MPs launch an in depth review of DB pensions
Following the publication of its report on BHS (see Pensions Bulletin 2016/30), the Work and Pensions Committee has, as promised, (see Pensions Bulletin 2016/22) now turned its attention to pensions law and regulation governing defined benefit pension funds.
To this end, the Committee has invited written submissions covering the following issues:
- Defined benefit regulation by the Pensions Regulator - including the adequacy and application of regulatory powers (including anti-avoidance), the level and prioritisation of resources, whether specific additional measures are needed for private companies or companies with complex and multi-national group structures, the pre-clearance system and the impact of the Regulator’s approach on commercial decision-making and the operation of employers
- The Pension Protection Fund – including sustainability and the fairness of the PPF levy system and its impact on businesses and scheme members
- The role and powers of pension scheme trustees
- Relationships between the Pensions Regulator, the PPF, trustees and sponsoring employers; and
- The balance between meeting pension obligations and ensuring the viability of sponsoring employers – including whether the current framework is generating inter-generationally fair outcomes and whether the current wider environment warrants an exceptional approach
The Committee is in particular hoping for recommendations on potential improvements in these areas, with the deadline for responses being 23 September 2016.
Comment
The wide-ranging scope of the inquiry is no surprise in the wake of the concerns expressed by the Committee in its report on BHS – for example, the report concluded that “The future of occupational pension schemes is perhaps the greatest challenge facing longstanding British businesses” and that while “there may be a case for stronger and more pro-active regulation, it is equally important that a balance is found to enable otherwise viable companies to continue to operate”.
We anticipate, therefore, that this has the potential to be a major inquiry considering radical solutions to what is increasingly one of the great problems of this age. Most people, including us, expect some sort of legislative response from the Government. What that will be though remains to be seen.
DB pension fund deficits and individual transfer values set to increase further
Pressure on defined benefit pension scheme funding levels (downwards) and on transfer values (upwards) continues as long-term bond yields fell further as a result of the Bank of England announcing its first interest cut since March 2009.
The Bank’s Monetary Policy Committee cut the Bank Rate by 25 basis points to 0.25% as part of a package of measures designed to “provide stimulus to the real economy and return inflation sustainably to the 2% target”. As a consequence the 15 year government bond yield fell from 1.58% to 1.42%.
Pension scheme deficits were already close to all-time highs, with the PPF estimating that the combined deficit of the DB schemes it protects increased from some £302bn at the end of March 2016 to around £384bn at the end of June following the UK’s vote to leave the EU (see Pensions Bulletin 2016/30).
Comment
The increase in pension scheme deficits is likely to make for more robust discussions between trustees and sponsoring employers for those schemes currently undertaking actuarial valuations.
The significant increase in transfer values has attracted comment in the press and it is possible that it will lead to more DB pension scheme members requesting transfer value quotations or transferring out their benefits.
DB transfer quotations stabilise for now
LCP is monitoring the pattern of transfer quotations and payments for the DB schemes we administer, and the practices adopted by trustees, to see how things are changing following the introduction of Freedom and Choice in April 2015.
Our latest findings, looking at experience up to 30 June, include:
- Quotation patterns have been fairly stable over the last six quarters following a noticeable increase in the number of quotations at the start of 2015
- Much of the increase in quotation rates in 2015 was due to an increase among members aged 55 and over
- Payment patterns have been more volatile. Take-up rates have recently increased, following a fall during 2015
- For the quotations that have proceeded to payment, the average transfer value and average member age have been significantly higher than for the ones that have not
- Currently, nearly 30% of schemes we administer are including estimated transfer value figures in retirement packs and around 15% are offering partial DB transfers
More details, including charts, are available on our website.
Does the PPF comply with EU insolvency law?
The Court of Appeal has cast doubt on whether the level of pension protection offered by the PPF is compatible with EU insolvency law in its ruling in the Hampshire v Board of the Pension Protection Fund case by referring interpretation of old European Court of Justice (ECJ) rulings back to the ECJ.
