LCP Accounting for Pensions 2017 – £150bn to go backwards
We have launched our 24th edition of “LCP Accounting for Pensions”, which you can access via our website. On there you can also find a short video of some of the most interesting findings this year.
Our report reveals the state of FTSE 100 companies' pensions including the largest liabilities, deficits and how these compared to market capitalisation. Unsurprisingly, pensions continue to pose a very significant risk for certain companies.
We’ve also included some interesting analysis on how the FTSE 100 could address some of their pension challenges. For example, pension liabilities could reduce by £30bn if those using RPI switched to CPI, and adopting new methods of setting accounting assumptions could reduce the combined accounting liability for pensions by £25bn.
Court of Appeal upholds BBC benefit changes
Following years of litigation the Court of Appeal has now decisively ruled against Mr Bradbury, a member of the BBC Philharmonic Orchestra, in his claim that the BBC should not have “capped” his pensionable salary increases at 1%.
Concerned about rising DB pension deficits, in 2010 the BBC offered members the choice of either staying in their existing benefit section, but with only 1% of future pay increases pensionable, or else they could join the new (less generous) career average or money purchase arrangements without the 1% cap.
Feeling that he was being coerced, Mr Bradbury complained to the Pensions Ombudsman, who rejected his complaint. He appealed against this Determination to the High Court where the cap was upheld but the case was referred back to the Ombudsman to decide if the BBC’s conduct amounted to a breach of its implied duty of trust and confidence. The Ombudsman decided that it did not. Mr Bradbury appealed to the High Court again and lost again. He has now lost in the Court of Appeal which ruled on the following issues.
Did the definition of Basic Salary permit the BBC to determine whether (or how much of) a pay rise counted as Basic Salary, or would it be a breach of the Scheme rules to impose the Cap?
The way that the BBC scheme rules are drafted is that (for the final salary section of which Mr Bradbury was a member) retirement pensions are based on “Pensionable Salary” in the last year of Pensionable Service. Pensionable Salary is defined as “Basic Salary”, being “the amount determined by the BBC as being an Employee’s basic salary or wages…”.
Mr Bradbury claimed that the definition of Basic Salary did not enable the BBC to determine that pay which ordinarily would be categorised as Basic Salary (including a pay rise) would not count as such. He also challenged the introduction of the “amount determined by the BBC” wording in a 2006 amendment on the grounds that it breached a long standing restriction in the rules on the legal power to amend them without an actuarial certificate that active members would not be “substantially prejudiced”. The actuary did give this certificate but it was argued that he should not have done if it turned out that the amendment was detrimental to the interests of active members. Whether or not a statutory actuarial certificate under section 67 of the Pensions Act 1995 was given, or required, is unclear.
The BBC disagreed and the Court sided with it. On a proper construction of the scheme rules the BBC may indeed decide that a pay rise is not pensionable (indeed, this result is “not startling”). Furthermore, the challenge to the 2006 amendment “goes nowhere” … “…the actuary had certified the amendment. It was a moot point as to how the actuary had reached the qualitative view that the amendment did not substantially prejudice members' interests”.
Did the Cap breach section 91 of the Pensions Act 1995?
This is a provision of the Pensions Act regarding the “inalienability” of pension rights – it limits the circumstances in which they can be surrendered. In essence Mr Bradbury argued that it protects future as well as accrued rights. The BBC said that it did not and moreover did not even have any application in these circumstances. The Court agreed with the BBC stating that “… section 91 had no application to the appellant's agreement to the Cap, since the section only prevented the surrender of rights under the pension agreement, not a change to the content of the appellant's employment contract”.
Did the BBC breach its implied duty of trust and confidence?
The Court decided that it did not. The BBC’s conduct was neither irrational nor perverse nor was there sufficient evidence of an improper motive. After all there was “… a multi-billion pound deficit in the Scheme and … the trustees, the unions and [the BBC] all agreed that something had to be done”.
Comment
This appears to be a comprehensive victory for the BBC, although given the history of the lawsuit a further appeal to the Supreme Court cannot be completely ruled out.
That the Court refused to try to second guess the actuary’s reasons for certifying the 2006 amendment will be comforting both for actuaries and those who rely on certificates signed by them where these are legally required in relation to pension scheme changes.
Regulator gets tough with public service pension scheme
In the first case of its kind, the Pensions Regulator has fined the scheme manager of a public service pension scheme for failing to submit basic information required by law.
From the regulatory intervention report published last week the London Borough of Barnet failed in its duty to submit a scheme return by the required deadline and despite promises to submit and subsequent chasers failed to do so for reasons that remain unknown. Some seven months after the deadline, the Council was fined £1,000. The scheme return has apparently still not been submitted and given this the Regulator has engaged a case team to discuss the scheme’s future governance and administration.
Comment
It is not clear why what on the face of it appears to be a straightforward requirement has not been met. The Regulator has previously expressed concerns about the way in which a number of public sector pension schemes are run. Presumably by publicising this case, the Regulator intends to send a strong signal to other public sector schemes.
