Euro-spanner in the PPF works?
Possibly, if the Opinion of Advocate General Kokott in the case of Hampshire v Board of the Pension Protection Fund is followed by the Court of Justice of the European Union.
As we reported in Pensions Bulletin 2016/32, Mr Hampshire is suing the Board of the PPF because the cap on PPF compensation means that his pension has been drastically reduced. He claims that the design of the PPF is incompatible with Article 8 of the EU Insolvency Directive, which previous CJEU rulings have indicated requires pension protection schemes to provide at least 50% of a member’s accrued pension.
The Court of Appeal had referred the case to the CJEU and the Advocate General has now found that:
- The Insolvency Directive is to be interpreted to the effect that every individual employee is entitled to compensation of “at least 50% of the total value of his accrued rights or entitlements to old-age benefits in the event of the insolvency of his employer”
- National systems of protection, such as the PPF, must also guarantee growth in the entitlement “in so far as over the years the guaranteed amount may not fall below 50% of the value originally accrued for a pension year” which appears to mean that the total value guaranteed should include pension increases attaching to the benefit; and
- The Directive applies directly to the PPF as a public body, with a consequential effect on schemes winding up outside the PPF
If the CJEU decides in this way (and assuming the UK has to follow the decision, which Brexit makes uncertain) then our initial take on the likely implications is that:
- PPF compensation must be subject to a floor of 50% of the pension at the date of insolvency and start of the PPF assessment process
- This must be monitored to ensure that it does not fall below 50% of what would have been received from the failed scheme taking into account pension increases that would have been awarded
- The decision may well apply retroactively meaning that the PPF may have to go back and award compensation for inadequate provision
It is notable that the pension scheme involved here had enough assets to eventually wind up outside of the PPF although not enough to secure benefits in full. Schemes in this position in future may need to take the 50% minimum into account in the priority order in which they secure benefits.
Comment
Should the CJEU decide in the same way as the Advocate General, a major administrative headache will be created for the PPF. But ahead of this, trustees of underfunded schemes in the process of winding up outside the PPF will likely need to obtain urgent legal advice on whether they should continue to apply the current winding up priority order.
The case will need to come back to the Court of Appeal who may offer guidance on how the Insolvency Directive impacts schemes winding up outside the PPF. It is also worth emphasising that the CJEU does not always follow the Advocate General. Indeed, AG Kokott’s opinion on same sex survivors’ pensions (see Pensions Bulletin 2016/48) was not followed in which case the implications of the CJEU referral for the design of the PPF would be approximately nil.
DWP publishes guidance on bulk transfer without consent for DC benefits
Following on from the regulations that change the rules that govern how pure DC benefits can be bulk transferred without member consent from one occupational pension scheme to another (see Pensions Bulletin 2018/09) the DWP has now published guidance aimed at the trustees of the transferring scheme.
Running to 24 pages, the purpose of this non-statutory guidance is to assist trustees in navigating a new regulatory regime that is very light on detail. After explaining the legislative requirements that have operated since 6 April 2018, the guidance focuses on such matters as:
- How trustees should determine whether their adviser is independent
- What attributes the trustees should be looking for in an adviser
- What the advice should cover; and
- How the trustees should assess the receiving scheme
The last of these takes a principles-based approach, making clear that there is no single test that needs to be met, it is possible to transfer even if some aspects of the receiving scheme are worse than the transferring scheme, and whilst desirable, “it is not critical to maintain the “absolute value” of a member’s pot from just before to just after a transfer”.
There is also an important section that sets out good practice in matters such as member communication, data quality, documenting the transaction, and transition management. There is also brief mention in separate sections of potential tax consequences and the operation of the charge cap.
Comment
This document contains valuable guidance for trustees needing to take what is an irreversible decision to transfer DC benefits out of their care. Although it would seem to go beyond the high level guidance that was promised, it should equip trustees, along with their advisers, to carefully navigate a new regime in which the scheme actuary has been replaced by an independent adviser with DC knowledge and the essential test is whether the transfer is in the members’ best interests.
Three more papers from the CMA
The Competition and Markets Authority has issued three more working papers as part of its investment consultancy and fiduciary management market investigation. They cover the competitive landscape, barriers to entry and expansion, and financial performance and profitability.
