Plc on a benefit change exercise involving the closure of the final salary section of the Unilever UK Pension Fund and the provision of future benefits under the career average and defined contribution sections of the Fund Marks and Spencer plc on their new innovative master trust arrangement with Legal & General which is designed to provide a new pension arrangement for 2012 which will comply fully with the auto-enrolment requirements. The master trust provides an overarching framework under which multiple pension schemes from different companies can operate. Each scheme can make independent decisions on factors such as investment funds and contribution rates, while benefitting from an independent governance structure provided by the trust. This new arrangement will replace the company s current DC pension scheme. We also advised on the provision of outsourced administration services in connection with the trust Royal London, the UK s largest mutual life and pensions company, in connection with the pensions aspects of the acquisition, on 1st July, 2011, of the business of Royal Liver Assurance Limited, including structuring arrangements for change of principal employer and a scheme apportionment arrangement Uniq plc, the chilled convenience food group, on a regulated apportionment arrangement with the Trustee of the Uniq pension scheme under which Uniq group was released from its liabilities in relation to Uniq s 1bn legacy pension scheme in return for a 90.2 per cent shareholding in Uniq plc, the group holding company, and a cash payment to the pension scheme (before deduction of certain expenses) of 14 million Royal Mail in relation to the transfer of more than 24 billion of liabilities from the Royal Mail Pension Plan to a new Government pension plan and separation of the Royal Mail Plan into segregated sections GlaxoSmithKline (GSK), one of the world s leading research-based pharmaceutical and healthcare companies, on a bulk annuity buy-in agreement between the trustees of two of its pension funds and the Prudential to insure the pension funds obligations to pay certain liabilities. The transaction covers around 15% of GSK s UK defined benefit pension liabilities and has an aggregate value of approximately 900 million BUPA on the pensions aspects of the sale of its UK protection and risk business If you would like to find out more about our Pensions and Employment Group or require advice on a pensions, employment or employee benefits matters, please contact Jonathan Fenn jonathan.fenn@slaughterandmay.com or your usual Slaughter and May adviser. London T +44 (0) F +44 (0) Brussels T +32 (0) F +32 (0) Hong Kong T F Beijing T F Published to provide general information and not as legal advice. Slaughter and May, For further information, please speak to your usual Slaughter and May contact.