9th July 2009 Issue No: 28 Pensions Bulletin Foster Wheeler Appeal Court gives guidance on sub-optimal Barber solutions In a development which has potentially wider ramifications, the Court of Appeal has overturned an important aspect of the judgment of the High Court in the case of Foster Wheeler v Hanley & Others. The Foster Wheeler scheme, which prior to the Barber judgment had a normal retirement age (NRA) of 65 for males and 60 for females, had implemented an equalisation procedure in stages, raising the NRA to 65 for benefits accrued from 16th August 1993, but through the operation of company policy, leaving men (and women) able to take an early retirement pension between 60 and 65 with no reduction for service prior to this date. This was costly for the scheme. This early retirement rule was altered in 2003 but did not adequately deal with the mixed NRAs generated by the scheme s 1993 Barber solution. Accordingly, the company approached the High Court (see Pensions Bulletin 2008/51) to see if it was possible to revisit it. In relation to the issues considered by the Court of Appeal, the High Court was asked to rule on which of the following three options for dealing with mixed NRA s most fulfilled the European requirements for equal treatment. First, that the entire pension (including pre-barber accrual) was payable at age 60 with no actuarial reduction. Secondly, that the entire pension was payable at age 60 but that the component which accrued with an age 65 NRA be subject to actuarial reduction for early payment. Thirdly that split pensions should be payable, ie a pension payable at 60 and another payable at 65. The High Court ruled that the first option was right (which it was reported added 30 million to the scheme deficit). The company appealed and given that each of the three options was a feasible equalisation solution, the Appeal Court s job was to decide the criteria for selecting one of the solutions and to then determine which one best fulfilled those criteria. Following a review of precedent, the Court of Appeal determined that the relevant criteria were that: scheme rule provisions should be adhered to where it is possible to do so in preference to another approach; and any necessary departure should represent minimum interference in both substance and form to the rules and should not provide for anything more than that intended by EU law in particular in relation to potential windfalls. Counsel for the company argued that the first option gave a member far greater rights than he is entitled to under European law and suggested that using the withdrawal from service rule (which gave the trustees discretion to apply an actuarial reduction) rather than the early retirement rule (where the actuarial reduction would be disapplied) was the most appropriate way of equalising. By applying the above criteria the Appeal Court accepted this and overturned the High Court ruling. In relation to the first option it held that the windfall element constituted a fatal flaw that would negate the effect of the temporal limitation in the Barber decision itself. It agreed with Counsel that the second option www.lcp.uk.com
was right as it affords the member his rights under the scheme and European law no more and no less. It also rejected the third option on the grounds that this was a more substantial interference than option two. It is unclear at this stage whether the case will be appealed to the House of Lords. This case seems like a clear victory for the company and may be seriously good news for other employers with sub-optimal Barber solutions who now have some guidance on what they need to do to comply with Barber if they wish or need to revisit what they have put in place. However, it must be emphasised that it very much turned on its own facts. More Barber legal news Harland & Wolff negligence proceedings grind on Following an appeal, the High Court has ruled that the Particulars of Claim in the proceedings brought by Harland & Wolff Pension Trustees Limited against Aon Consulting Financial Services Limited may be partially extended. The Harland & Wolff trustee is suing Aon for alleged negligence in relation to the advice their predecessor, Godwins, gave on equalisation of male and female retirement ages after the Barber judgment on 17th May 1990. In short, by a 1993 deed the scheme was purportedly amended, retroactively to 17th May 1990, so that females benefits were levelled down to males for the Barber window between 1990 and 1993. The High Court held this to be unlawful (see Pensions Bulletin 2006/32) with the consequence that males Barber window benefits had to be levelled up to females ; an expensive proposition in a scheme with a large preponderance of males. After the 1993 deed had been executed the trustee agreed to increases to pensions in payment on the false premise that females benefits accrued during the Barber window had been successfully levelled down. The trustee asserts that it would never have agreed to the pension increases if the true cost of equalisation had been known and wishes to add this to the claim for damages currently before the Court, increasing it by 6.5 million in today s money. The amendment to the Particulars of Claim had originally