Winding up Entitlement extends to those who can control steps to payment

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1 14th February 2008 Issue No: 7 Pensions Bulletin Winding up Entitlement extends to those who can control steps to payment In a significant development linked to last year s Court of Appeal ruling in the case of Trustee Solutions vs Dubery (see Pensions Bulletin 2007/32), the High Court has ruled that in the application of the pre 6th April 2005 statutory priority order, the meaning of entitlement extends to those who would be able to obtain immediate payment of benefits by taking one or more steps within their power and which do not require the consent or intervention of any third party. The case concerned the Demaglass Pension Scheme that had commenced winding up on 23rd May 2000 following the insolvency of the principal and only employer. The scheme was in substantial deficit and so the application of the statutory priority order was of vital importance to the interests of the various beneficiaries. The independent trustee approached the Court to ask whether: members over the age of 50 who had left service on 23rd May 2000 and were entitled to a deferred pension, but had not exercised any right to take a reduced pension with immediate effect; and members over the age of 50 who had not left service and were still employed by the company on 23rd May 2000, but who had the right to take early retirement, should be treated as if they had an immediate entitlement to benefits. After examining the rules of the scheme, which contained no explicit barrier to a deferred pensioner over the age of 50 obtaining immediate benefits, the Court said yes in both cases. Those who were still in employment could choose to leave employment, become deferred pensioners and then, if over 50, obtain immediate payment of benefits. Consequently, in the Court s view, such members fell within the class of beneficiaries entitled in this case, to potentially the first cut of the scheme s assets (albeit ignoring pension increases) rather than potentially the last. In order to come to its decision, the Court, after examining the Court of Appeal ruling in Trustee Solutions vs Dubery, rejected the contentions that entitlement was to be interpreted: narrowly as relating only to benefits that were in payment; or slightly less narrowly in that the limitation was that the benefit could also have unconditionally fallen due for payment and the member had done all that was necessary to call for it to be paid. In considering the position of active members, the Court was content that a valid step in order to obtain entitlement was for the individual to wrongfully breach his contract of employment by leaving with immediate effect. But even if a period of notice was required to bring the member s service to an end, this would not prevent the principles established in the Appeal stage of Trustee Solutions vs Dubery from applying. This case has resulted in a significant extension to the meaning of entitlement particularly in relation to the active members. Entitlement was never restricted just to pensions in payment, but many advisers may not have reckoned on it extending to where the individual

2 had a right to call for benefits to be paid but had not done so including where the individual had consciously chosen to opt for deferral or continue in work. Subject to any appeal, further unscrambling of other scheme wind ups may be necessary. This case turned on the rules of the scheme individuals over age 50 in other schemes may not be so lucky. Unsaid, but by clear implication, those in this scheme under the age of 50 are now likely to find that they will receive very little indeed and will have to rely instead on the soon to be expanded Financial Assistance Scheme. Age discrimination Proportionate means of achieving a legitimate aim Under the age discrimination regulations it may be possible to objectively justify discriminatory treatment if that treatment can be shown to be a proportionate means of achieving a legitimate aim. What this means in relation to age discrimination law is largely untested. In the case of Bloxham v Freshfields (see Pensions Bulletin 2007/44) the Employment Tribunal provided some pointers. It has now provided some more in two, albeit non-pensions, cases. Firstly, the case of Hampton v the Ministry of Justice and the Lord Chancellor concerned a Recorder (a parttime judge) who had been compulsorily retired upon reaching age 65 by his employer now the Ministry of Justice. Until 1998 the retirement age for Recorders had been 70. The individual was content to be retired at 70 but not at 65. The Ministry admitted age discrimination and pleaded a number of reasons in defence including that it was legitimate to have a retirement age of 65 rather than 70 because it enabled a reasonable flow of new appointments and therefore a reasonable flow of candidates for the full-time judiciary, both by permitting new appointees to begin judicial careers and by ensuring a sufficient supply of work to those who may progress to a full-time appointment, giving them the necessary experience. But the Tribunal struck down both arguments. By appealing to the statistics in relation to the new intake argument and to the possibility of re-arranging work allocations in relation to the sufficient experience argument, it found that the Ministry could not defend its discriminatory treatment. The Tribunal chose also not to kow-tow to (or indeed to have any regard to) the non-statutory guidance supplied by the Government about the justification of age discrimination. Secondly, in the case of Seldon v Clarkson, Wright & Jakes the Tribunal considered the circumstances surrounding the compulsory retirement, at the age of 65 of a partner in a firm of solicitors, in particular whether the legitimate aim and proportionate means stacked up. The Respondent law firm argued that the long-standing retirement age of 65 for partners was in furtherance of the following legitimate aims: That the firm s associates are given the opportunity to be partners and so stop them leaving. The Tribunal accepted this. That there will be sufficient partner turnover so that each partner can expect to become Senior Partner in due course (bear in mind that this firm has less than ten partners). The Tribunal did not accept that this was a legitimate aim. To facilitate the planning of the partnership and workforce. The Tribunal accepted this. Page 2