Pension Schemes Newsletter 89
HMRC’s latest pension schemes newsletter contains the usual pot pourri of technical issues impacting the running of registered pension schemes, starting with the news that in the three months ending 30 June 2017 HMRC has repaid £26.8m of tax taken from scheme members as a result of their taking benefits flexibly under the previous Chancellor’s freedom and choice policy. In the previous quarter HMRC repaid £22.8m.
Other points of note are the following:
- The fall in value and number of transfers to QROPS continues with the publication of statistics for 2016/17 (down from £1.5m to £1.22m) – but the real interest will come around this time next year when we should be able to see the impact that the overseas transfer charge introduced in March 2017 has on this market
- A further delay in the launch of the lifetime allowance look up service for pension scheme administrators
- A promise to resolve, by April 2018, the problem of P6 tax coding notices being issued in error for death benefits that are entirely non-taxable; and
- Details of the new pensions online service which will be rolled out in two phases
Comment
The initial overcharging of tax on pension fund withdrawals, due to HMRC applying emergency tax codes, is a feature of the new regime and, despite outrage in some sections of the media, HMRC is unlikely to want to change it. Those affected should put in a claim for repayment, with the only issue for schemes being that they should make members aware that they will be overtaxed and of the action they need to take.
Perhaps the more worrying point is that by taking lump sums many individuals are incurring tax at a higher rate than had they staggered the way in which they accessed their pension funds. This is a real windfall for the Treasury.
McDonald v McDonald turns the tables on Scottish approach to pension sharing
In a ruling handed down on 26 July the Supreme Court has overturned the received wisdom on an important aspect of the pension sharing legislation applicable to Scottish cases.
Unlike the situation pertaining in the rest of the UK, the pension benefits taken into account are determined having regard to the period of time the couple have been married (up until separation). Furthermore, until last week it was thought that only the period of the member’s active membership in the pension scheme was relevant to the pension sharing calculation. But the Supreme Court has now held that the legislation setting out the apportionment formula must be read differently and has set out four reasons why it believes this to be the case.
Primarily the Supreme Court believed that to achieve the previous interpretation, it was required to read additional wording into the regulation and the Court could find no logic for doing so.
Following the ruling, the correct basis of apportionment now (applicable to all the pension benefit) is to determine what proportion of the period the individual has been a scheme member has occurred whilst being married (ie including any period in which there was no accrual – such as being in receipt of benefit). In Mr McDonald’s case that meant instead of pension benefits to the value of £10,002 being in the pot available to be split, it is now £138,534.
This sudden change of fortune for Mrs McDonald has come about because whilst only around 5% of Mr McDonald’s pension accrued after he married, the length of his marriage has been such that roughly 80% of it is now shareable under the fresh interpretation.
Comment
Mrs McDonald lost in front of the Sheriff and at the Inner House, but it is now back to the Sheriff for the pension sharing case to conclude on the basis of the new interpretation. Although this was an extreme case, one wonders how many other Scottish cases may now be revisited (to the benefit of the ex-spouse) where separation was some years after accrual ended.
CPIH regains National Statistics designation
The UK Statistics Authority has now confirmed that CPIH – the Consumer Prices Index (CPI) including owner-occupied housing (OOH) costs – has met the standards to have its National Statistics designation restored.
CPIH was stripped of its National Statistics designation in August 2014 due to concerns relating to the processing of some of the administrative data sources used to estimate OOH costs.
From March 2016, the Office for National Statistics has made a concerted effort to address these concerns and in November 2016, the National Statistician John Pullinger expressed his desire to move CPIH towards becoming the ONS’s preferred measure of consumer price inflation (see Pensions Bulletin 2016/45) with effect from March 2017. However, when we reached March 2017, CPIH had yet to regain its National Statistics status. Nevertheless, the ONS’s Consumer Price Inflation statistical bulletin and data tables were rejigged so that CPIH has since been the lead statistic quoted (see Pensions Bulletin 2017/12).
Comment
Although CPIH is now re-designated as a National Statistic, the UKSA has stressed that it has no view on whether CPIH should be presented as a headline or preferred measure of inflation and CPI is still recognised as the Government’s preferred measure of price inflation for social security and pension benefits.
However, given the National Statistician’s clear statement on the matter at the end of last year, we feel it must only be a matter of time before this changes.
Trustee with a Scottish limited partnership? Then you should read this
Scottish limited partnerships are subject to a new legal compliance requirement under regulations made on 22 June 2017. They must register details of "persons with significant control" (PSCs) and "relevant legal entities" (RLEs) over the partnership with Companies House from 24 July 2017. Individual pension trustees who participate in such partnerships are likely to count as PSCs and corporate pension trustees are likely to count as RLEs.
Non-compliance with the new requirements is potentially a criminal offence.
Comment
It is for the management of these partnerships to ensure that the new registration requirements are met. Nevertheless, pension trustees who participate in them – it is not uncommon for pension schemes using asset-backed contribution structures – should take steps to ensure that the new requirements are met in time. This will involve taking legal advice on this point.
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.
