Pensions Bulletin 2014/16

Honda loses appeal over faulty legal documents

The Court of Appeal has upheld a High Court decision that the Swindon-based Honda car-making workforce is entitled to a higher scale of pension benefits than previously thought, with the potential to cause an additional liability to the Honda Group UK Pension Scheme of between £47 million and £70 million.

Prior to investing in car manufacturing in the UK, Honda operated the scheme, which provided defined benefits (DB) for their UK employees in their sales and marketing operation. These employees were employed by a company called Honda Motor Europe Ltd (HME).

Honda decided in the 1980s to provide DB pensions for their employees in the new Swindon car plant through the same scheme. These were employees of Honda of the UK Manufacturing Ltd (HUM). Accordingly, a “deed of adherence" was executed on 6 October 1986 to admit HUM into the scheme with effect from 1 August 1986.

Apparently the intention was always that the HUM employees would be entitled to less generous benefits than HME employees. However, the deed of adherence simply stated that it “…extends the benefits of the Scheme…” to HUM employees. The deed said nothing about some different scale of benefits for these employees (although the member announcement did). The HUM benefit scale was not formally documented until 10 December 1998 and so the question arose as to which benefit scale was applicable to pension accruals between 1 August 1986 and 10 December 1998.

This went to the High Court, which ruled that HUM employees are entitled to the HME scale. As the cost of this is estimated to be £47m on a scheme funding basis (and £70m on buyout) Honda unsurprisingly appealed. The Court of Appeal has now dismissed the appeal.

The case turned on construction issues and the Court of Appeal held that the deed of adherence had to be interpreted as to what its words, interpreted against the relevant background, would have meant to a reasonable reader and, amongst other things, should not be read as what they meant to say, unless something had obviously gone wrong with the language used. The Court held that the meaning of the deed of adherence did not extend beyond admitting HUM and its employees to the scheme.

Regulator on a mission to cut DB costs too

The Pensions Regulator has launched an initiative to encourage employers and trustees of defined benefit (DB) schemes to tackle scheme costs. This follows the recent Government actions on defined contribution (DC) charges (see Pensions Bulletin 2014/13).

Research carried out for the Regulator on 316 private sector DB schemes found that nearly a quarter of trustees could not identify what they were paying in investment charges, even though these represent the second largest expense (behind administration costs) for such schemes.

The Regulator has developed a charges checklist and a web tool to help trustees assess how the costs of their DB scheme compare with those of a typical scheme of a similar size. The headline results, split by scheme size, are shown in the table below. The Administration and Investment columns show the two highest costs as a proportion of a scheme’s total costs.

Opportunities for some recent retirees to take advantage of Budget easements?

The Government intends to make legislation enabling a limited set of individuals to unravel their recent pension decisions and take advantage of the new flexibilities announced in the Budget (see our News Alert). These easements will be helpful to pension scheme members who had defined contribution funds and have received their tax-free lump sum on or before 27 March 2014 and have either cancelled an annuity contract within the cooling-off period on or after 19 March 2014 (Budget day) that was linked to that lump sum, or have not yet decided how to access the rest of their pension savings. Broadly speaking, the Government’s intention is that these individuals will be able to wait for either the new interim flexibilities to come into law, or the 2015 changes without suffering penal tax consequences on their tax-free lump sum if they choose to keep it in the meantime.

HM Treasury issued a press release about this with further guidance being published by HM Revenue & Customs (HMRC). However, the HM Treasury announcement has confused matters by referring to an 18 month window for affected individuals to decide what to do and, whilst this has been picked up by some press reports, the HMRC guidance does not mention this. Until the actual legislation is published defining this 18 month window this point will remain unclear.

The HMRC guidance specifically states that individuals who are already receiving income from a new annuity contract and whose cooling-off period has already ended will remain bound by their contract.