been rejected by the Master on the grounds that it constituted a fresh claim and as such would be time barred under the Limitation Act 1980. In seeking to overturn this decision the trustee s Counsel successfully argued before the High Court that the amendment merely constituted a new head of loss, consequential upon the original claim and so the advice in relation to the pension increases can be included in the claim. Sixteen years after the disputed events and five years after legal proceedings began the substantive issue of whether the advice given by Aon s predecessor was negligent or not still has not been tested. Given the uncertainties which prevailed in the early nineties until the European Court of Justice clarified the extent to which Barber was retroactive, many other scheme sponsors, trustees and advisers will be interested in the eventual outcome. Anti-forestalling Government makes complex and limited concession Following last-minute engagement with pensions industry representatives, the Government has, as thought probable (see Pensions Bulletin 2009/26), made a concession within the anti-forestalling provisions of the Page 2
Finance Bill. It was accepted into the Finance Bill at Report Stage on 8th July. Further opposition amendments were withdrawn. The concession will be of some interest to high income individuals who prior to Budget Day had a significant irregular contribution history into defined contribution vehicles. This might have been as main savings (as is typical for the self employed), additional voluntary contributions, or as employer contributions (possibly by way of bonus sacrifice). For such individuals the concession potentially increases the special annual allowance from 20,000 to up to 30,000. This allowance is the level of new pension savings, beyond which and subject to important protections, under the Finance Bill proposals, high income individuals face additional income tax as a result of active membership of registered pension schemes. The uplifted allowance can apply only where any employer or relievable employee contributions were paid into a money purchase arrangement on a less frequent than quarterly basis in any of the three tax years 2006/07 to 2008/09. Such contributions are known as an infrequent money purchase contributions amount. The total of these contributions over the three years is divided by three to form the relevant mean which then replaces the 20,000 special annual allowance, but only if it is more than 20,000 and subject to a cap of 30,000. Other announcements relevant to the anti-forestalling provisions made during the debate were that HM Revenue and Customs will explore the possibility of making regulations such that: those who change their pension provider but otherwise continue with the way they are making protected pension savings will be able to retain their protection; and those who set up new pension arrangements on or just before Budget day may keep their protection, but this is subject to discussion with providers it is thought to cover the position of those who entered into a contract before the Budget for a one-off payment, but the payment had not been made by this date. The 30,000 allowance is a very limited concession, given that the policy intent for antiforestalling as declared at the Budget was fairness (it has since become fiscal neutrality). It takes some of the sting out of the provisions for those with a history of irregular pension savings, but still leaves much unfairness, anomalous comparisons and uncertainties of operation. The concession works as one would expect for those who only make irregular contributions, so as to give extra protection from the new tax, albeit to an extent limited far below what many might have expected. For an individual who has made a mixture of regular and irregular savings (so has a protected element of pensions savings), the new concession might add little or nothing. And early investigations suggest that it gives some very unintuitive results and anomalies. Given this, it is a shame that the Government did not engage properly with the industry at an earlier juncture, to come up with a less complex solution. Page 3
Survey What motivates individuals to become trustees? 97% of trustees would recommend becoming a trustee to others, according to a survey published by the Centre for Diversity and Equality in Careers and Employment Research. This somewhat surprising result (albeit subject to a caveat of engaging with trustee training), runs against the oft-heard cry of who would want to become a trustee? in today s highly regulated world with increasing demands being placed on trustees time and the risk of personal liability. Nearly 150 trustees participated, drawn from two sources the Trade Unions Council and the National Association of Pension Funds with the aim of researchers being to explore trustees motives for participating in trusteeship. The respondents were quite diverse in their experience and professional backgrounds although they appeared to conform to the stereotype of being predominantly white male in late middle age drawn from a British background. When asked about what motivated them to become a trustee, the researchers reported a thread of altruism and