Pensions Bulletin 2014/21

Round one to the Regulator in High Court liberation fight

The Pensions Regulator has won in the High Court on all three preliminary points put up by the providers of an alleged pensions liberation scheme to attempt to thwart a claim brought by the Regulator against it.

This preliminary judgment in the Pensions Regulator v A Admin Ltd & Others reveals an unusual liberation situation. It involves the individual forming a personal management company that they control; that company then adhering to a liberation pension scheme; the individual transferring their bona fide pension scheme monies into that liberation scheme and then surrendering their entitlement, purportedly for the purpose of providing benefits to his or her dependants outside the scheme, but in reality to facilitate a surplus payment to the personal management company.

In July 2013 the Pensions Regulator brought a claim alleging, broadly speaking, that all five defendants in the current case were involved in inviting people to transfer their pension funds out of their occupational or personal pension schemes into the above arrangements, and that this constituted misuse or misappropriation of the original schemes’ assets.

In January 2014, one of the defendants (Mr Baxendale-Walker) sought to strike out the claim and the associated injunction against continued activities relating to these arrangements. To address this strike out, the judge determined that three issues needed to be determined:

• The certainty issue – ie whether the trust deeds governing the liberation schemes were constructed such that it is possible to compute with certainty what pension the scheme member could expect to receive under the trust. Applying precedents set in law, the Court ruled that it was not possible to do so and so the beneficial interests of the members were therefore void for uncertainty – in other words, the liberation schemes had not been set up as valid trusts

• The future pension issue – ie whether, had the liberation schemes been set up as valid trusts, members would have a right to a future pension under them (within the meaning of section 91(1) of the Pensions Act 1995). Mr Baxendale-Walker argued that the members do not have any right to a future pension because the trust deed gave the Trustee complete discretion not only over how to compute the pension but also as to whether a member would get a pension at all. This implies that members would be prepared to pay over a cash equivalent without any certainty of getting anything at all back by way of pension! The Court ruled that, had the schemes not been void for uncertainty, members would have been held to have a right to a future pension

• The same scheme issue – ie whether the legislative exclusions to the inalienability of an occupational pension would permit a surrender of members’ future rights to pension provided this was in order to benefit a dependant in any broad sense (ie not just restricted to benefits provided under the same scheme). This too was rejected by the Court, which held that section 91(5) of the Pensions Act 1995 limits the exclusion from the general prohibition on surrenders to those where new dependant benefits are to be provided under the same scheme as the scheme providing the surrendered benefits

There now needs to be a case management conference to consider the effect of the judgment on the rest of the claim. In the meantime it seems that all the defendants continue to be bound by their undertaking (given in August last year) to stop participating in, or soliciting others to participate in these liberation arrangements.

HMRC clarifies tax treatment of annuity arrears

In its latest Pension Schemes Newsletter 62 HM Revenue & Customs (HMRC) states that, where a lifetime annuity is backdated to the date that the member would have had the right to be paid a pension under the scheme rules, then it may be treated as an authorised payment for the purpose of the pension tax rules.

The Newsletter also contains some FAQs about pension scheme registration and a statement of the timescales HMRC works to when dealing with requests for information about potential receiving schemes from transferring schemes. Both of these articles follow up the revised processes announced last October (see Pensions Bulletin 2013/44).

Freedom and choice in pensions – IFS considers who actually benefits

Only a minority of those aged 55-59 are likely to be able to benefit from the 2014 Budget proposals on defined contribution (DC) pensions flexibility, according to research published by the Institute for Fiscal Studies (IFS).

The IFS estimates that around 30% of those aged between 55 and 59 will experience greater flexibility as a result of the Budget changes. Nearly 60% of these are men. Those affected are generally in better health, better educated and more likely to own their own house than the average. They also expect to live longer.

An apparent paradox is noted. Those affected might be relatively well-placed to receive and to act appropriately upon information, guidance and advice that they are given over how to manage their own finances. However, the fact that they are in relatively good health and expect to have a greater than average chance of living to older ages may complicate their retirement planning and potentially increase the costs of making an inappropriate decision, although given their other characteristics (ie they are already well off) they are unlikely to be become a burden on taxpayers in the short term.

