Trustees focus. Malcolm Wicks Minister for Pensions

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1 Trustees focus. We do not expect trustees to be experts on everything or to have the detailed technical knowledge of a professional... They need to know what the trust deed and scheme rules say and what other policies have been adopted by the scheme. That is what we mean by conversant... Malcolm Wicks Minister for Pensions June 2004

2 UK case law Pitmans Trustees Ltd v The Telecommunications Group plc (TTG) The assets of TTG s defined contribution scheme were transferred to a defined benefit scheme, which had been established by a subsidiary of TTG. The principal employer decided to terminate the plan and the trustees resolved to wind the scheme up. The trustees claimed 4.4 million from TTG, as the scheme was in deficit by this amount, as certified by the actuary. TTG refused to pay the 4.4 million arguing that as it had only employed members who were entitled to defined contribution benefits it had no liability for the deficit in the defined benefit section. The trustees sued for the 4.4 million. The trustees claim was dismissed. The trustees had not adequately consulted with TTG before adopting a new statement of investment principles (SIP), so the debt based on the new SIP was not properly established. However, the court said that the trustees could recalculate the debt on the basis of the new SIP after they had properly consulted TTG. The court rejected TTG s argument that it was not liable for the debt because it had never employed anyone entitled to defined benefits. Crossley v Faithful An interesting decision from the Court of Appeal concerning whether an employer has a duty to warn employees about the economic consequences of employees decisions. Following a period of illness, Mr Crossley submitted a claim under a long-term disability insurance scheme, of which he was a member. One of the terms of the scheme required Mr Crossley to be an employee of the employer, Faithful & Gould Holdings Ltd. Following a discussion with the employer, Mr Crossley subsequently resigned and as a consequence, ceased to be entitled to the benefits under the disability insurance scheme, as of right. Discretionary benefit payments continued for a while, but eventually stopped. Mr Crossley wanted damages on the basis that the employer had acted in breach of an implied term of Mr Crossley s contract of employment to take reasonable care of Mr Crossley s economic well-being by: 1 asking Mr Crossley to submit a letter of resignation, knowing what effect that would have on his disability benefits; or 2 failing to warn Mr Crossley of the effect his letter would have on his entitlement to those benefits. Mr Crossley s claim was rejected. Not only would the implication of such a term impose an unfair and unreasonable burden upon employers; it would also result in a major extension of the law in this area - something which the House of Lords had comparatively recently refused to do.

3 UK legislation The Pensions Bill Following its publication in February the Pensions Bill has completed its passage through the House of Commons and has recently had its First Reading in the House of Lords. Royal Assent is still expected before the Queen s Speech in November. Many substantial amendments were made to the Bill. In particular: Early leavers Employees who have been members of an occupational pension scheme for at least three months, but leave before they have been in the scheme long enough to qualify for a deferred pension, will be given a choice of taking a transfer value or a refund of their own contributions. The two year vesting period for a deferred pension will remain in place. Scheme amendments Section 67 of the Pensions Act 1995 is to be amended and will, amongst other changes, enable schemes to amend past service rights without the member s consent, where the actuarial value of the rights is being maintained. Anti-avoidance clauses New clauses have been introduced which aim to make it more difficult for employers to side-step their defined benefit pension obligations. - From 6 April 2005 the Regulator will be able to issue Financial Support Directions where an employer is either a service company or is insufficiently resourced and therefore unlikely to be able to meet any statutory debt that may arise. A financial support direction may be issued to the employer concerned, or any person who is connected or associated with the employer (which could include members of the same company group, controlling shareholders, directors and the owners of unincorporated businesses). These provisions are not confined to cases where the parent company has deliberately arranged matters in such a way as to restrict the pension liabilities to a subsidiary which cannot afford to meet them. - Contribution notices may also be issued by the Regulator from 6 April 2005, requiring additional sums to be paid to the scheme, in two situations: 1 where there has been a failure to comply with a financial support direction; 2 where there has been an attempt (not in good faith) to avoid or reduce an employer s statutory debt and the act or omission occurred on or after 11 June Transactions at an undervalue Restoration orders may be made by the Regulator if: 1 the employer has been subject to a relevant insolvency event ; and 2 there was a transaction of scheme assets at an undervalue (i.e. consideration of no value or less than market value) in the previous two years starting on or after 11 June The restoration order is intended to put the scheme back into the position it would have been, had the transaction not occurred. Pensions Directive A number of new clauses have been introduced to comply with the requirements of the European Pensions Directive. Pensions Tax Simplification The Chancellor has confirmed that the proposed tax simplification of the pensions system will go ahead but with the implementation date being put back by a year to April Some changes to the original proposals have been announced: 1.5m lifetime allowance (i.e. the maximum value of benefits) This has been increased from the original starting figure of 1.4m, although by deferring its introduction by a year, the increase could be viewed as simply anticipating an RPI increase. The lifetime allowance will rise to 1.6m in 2007, 1.65m in 2008, 1.75m in 2009 and 1.8m in After 2010 it will be reviewed every 5 years. 215,000 annual allowance (i.e. the maximum value of benefit accrual) Again, this represents an increase from the 200,000 proposed from the original starting date of 6 April Stepped increases will see this figure rise to 255,000 by Minimum pension age The Finance Bill confirms the Government s intention to raise the minimum pension age in registered schemes to 55 from 6 April There will be exceptions to this depending on a member s existing rights before 6 April These exceptions differ from those that were originally proposed and the requirements vary between occupational and personal pension schemes. Full details of pensions tax simplification were included in the Finance Bill which was published in April. The Bill has had its Second Reading and is now at Committee stage.