3 To limit the need to expel partners by way of performance management thus contributing to the congenial and supportive culture of the firm. The Tribunal accepted this. To encourage partners to make adequate financial provision for retirement. The Tribunal rejected this. Finally, to protect the partnership model by ensuring that partners were subject to the same compulsory retirement age of 65 as employees (including salaried partners). The Tribunal rejected this. Having established that the aims were legitimate (and, incidentally, it not being necessary for the aims to have been enunciated when the retirement age of 65 was first established, long before anyone thought of age discrimination laws) the Tribunal then considered the question of proportionality. To be proportionate it must be shown that there is no alternative, non-discriminatory, way of achieving the partnership s aims. The only alternative discussed was performance management. Noting that performance management would be difficult and have an uncertain outcome, as well as being demeaning to the dignity of the partner, the Tribunal held that compulsory retirement was proportionate and so held in favour of the Respondent. These cases are forceful demonstrations of the difficulties employers may face in pensions age discrimination issues where they cannot rely on the many but incomplete exemptions and also how objective justification may work in practice. Once age discrimination is established, the onus is entirely with the employer to prove that its actions are legitimate. What might seem reasonable at the time in the business context might not stack up when dissected in the Tribunal. On the other hand, Seldon reinforces the impression given by Bloxham that the Tribunal will take a practical view of the choices faced by employers who act reasonably. Pensions Bill Timetable for improvements to the Financial Assistance Scheme The Government has provided further details on its legislative timescales for extending the Financial Assistance Scheme (FAS). Last week (see Pensions Bulletin 2008/06) we reported that Government amendments were expected to the Bill in relation to the FAS. These were tabled on 7th February and provide that all members can qualify for FAS purposes regardless of whether their liabilities are likely to be met by their scheme. This will result in the inclusion of those whose schemes are still winding up, but who would otherwise have received their benefits in full from their scheme. James Plaskitt, the Parliamentary Under-Secretary of State for Work and Pensions, said that this amendment was necessary because to take over all members assets, the Government will need the power to make FAS payments to them so that it can pay what they would have expected to receive from their scheme. Introducing the Commons committee debate on this amendment, James Plaskitt re-iterated a comment by the Minister for Pensions Reform that regulations would be brought forward in March to increase payments to 90% from the current 80% and from normal retirement age. Mr Plaskitt said that a short two-week consultation has been agreed with the Opposition and this is expected to begin on 6th March. Page 3

4 The Minister for Pensions Reform sent a letter to MPs on 1st February which said that the Government was considering where other adjustments might be needed to existing powers to deliver all elements of the package of improvements to FAS, and that there might be a need for a few further changes to be made via the Bill when it goes to the House of Lords. However, the vast majority of the changes necessary to deliver the package can be made via regulations. The Government intends to publish a further set of draft regulations before the end of March, which will cover such matters as early retirement on ill-health grounds. There will be a final set of regulations later in the year. Once these are in force the Government will have moved to a position in which FAS payments are calculated on a basis broadly comparable with compensation payments from the Pension Protection Fund. Government v Parliamentary Ombudsman Second replay The Court of Appeal has ruled on appeals against the findings of the High Court s judicial review of the Government s rejection of two of the findings of the Parliamentary Ombudsman s report that the Government had been guilty of maladministration leading to injustice to members of underfunded pension schemes winding up with insolvent employers. At the same time it has ruled on a number of cross-appeals by representative beneficiaries. In her report (see Pensions Bulletin 2006/11) the Ombudsman had, amongst other things, held that the Government was guilty of maladministration by: providing misleading information to scheme members about the security that the minimum funding requirement (MFR) regime would provide; and approving a change to the MFR basis. The Government rejected these findings and representative members challenged this in the judicial review proceedings (see Pensions Bulletin 2007/14). Here the government s decision to reject the Ombudsman s finding of maladministration in relation to misleading information was quashed but its decision to reject the finding in relation to changing the MFR basis was upheld. Both sides appealed and on the two points above the Court of Appeal agreed with the judicial review whilst throwing out the representative beneficiaries cross-appeal. Another legal score draw (despite some slanted reporting once again) but the substance of the case so far as the pensions industry is concerned has been superseded in the political arena by the Government s climb down on the level and scope of compensation under the FAS. Although it is yet to be seen whether members who lost out during this sad farrago have lost their zeal for litigation following the FAS improvements, the Government has indicated that it will take its case to the House of Lords. Page 4