The IFS also states that its research suggests that, in the near term at least, the concern that the greater flexibility could result in people spending all their funds quickly and then falling back onto state support is not likely to be a significant concern as the vast majority of those most likely to get the greater flexibility are home owners.

A lot of wealth in Great Britain is tied up in pensions

In a piece of work which has attracted some press attention the Office for National Statistics (ONS) has published research on Wealth in Great Britain. This looks at total wealth and various categories of wealth, of which private pension wealth (which includes public sector but not state pensions) is one.

The data comes from the third wave of the Wealth and Assets survey when 21,451 private households were surveyed over a two year period 2010-2012. Some of the more eye-catching output includes:

• Aggregate total wealth of all private households in Great Britain was £9.5 trillion

• The wealthiest 10% of households owned 44% of aggregate total wealth while the least wealthy half owned 9%

• Half of all households had total wealth of £218,400 or more; and

• There are 1,394,700 millionaire households

Private pension wealth was the largest component of aggregate total wealth (over £3.5 trillion, or 38%, just above property wealth at 37%) and within this sector:

• 34% of adults aged 16 or over contributed to a private pension

• A much higher proportion of employees in the public sector (85%) belonged to a current occupational pension scheme than their counterparts in the private sector (40%)

• The median value of current occupational pension wealth of employees in the public sector (£42,600) was nearly double that of employees in the private sector (£24,000)

• Around a quarter (24%) of all households in Great Britain had no private pension wealth; and

• Of those who had any private pension wealth, the 10% of households with the highest had almost half of the total (48%). This was six times the total private pension wealth of the 50% of households who had the lowest

Governance survey highlights liberation and auto-enrolment results

The Pensions Regulator has published its eighth annual survey of occupational pension scheme governance, which includes new information on action taken by schemes to tackle pension liberation fraud. Key findings include:

• Despite it being a legal requirement for defined contribution (DC) schemes to review their Statement of Investment Principles (SIP) at least every three years, just half (49%) of schemes have done this, broadly consistent with last year (54%)

• More than half (60%) of defined benefit (DB) and hybrid schemes say that they fully integrate the management of risks relating to scheme funding, scheme investments and the employer covenant; 28% say they do this to some extent

On pension liberation fraud:

• Large schemes are more likely to be aware of pension liberation fraud (99%) than small schemes (88%)

• Among the schemes aware of pension liberation fraud, eight in ten (78%) schemes have processes in place to combat pension liberation fraud, with one in seven having suspected such activity in transfer requests

• At an overall level, two in three schemes (64%) are already discussing pension liberation fraud at trustee meetings, with around half using the transfer pack insert (56%) and action pack (49%) provided by the Regulator

On auto-enrolment:

• Over a quarter of schemes surveyed (28%) are being used or planned to be used for auto-enrolment

• These schemes are more likely to demonstrate a number of positive governance traits compared to those not being used for auto-enrolment – for example, they are more likely to have documented internal controls (82% compared to 71%) and are more likely to receive formal reports on administration standards at least quarterly (56% compared to 40%)

PASA proposes standard on pension scheme administration error management

The Pensions Administration Standards Association (PASA) has launched a consultation on proposed guidance that sets out ways in which errors that inevitably arise in the administration of complex pension scheme benefits can be best managed.

For this purpose an error is defined as an inaccuracy in a financial amount quoted or paid to or on behalf of a member.

PASA’s aim is to have a consistent, industry-wide approach for recording errors, correcting them and addressing their root causes.

This builds on PASA’s Accreditation Standard 2.3 on errors. PASA invites comments from any interested party via a survey which can be accessed at the first link above.

Pensions Regulator adjusts its procedures

The Pensions Regulator has published its latest thoughts on its procedures as part of its ongoing review of its regulatory functions.

Some amendments have been made to its current Case Team procedure to make it clearer and more transparent. And it is also consulting on the procedure it follows in cases where the decision is made by the executive arm of the Regulator rather than the Determinations Panel. Consultation on this closes on 27 June 2014.

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.