FCA publishes Budget 2014 guidance for the interim period

The Financial Conduct Authority (FCA) has published guidance for pension, annuity and income drawdown providers, as well as financial advisers and other intermediaries, to ensure customers can make informed decisions about their retirement in light of the pension reforms announced in the 2014 Budget.

The guidance provides clarity on the FCA’s expectations of firms during the interim period (from Budget 2014 to April 2015) when many of the Budget changes come into force.

In a related move the Association of British Insurers (ABI) announced last week that its members are extending, for all those people who were in the standard 30 day cooling off period at the time of the Budget announcement, the time limit for them to cancel their annuity contracts. The cooling off period for these people has either been extended until at least 17 April 2014, or insurers are contacting their customers (either directly or via an adviser) to confirm whether they want to go ahead with their chosen annuity.

The ABI also says that its members aim to restore cancelling customers to their pre-decision position as far as possible, and where it is not possible for the original pension provider to achieve this, the new provider and the original provider aim to find a solution so that the customer can benefit from the Budget changes.

Regulator issues statement on DC Budget changes

The Pensions Regulator has issued a statement aimed at trustees and others involved in the governance and administration of trust-based occupational defined contribution (DC) schemes, the purpose of which is to help them understand some of the key pensions measures announced in the 2014 Budget and what this may mean for schemes and members.

It suggests that:

• Trustees and those involved in scheme governance and administration should take their own advice on the implications of the Budget announcement as its impact will vary depending on scheme rules; and

• Individual members should also consider seeking their own financial and tax advice on how the changes might impact them

It also says that the Regulator will be reviewing its DC code and regulatory guidance in light of these and other changes.

UK Coal – losing pensions liability not enough

Despite the Pension Protection Fund (PPF) agreeing to take on UK Coal’s pension scheme liabilities in July 2013, the Government has had to step in to help the company keep two of its mines open until autumn 2015 in what has been described as a “managed closure”.

The PPF has confirmed that it expects to make a recovery no worse than it would have if UK Coal had passed into immediate liquidation last July. Details of that restructuring are not officially available (but are being reported as involving the PPF being given a £60m secured loan note and a £790m unsecured loan note in exchange for agreeing to take the schemes into the PPF). Following a major fire, this deal would seem to have been a necessary follow up to the arrangement agreed by the Pensions Regulator during 2012 (see Pensions Bulletin 2013/03) under which the schemes were kept out of the PPF.

EU Directive on vesting pension rights for migrant and cross-border workers finalised

The European Parliament has adopted a Directive whose purpose is to provide more protection for the accumulated occupational pension rights of workers moving between EU states. This follows an earlier agreement between the European Parliament and member state negotiators (see Pensions Bulletin 2013/50).

The Directive will improve the protection of mobile workers' rights under occupational pension schemes in three ways:

• Acquisition – pension rights should be vested (guaranteed) after three years of employment at the latest. When a minimum age for vesting is stipulated, it must not be higher than 21 years

• Preservation – the rights of workers who leave an employer-run pension scheme before retirement must be preserved and treated fairly compared to the rights of those workers who remain in the scheme, for example as regards indexation

• Information – workers have the right to know how potential mobility would affect their pension rights, and those who have left the scheme must be informed about the value of their rights

Pensions Bill progress and State Opening

With Parliament having now risen for its Easter recess, there are a number of Government Bills awaiting Royal Assent, including the Pensions Bill.

The formal State Opening of Parliament for the final session of this Parliament has now been rescheduled for 4 June, as there is a G7 summit scheduled that week in Brussels. The current expectation is that the Pensions Bill (amongst others) could receive Royal Assent by the time Parliament is prorogued/rises for Whitsun (22 May).

Fiona Morrison next President-elect of the Institute and Faculty of Actuaries

We are delighted to report that LCP partner Fiona Morrison has been elected as the next President-elect of the Institute and Faculty of Actuaries. Fiona will become President-elect in June 2014, when Nick Salter replaces David Hare as President, and she will take on the role of President in June 2015.

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.