- In the paper on the competitive landscape, the CMA says that its investigations suggest that investment consultancy and fiduciary management constitute separate markets, the investment consultancy market is not highly concentrated and although the fiduciary management market is more concentrated, it is also not highly concentrated. However, the fiduciary management market is expanding rapidly, with key players having ambitious growth plans, with the possibility that concentration will increase in the next few years
- Moving on to the paper on barriers to entry and expansion the CMA says that at this stage it has not identified or concluded whether there is an adverse effect on competition in relation to barriers to entry or expansion. Its emerging findings are that barriers to setting up a new firm or new service line are not prohibitively high, but are greater in fiduciary management than in investment consultancy. When it comes to expansion the CMA says that potential barriers to winning clients are potentially greater than when setting up a new firm or service line, and barriers to expansion may be greater in fiduciary management, even though this sector is expanding. The CMA also says that the importance of reputation means that while new entrants can and do win clients, increasing a firm’s client base may take longer for a smaller firm than for more established participants and particularly for larger firms active in related markets. It says that this is the case for both investment consultancy and fiduciary management services
- Finally, the paper on financial performance and profitability seeks to examine whether excess profits are being made in either market and as such could be an indicator that competition problems may exist. However, the CMA was unable to reach a finding and concludes that it would not be proportionate to look into this further
Comment
Whilst all of these papers are noteworthy none of them point to the CMA needing to intervene, but we will need to wait for the provisional decision report in July to see whether the CMA’s investigation proves to be a non-event.
Reform of Scottish limited partnerships announced
The abuse, by suspected criminal elements, of limited partnerships, and particularly Scottish limited partnerships (SLPs), made headlines over the weekend ahead of the Government announcing proposals to address the issue.
A consultation launched on Monday acknowledges that there are legitimate business reasons for using SLPs, including pension schemes facilitating asset-backed security arrangements with the employer, but in an effort to prevent nefarious use the Government is proposing the following:
- Those that present the limited partnership for registration should confirm they are subject to anti-money laundering supervision
- Two alternative proposals regarding the limited partnership’s principal place of business – for an SLP these are either that the principal place of business has to remain in Scotland (with disclosure requirements), or that it would be required to maintain a service address in Scotland (with statements confirming this); and
- That the reporting and strike off provisions for limited partnerships are brought more in line with those for limited companies
The consultation also reveals that there are currently over 60 asset-backed pension arrangements with a total value of over £10bn of securities covering in excess of 700,000 scheme members, going on to note that they are being used by some of the UK’s largest companies and household names.
The deadline for responding to the consultation is 23 July 2018.
Comment
There does appear to be clear evidence, gathered in part from an earlier call for evidence, of suspected criminal activity involving SLPs, so these reforms, which appear to be proportionate, have merit. It also seems that these proposals are not intended to adversely affect the operation of SLPs being used by pension schemes to facilitate asset-backed contribution arrangements. However, such schemes may wish to consult their legal advisers and consider responding to the consultation.
Helping consumers avoid running out of money in retirement
This is the theme taken by an interesting policy briefing published by the Institute and Faculty of Actuaries which also seeks to influence the outcome of the keenly awaited Retirement Outcomes Review being undertaken by the Financial Conduct Authority (see Pensions Bulletin 2017/30).
Focussing on “Middle Britain” consumers whose level of DC savings would generate a moderate income (between £1,500 and £12,500 pa), but who are unlikely to seek financial advice, the briefing suggests that it would be valuable to develop and promote rules of thumb for such consumers so that they are put into a better position to balance flexibility with certainty, in order that they do not run out of money in retirement.
Calling on the results of some financial modelling, the briefing suggests that a balanced approach could be to use drawdown in the early years of retirement, but take no more than 3.5% of the DC fund out each year, before considering the possibility of annuitisation after five to ten years. Alternatively, there could be a combination of drawdown and annuitisation for this period before fully annuitising.
Comment
This is an interesting contribution to a policy debate that does need to come to a rapid conclusion as right now there are an increasing number of DC retires who are in drawdown, often without advice, quite possibly investing in assets that are not appropriate for their needs and with no clear idea as to how their DC pot will be able to provide them with a sustainable income throughout their retirement.
European pensions regulator sets out information demands
The European Insurance and Occupational Pensions Authority has decided on new information requirements about occupational pension schemes from “national competent authorities” (such as the UK’s Pensions Regulator).
EIOPA’s formal request in effect establishes a new framework for national regulators to report to EIOPA and focuses on three main information areas – valuation balance sheet information, inputs and assumptions used for valuations, and “flow data”. Much of this information is to be reported at an aggregate level, but details of some of the largest schemes will also need separate reporting.
EIOPA states that it needs this information in order to monitor and assess market developments and to undertake economic analyses of the occupational pension market, with a particular focus on financial stability.
The reporting requirements will apply as of the third quarter of 2019 for quarterly reporting and as of 2019 for annual reporting taking into account a transitional period and a proportionate approach for smaller pension schemes.
Comment
The document reveals that EIOPA will be requiring very detailed information, delivered in standard form and on at least an annual basis. Although the prime audience for this document is “national competent authorities”, there could be a knock-on to individual schemes in the UK if the information the Regulator is currently obtaining, from sources such as the DB scheme return and valuation submissions, proves to be insufficient to placate EIOPA. But all of this may be entirely unnecessary depending on what type of Brexit is eventually delivered.
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.
