High Court rules against IBM in scheme closure case
In the most important pensions legal case reported in 2014 so far Mr Justice Warren, sitting in the High Court, has given a mammoth 435 page judgment about the duties of employers when restructuring their pension arrangements. Employers who are in the process of, or are considering, changing or closing their defined benefit (DB) schemes should take legal advice about how this decision affects them.
IBM implemented a wide-ranging and complicated restructuring of its UK pension arrangements in 2009. This involved closing its DB schemes to future accrual, making future pay rises non-pensionable and a more restrictive early retirement policy.
The case largely revolved around powers that the employer had to exclude members, or classes of members, from scheme membership. The employer had exercised these powers but the trustee had become concerned about the validity of this exercise (together with, amongst many other things, the validity of the introduction of these powers in the first place). The judgment involved a detailed analysis of the nature of the employer’s duty when exercising such powers, including its contractual duties towards its employees and also the “implied duty of good faith” which is a legal concept that has been around since the Imperial case in 1990.
It was held that IBM UK breached its “Imperial” duty in ending future accrual and changing its early retirement policy, as well as its contractual duty of trust and confidence to its employees in its failure in its consultation on the non-pensionability agreements.
The Imperial duty has been tested several times, but this is the first instance where an employer has been held to be in breach of it. Very instructive guidance is given on the nature of the duty and the test for breach. The correct test is that the employer must not act irrationally or perversely in a way that no reasonable employer would. Mr Justice Warren held that the employer had failed to pass this test because, in the past, “reasonable expectations” had been created amongst the employees, not least by communications emanating from the employer on its funding commitment, upon which a lot of weight was put.
Comment
There is a great deal to digest in this judgment – we are not providing a forensic analysis – and it is definitely the case that it is all very much to do with the particulars of this situation, but the clear guidance on the Imperial duty is an important development of the law.
There will be a further hearing about “remedies”. As large sums of money are likely to be involved (after all the essence of the judgment is that, half a decade down the line, the schemes were not actually closed) the case may well be appealed by IBM. Employers in the process of closing DB schemes or changing benefits, or thinking about it, will need to take legal advice on the implications of this judgment. Worryingly, some employers may need to look at previous closures in the light of the judgment.
Bridge regulations update – Government relents on retrospection
Schemes should not have to revisit their past decisions in respect of certain benefits in nearly all cases when the more restrictive definition of “money purchase benefits” is put into law and backdated to 1 January 1997, according to a ministerial statement made last week by Steve Webb.
This follows a significant reworking of the proposed regulations containing transitional and consequential provisions, after consultation on them closed last year (see Pensions Bulletin 2013/46).
It had been intended to differentiate between decisions taken after the day of the Supreme Court judgment (27 July 2011) and those taken before, but it now seems that most decisions taken before the new definition comes into force will now not need to potentially be revisited. The in force date for the new definition has also been put back three months to July 2014.
Comment
This welcome result means that trustees with affected schemes can focus on the implications for the future management of the scheme of certain benefits no longer being treated as money purchase. However, until the final regulations are laid before Parliament it is too early to say whether they will be fully effective in removing the need to examine the past.
It would have been so much more straightforward for all concerned had the Department for Work and Pensions switched on the new definition from July 2014 rather than turned it on from 1 January 1997 and then turned it off for the period inbetween in certain situations and for particular benefit types. The resulting regulations would also have been a fraction of their likely final length and much easier to understand. Maybe in a few years’ time a future Government will declare a great red tape saving by doing just this.
HMRC’s latest pension newsletter
The latest newsletter (number 61) from HM Revenue & Customs (HMRC) briefly recaps the recent pensions measures announced in the Budget. See LCP’s News Alert and Pensions Bulletin 2014/12 for our summary and comments.
The newsletter (and changes to the HMRC webpage) also reminds readers that following the reduction in the general Lifetime Allowance to £1.25m on Sunday 6 April, HMRC has updated its link page on Lifetime Allowance protection to the window to apply for Fixed Protection 2014 closed on Saturday; and the window for registering for Individual Protection 2014 for those who qualify to do so will open in August 2014.