4 Civil Partnership Bill The Civil Partnership Bill was introduced in the House of Lords on 30 March. The Bill will give same-sex couples the opportunity to have their relationship legally recognised, by registering their relationship. The Bill, together with regulations, will give those couples who register their relationship the same pension rights as a married couple. At present the Bill only deals with survivors pensions from contracted-out schemes and only in relation to pensionable service from the date of commencement of the Bill. However there is power for regulations to deal with all pensions. Courts will be given similar powers to those available on divorce to make pension sharing orders, when a civil partnership comes to an end. Where a couple are over state pension age and one of them dies, the surviving partner will be able to access the deceased s state pension to boost their own entitlement. The Bill is currently at Committee stage in the House of Lords. Other news Compromising an employer s debt Opra has published new guidelines on compromise agreements relating to underfunded defined benefit schemes. This is the situation where trustees might agree to enforce less than the statutory debt owed by an employer, because enforcing the whole debt could lead to employer insolvency (in which case the trustees would obtain even less than under the compromise agreement). The new guidance outlines steps the trustees should take when considering compromising an employer s debt, namely: - avoiding conflicts of interest - to the extent that it may be appropriate for trustees to consider opting out of decision making or appointing an independent trustee to help reach an agreement. to the schedule period or period for correcting a serious MFR shortfall - obtaining appropriate independent professional advice - being assertive in negotiations - considering obtaining additional contributions from other employees in a group - applying the same diligence to compromise where the Scheme is to wind up and where it is to be ongoing - not assuming members will receive Pension Protection Fund protection - considering all options - this may include, for example, deferral of wind-up or applying to Opra for an extension

5 Winding-up - employer s debt New regulations have been introduced requiring solvent employers whose underfunded defined benefit schemes are wound-up to pay enough money into the scheme to secure the benefits in full by purchasing annuities. The change was indicated in the government action plan published last year and in draft regulations issued with that plan. The regulations apply if winding-up starts on or after 11 June 2003 and if the amount due from the employer is determined as at a date on or after 15 March Although the original announcement indicated that the full buy-out debt would only apply where the employer had chosen to wind-up the scheme, the regulations also impose the debt where the trustees decide to wind-up the scheme. Where the new buy-out debt applies, corresponding changes are made to the way that the statutory winding-up priorities are to be implemented. This change is also stated to affect every wind-up that starts on or after 11 June 2003, where the date chosen for calculating the statutory debt is 15 March 2004 or later. Two issues arise from this: - There are serious doubts about whether the regulations can validly amend the operation of the priority order for a scheme which had already started to wind-up before 15 March This is because the changes would have a retrospective impact on the rights of individual members which had already crystallised in accordance with the priority order that applied when the winding-up started. - If the changes are valid they leave trustees with the difficult dilemma of whether to pick a calculation date on or after 15 March 2004 (in order to maximise the amount they can recover from the employer) or an earlier date (so as not to disrupt members existing expectations under the current priority order requirements). Winding-up changes - statutory priority order Changes to the winding-up requirements have altered the statutory priority order for securing benefits in schemes that start to wind-up on or after 10 May For schemes that started to wind-up before 10 May, pensions in payment and future increases to pensions in payment took priority over deferred benefits. Following the change, pensions in payment continue to have this priority but deferred benefits will now rank ahead of future increases to pensions in payment. (However, future increases to pensions in payment will still rank ahead of future increases to deferred benefits unless winding-up starts after 5 April 2007). A further change is that contracted-out benefits will no longer have any special position in the priority order and are treated in the same way as benefits that are not contracted-out.

6 To discuss any of the issues raised in this bulletin, please get in touch with your usual contact in the Linklaters Pensions Team. Ruth Goldman (44-20) Christopher Cooke (44-20) Tim Cox (44-20) Claire Petheram (44-20) We welcome your feedback on this and any other pensions publication. Editor: Julie West ( This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editor. Linklaters. All rights reserved Please refer to for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you publications such as this and other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of associated firms. If any of your details are incorrect or have recently changed or if you no longer wish to receive this publication or other marketing communications, please let us know by ing us at