Mr Hampshire worked for Turner & Newall from 1971 to 1998 and was a member of the T & N Retirement Benefits Scheme (1989) (the Scheme) throughout. He took early retirement at age 51 with a pension of £48,781.60 pa with attaching pension increases of a minimum of 3% pa.
The Scheme entered PPF assessment on 10 July 2006 following a relevant insolvency event. The way that the PPF is designed is such that members who are aged less than “normal pension age” when the insolvency event occurs (as Mr Hampshire was, he was 58 then and his NPA was 62) are subject to the PPF compensation cap where pension is above that level. The effect of this was that Mr Hampshire’s pension was reduced to £19,819 pa, a reduction of 67%. He also lost most of his pension increases (as most of his benefits were accrued prior to April 1997) and calculates that his entitlement would now be £76,302 pa had none of this been so. Instead his pension remains at around £20,000 pa.
Understandably Mr Hampshire has challenged this cap and there is indeed now uncommenced legislation on the statute book (see Pensions Bulletin 2015/14) to mitigate the impact of how PPF compensation works for long serving scheme members.
In bringing his challenge, Mr Hampshire has also looked back to two cases previously heard by the ECJ. The Robins (ASW) case in 2007 held that the design of the statutory regime applied to protect pension benefits on employer insolvency prior to 2004 could be said to not fully comply with the provisions of the EU Insolvency Directive. However, the ECJ at that time hesitated to rule that a reduction in pensions of more than 50% was a definitive floor. This position seemed to be confirmed by the 2013 Irish Hogan (Waterford) case.
However, the Court of Appeal has decided, following a close consideration of the Robins and Hogan cases that: “… the [ECJ] meant what it said [ie that “correct transposition of Article 8 of Directive 2008/94 requires an employee to receive, in the event of the insolvency of his employer, at least half of the old-age benefits arising out of the accrued pension rights for which he has paid contributions under a supplementary occupational pension scheme.”].
If this is right, it follows that the capping provisions which apply to Mr Hampshire's pension under the 2004 Act and the regulations have not correctly or adequately transposed the provisions of Article 8 [of the Insolvency Directive] into domestic law. The point is not, however, entirely free from doubt and it is true that the statutory schemes under consideration in Robins and Hogan were very different from that under the 2004 Act where the cap affects only a small percentage of the membership of the Scheme. In these circumstances, we have come to the view that the point is not acte clair and we propose to refer it to the [ECJ] before determining the appeal …”.
Mr Hampshire has also challenged the level of pension payments he is entitled to by invoking various other legal principles. Although these options have been touched on in the ruling, the Court largely wishes to defer consideration of a number of these until after the ECJ has responded.
Comment
It may be that the ECJ will now rule so that the Government will have to revisit the design of PPF compensation to comply with the Directive.
Whether or not the Government will ultimately have to pay any attention to what the ECJ decide is unclear following the referendum. This might depend on whether or not the ECJ rule before the UK leaves the EU but this most definitely takes us into uncharted legal and constitutional territory.
Joy and celebration as Europe rides to the rescue of same sex spouses?
British equality law continues to allow pension schemes to discriminate against pension scheme members and their same sex spouses and civil partners in the provision of survivors’ pensions in respect of service before 5 December 2005. The last major UK development in this area was the Court of Appeal ruling in the Walker case last year (see Pensions Bulletin 2015/43 in which this limitation was upheld).
We understand that the next stage of Mr Walker’s case will be a Supreme Court hearing in November, which may in turn lead to the European Court of Justice (ECJ) but in the meantime Advocate General Kokott (the AG) has now weighed in in the Irish case currently before the ECJ of Parris v Trinity College Dublin.
Dr Parris is a retired lecturer at Trinity College Dublin and is a member of the Trinity College pension scheme, which has since been effectively nationalised. He entered into a civil partnership with his long-term same sex partner in the UK on 21 April 2009 (and then married, again in the UK – Mr Parris is a UK/Irish dual national – on 12 January 2015). Irish law did not recognise civil partnerships entered into abroad until 12 January 2011 and then did so only on a prospective basis.