5 Professional trustees Money laundering compliance By 1st April 2008, a Trust or Company Service Provider must be registered with HM Revenue and Customs (HMRC) under the Money Laundering Regulations 2007 (SI 2007/2157). This definition applies to persons who by way of business carry out trustee duties for any trust, not just pension scheme trusts. But once registered, affected pension scheme trustees only have to comply with simplified due diligence procedures. Further information on the requirements can be found in HMRC s press release or the money laundering Trust or Company Service Providers section of their website here including links to the forms section that contains guidance on completing the required MLR100 (registration) and MLR101 (application for fit and proper test) forms. Failure by affected trustees to comply with the Money Laundering Regulations could lead to fines or even imprisonment. Whilst it seems that professional trustees, such as those statutorily appointed as the independent trustee, must register there remains some doubt as to whether these regulations extend to trustees who receive payment for their services but would not be regarded as professional trustees, for instance pensioner trustees who receive fees for attending trustee meetings of the scheme of their former employer but do not partake in trustee work for any other scheme. Individuals in this situation may wish to obtain legal advice as to their standing under the Money Laundering Regulations. Sponsoring companies and lay trustees of schemes that have professional trustees may wish to request evidence from their professional trustees that they have registered with HMRC and establish how they intend to comply with these regulations. Consultation on pension scheme changes Smaller employers to be affected On 6th April 2008 the phasing in of the employer consultation requirements will be completed with the lower threshold above which the employer must undertake consultation falling from 100 to 50 employees. When, two years ago, the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 were introduced, the threshold was set at 150 employees. There are no further reductions of the lower threshold timetabled in the legislation. The regulations require that before making certain listed changes to an occupational pension scheme or personal pension scheme with direct payment arrangements, employers must provide written information about the proposed change to affected members and their representatives and consult about the change with certain employee representatives. The changes include such matters as proposals to increase normal pension age, closure to new entrants, closure to future accrual and introducing or increasing member contributions. Page 5

6 Pension Protection Fund Notional levy ceiling The Occupational Pension Schemes (Levy Ceiling Earnings Percentage Increase) Order 2008 (SI 2008/217) has been laid before Parliament. The Order uprates the levy ceiling of m set for the 2007/08 financial year (see Pensions Bulletin 2007/08) by the increase in the general level of earnings for the twelve months ending on 31st July 2007 ie 3.6%, setting the levy ceiling at m for 2008/09. The purpose of the ceiling is to limit the total amount of the pension protection levy that can be raised by the Pension Protection Fund (PPF). Once again, this ceiling is notional given that in 2008/09 the PPF intend to raise 675m This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you. 30 Old Burlington Street London W1S 3NN Tel: +44 (0) Fax: +44 (0) St Paul s House St Paul s Hill Winchester Hampshire SO22 5AB Tel: +44 (0) Fax: +44 (0) *Oriel House York Lane, St Helier Jersey JE2 4YH Tel: +44 (0) Fax: +44 (0) LCP Belgium Marcel Thirylaan 200 Avenue Marcel Thiry 200 B Brussel Bruxelles, Belgium Tel: +32 (0) Fax: +32 (0) LCP Libera AG Stockerstrasse 34 Postfach 8022 Zürich Switzerland Tel: +41 (0) Fax: +41 (0) LCP Libera AG Aeschengraben 10 Postfach 4010 Basel Switzerland Tel: +41 (0) Fax: +41 (0) Actuarial Consultancy of the Year UK Pensions Awards 2005, 2006 & 2007 FT Business Pension and Investment Provider Awards 2007 Investment Consultancy of the Year UK Pensions Awards 2007 FT Business Pension and Investment Provider Awards 2007 All rights to this document are reserved to Lane Clark & Peacock LLP. This document may not be copied or used in any way without prior permission from Lane Clark & Peacock LLP. LCP is a limited liability partnership registered in England and Wales with registered number OC LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street, W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. LCP is part of the Alexander Forbes group of companies, employing over 4,000 people internationally. A member of the Multinational Group of Actuaries & Consultants Main offices in: AFRICA AUSTRALIA EUROPE NORTH AND CENTRAL AMERICA * No regulated business is carried out from these offices Page 6