Pensions tax law keeps changing – HMRC guidance gets harder to write
HM Revenue & Customs (HMRC) has made further updates to its Registered Pension Schemes Manual (RPSM), covering a miscellany of topics.
Many of the changes pick up amendments made by the Finance Act 2013, for example simply acknowledging the reduction in the Annual Allowance from £50,000, to £40,000 for tax years 2014/15 onwards.
Sadly some of these changes are already out of date. The unexpected and immediate changes already made following the recent Budget to trivial commutation lump sums (“TCLS”) are not yet reflected (and override the small adjustments from Finance Act 2013 reflected in the RPSM update page) – although up-to-date “plain English” guidance does now appear elsewhere on HMRC’s website.
There is also guidance on the mechanics and timing of the new obligation on scheme administrators (see Pensions Bulletin 2013/31) to notify HMRC on the Event Report whenever they are required by law to provide an individual with an Annual Allowance “pension savings statement“ in respect of tax years 2013/14 onwards – which is whenever the individual’s pension savings in the scheme for a tax year are greater than that tax year’s Annual Allowance. And HMRC seems to be rowing back on previous guidance that said a scheme could if it wished provide its pension savings statement information to a member in several documents (eg perhaps one mailing on main DB benefits, and a separate mailing about DC AVCs).
Some of the pages show that rereading familiar parts of the law can come up with surprising results. A new page that may have readers scratching their heads is RPSM09104455: it relates to the fact that one of the limits placed by tax law on taking tax-free cash sum at retirement (the “pension commencement lump sum”) is 25% of the HMRC value of the retirement benefits being paid. It shows the surprising fact that this tax-free scope calculation can include 25% of other (unauthorised currently) lump sum payments in some circumstances – mostly esoteric now, but potentially useful in a future DC world where all benefits can be drawn as retirement lump sum.
Comment
We would recommend practitioners beware – the trivial commutation lump sum tax rules have some tricky details which will be more and more important with the new £30,000 limit.
What our overall review of this update does show is how complex the pensions tax regime has become and how difficult it is for HMRC’s guidance to keep up with the constant changes – and the danger that the Plain English webpages may have to grow to be as long as the RPSM.
HMRC tries to make its Annual Allowance calculator tool more useful to the public
As we have noted before (in Pensions Bulletin 2013/42 and before that in Pensions Bulletin 2013/08) HM Revenue & Customs (HMRC) provides a Pensions Savings Annual Allowance calculator which we think could be very valuable for individuals to work their way through their obligations to monitor their own Annual Allowance position and report and pay an Annual Allowance charge when it arises. But it is a shame that the tool is flawed.
Effectively it is a black box which is intended to convert the information an individual can, by right, get from the schemes in which he has pension savings about how much Annual Allowance has been used up in the scheme, into either reassurance that he has no Annual Allowance charge liability, or else into a figure that he has to put into his tax return. It is also intended to calculate how much remaining unused Annual Allowance he can continue to “carry forward”.
But HMRC has at last added to the introduction page important caveats to explain the situations when the tool will potentially produce the wrong results. As they try to explain, importantly the calculator ignores the special adjustments that arise if an individual’s Annual Allowance usage for 2011/12 includes a so-called “straddle/split pension input period” (an Annual Allowance measuring period for 2011/12 that started before 14 October 2010). While this may now seem historic, for such individuals whose Annual Allowance usage in 2011/12 was large, the tool could continue to misstate taxable excess and carry-forward for some years.
The two other situations warned about are where, broadly, an individual counts as having no unused Annual Allowance from a previous tax year if they had no rights within any tax-registered pension scheme (see HMRC guidance at RPSM06108010) and the fact that if an individual uses flexible drawdown, thereafter he has an Annual Allowance of zero.
Comment
We are pleased that there are now caveats (although they are rather hard to understand). It is a shame that the calculator cannot deal with “straddle PIPs”. It is even more of a shame that, at the time of writing this item, the calculator still uses £50,000 as the Annual Allowance for 2014/15.
This Pensions Bulletin does not constitute advice, nor should it be 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.