The pension scheme has a rule (referred to as “the Rule” in the AG’s Opinion) that survivors’ pension entitlements (of 2/3rds of the member’s pension, payable for life) depend on whether or not the member entered into a civil partnership or marriage before the earlier of the member attaining age 60 or retirement. Dr Parris’ civil partnership and later marriage both came after age 60 and so his husband does not have a right to a full survivors’ pension (although there was a right to a less generous pension for five years if Dr Parris had died within five years of retirement). Not only were the civil partnership and marriage not in time for the purposes of this entitlement rule, it would not have been possible under Irish law as it stood at the time of his 60th birthday for Dr Parris to have legally entered into a civil partnership or same sex marriage.
Dr Parris has complained through the Irish legal system that he has been directly or indirectly discriminated against on the grounds of both his age and sexual orientation.
The AG’s Opinion on questions referred to the ECJ was that:
- The Rule constitutes unlawful indirect discrimination on the grounds of sexual orientation which is neither proportionate nor objectively justifiable
- (While not having to answer this question having already opined that there is discrimination on the grounds of sexual orientation) the Rule also constitutes unlawful direct discrimination on the grounds of age
- Taken together there is probably indirect discrimination on the combined grounds of age and sexual orientation
Perhaps crucially from the UK standpoint (and in the face of a specific Government intervention on this point) the AG considers that there should be no “temporal limitation” on the effect of this Opinion (if it is supported by the ECJ). This means that despite most of the benefit rights involved having accrued before the various equality laws came into effect these laws may apply retrospectively.
Comment
Many UK pension schemes have already decided to not avail themselves of the 5 December 2005 limitation and just provide equal survivors’ pensions to same sex spouses/civil partners. But there is still no legal obligation to do so and if it is enforced funding strains may be put on some smaller DB schemes where awarding equal survivors’ pensions in respect of high earners with lots of pensionable service.
Readers should note that this is an AG Opinion. It will not necessarily be followed by the full court but if it is will clearly be a win for Dr Parris and others in a similar position in Ireland.
The AG’s comments about retroactivity may have a bearing on the UK litigation so that we do end up with a legal authority striking down the 5 December 2005 limitation and requiring fully equal survivors’ pensions for same sex partners. What would the Government do then? These are the second potentially significant ECJ proceedings concerning pensions that we report in this week’s Pensions Bulletin demonstrating that the influence of EU law will continue to be felt for some time yet regardless of how Brexit goes.
Pensions Institute reports on “milking and dumping”
In an early contribution to the debate about the future of defined benefit pension regulation the Pensions Institute has published a report which reviews the history of how some employers have (or are perceived to have) “exploited scheme surpluses” and “shed or sidestepped deficits”.
Comment
This report has received quite a lot of press coverage. Disappointingly it offers little in the way of constructive suggestions to improve matters, although perhaps this was not the point!
Scheme reconciliation service – late requests no longer accepted
The 19th edition of HMRC’s Countdown Bulletin confirms that with immediate effect no further late expressions of interest to use the Scheme Reconciliation Service will be considered for approval. HMRC had previously announced that it would in exceptional circumstances only consider approving such late requests once the 5 April 2016 deadline had passed.
The Bulletin also lists various types of queries from pension scheme administrators that HMRC teams will no longer be responding to.
PPF publishes levy data correction principles
The PPF has published a document that draws together the key principles that it will apply when considering a request for levy data correction made by schemes and advisers.
The document discusses the discretions available to the PPF to allow corrections to levy data and, perhaps most usefully, details the considerations that are likely to be relevant in the individual exercise of discretion, a key element of which looks to be the timing of the request.
Comment
This helpful update from the PPF emphasises once again its limited appetite for correcting information “post event”, and the importance of schemes submitting accurate data by the relevant deadline.
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.