morality running through the reasons why people took on this role. Trustees also reported that they found not only were these attributes necessary to fully engage with their trustee responsibility, but their demanding and time-consuming role could be immensely interesting and rewarding. This is a refreshing survey that also contains some nuggets of wisdom as reported by trustees. Amongst the best was Read, read and read some more, be fair, level-headed and consider everyone. And also if the scheme is large give up any idea of free time. OECD Pension fund governance guidelines Following the publication of the core principles of occupational pension regulations recently (see Pensions Bulletin 2009/26) the Organisation for Economic Co-operation and Development (OECD) has finalised its updated guidelines for pension fund governance. The material within it is aimed at Governments and pension scheme regulators in OECD member countries. Other than some re-ordering, these guidelines, which themselves have been updated from a 2005 edition, seem little altered from that issued for consultation (see Pensions Bulletin 2008/33). It is always useful to see what a respected body outside the UK has to say about pension scheme governance, but it does appear that the UK system already seeks to cover virtually all that this latest set of guidelines has to say. Cost efficiency of the Pensions Education Fund DWP Research The Department for Work and Pensions (DWP) has published a 130 page research report on the Pensions Education Fund (PEF). The Fund, which grew out of the Government s informed choices initiative, began in earnestness in January 2006 by providing Government funding to not-for-profit organisations to enable them to engage innovatively with individuals in the workplace on issues around planning and providing for retirement. Page 4
The first phase of the scheme ran until March 2008 and the DWP extended its existing contracts with PEF providers for a further 12 months. Now it appears, through research previously published on the benefits of the service (see Pensions Bulletin 2008/28) and this latest research of PEF providers on its costs, that the Government wishes to complete an evaluation of the service (which apparently ran to 26 projects). Amongst the many findings of this latest report is that the main added value of using PEF providers is their ability to use established networks to deliver pensions information, notably to otherwise hard-to-reach groups. It also found unsurprisingly, that PEF providers were more than willing to receive higher funding in order to expand their operations, along with a warning that without continued funding their existing activity could not be sustained. They also warned that a hiatus in funding would lead to start up costs should they be re-engaged at some future point. Although it was not clear at the outset, a ministerial announcement this March suggests that the PEF was only intended as a pathfinder and that its time is now up. The Government is now focussing on much wider communication intentions around auto-enrolment and Personal Accounts and of course there are various money guidance initiatives underway. It remains to be seen what value the PEF has delivered during its three year existence for the 5m or more that it has cost taxpayers to fund it. Financial planning through retirement AIFA/Prudential study More needs to be done so that individuals are supported to efficiently decumulate in retirement their assets built up whilst working, says a report focusing on financial planning in retirement. The report, which has been published by the Association of Independent Financial Advisers (AIFA) in association with the Prudential, makes, to this end, a series of recommendations for consumers, employers, advisers, product providers, legislators and regulators. Amongst the more interesting observations are the following: that rule-makers largely consider retirement as a single period without reflecting on how individual needs change during retirement; and that Government and industry initiatives are often predicated falsely on the belief that individuals have sufficient time, interest and mental capacity to logically appraise their options and make considered financial decisions. International accounting standards Small and medium-sized companies Following consultation in 2007 (see Pensions Bulletin 2007/08) the International Accounting Standards Board has finalised new International Financial Reporting Standards (IFRS) for small and medium-sized entities. This is made up of simplified, cut-down versions of the standards that make up full IFRS, including a simplified version of the pensions accounting standard IAS19. The simplified pensions standard leaves out some of the more complex parts of IAS19, such as the option to smooth gains and losses using the 10% corridor. The new standards will not have an immediate impact for companies as governments and regulators in the UK and other countries will first need to decide if they want to adopt them. Page 5
However, if they are adopted, we could one day find that these standards are used by smaller and unlisted companies all around the world. 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. Page 6