Pensions Bulletin 2019/25

Box Clever – big win for the Pensions Regulator in the Court of Appeal

On 20 June the Court of Appeal unanimously dismissed the appeal by the ITV companies against the decision of the Upper Tribunal (Tax and Chancery Chamber) to uphold the Pensions Regulator’ s issuing of a Financial Support Direction (FSD). See Pensions Bulletin 2018/21 for details of the history of this case.

The appeal was based on three grounds – retrospectivity (including human rights arguments), connection and reasonableness.

Retrospectivity and human rights

Turning to the first, the Court was asked whether the FSD legislation, introduced in the Pensions Act 2004, can have retrospective effect given that the events giving rise to the FSD took place before that legislation came into force (or was even thought of). Part of this question related to whether ITV’s human rights (specifically “A1P1” of the European Convention on Human Rights which protects property rights) are infringed by the FSD.

The Court of Appeal took the view that, while there is indeed a presumption against retrospectivity in English law, it was not sufficiently engaged in this instance for the FSD to be prevented. This is because the Regulator’s statutory obligations – to protect benefits under occupational pension schemes and to reduce the risk of compensation becoming payable by the Pension Protection Fund – point strongly to giving the words in the legislation their normal and natural meaning. And those words do not include anything to stop the Regulator looking at things which happened before the law (or indeed the Regulator) came into being.

Nor did the human rights argument fly. The Tribunal found that A1P1 would prevent a law which reduced accrued rights or confiscated property. However, it does not necessarily prevent the creation of a liability in respect of past events, so long as a “fair balance” is struck between the social remedial aim of dealing with the problem of underfunded pension schemes and the interests of the ITV companies. The Court of Appeal agreed. After all, it has not been suggested that the human rights of PPF levy-payers have been infringed by the introduction of the PPF levy even though the deficits the PPF compensates for may have been run up before the PPF was set up.

Connection

The Court also upheld the Tribunal’s decision that the ITV companies met the “associated or connected” test and are thus in scope of an FSD. We need not dwell on the details as they are highly specific to the transactions under scrutiny here.

Reasonableness

This left the question of whether, as is required by the legislation, it would be reasonable for the Regulator to issue an FSD. The Tribunal had found that ITV bore a responsibility (but not blame) for the situation having regard to the nature of the relationship between ITV and the employing companies and the pension scheme and the value of the benefits received by ITV amongst other things.

The Court of Appeal upheld this decision. It will only overturn the decision of a specialist tribunal if it had made some error of law or reached a decision that no reasonable tribunal could make. It found neither, nor gave any indication of disagreement with the Tribunal.

Comment

Clearly a good result for the Regulator which may embolden it to use its “moral hazard” powers more often. But it may not be the end of the road yet, as it has been reported that the Court of Appeal has denied ITV leave to appeal to the Supreme Court, but that ITV will petition the Supreme Court to appeal.

There is also the possibility that this all may end up as a pyrrhic victory for the Regulator. None of the proceedings so far address the matter of quantum. There may well be a Financial Support Direction, but we do not yet know how much financial support will be directed. While the Tribunal held that ITV did bear some responsibility for the pension deficit it is by no means clear that it bears all the responsibility and the quantum of the FSD may reflect this. We have seen something similar before in the Bonas case (see Pensions Bulletin 2011/26).

Auto-enrolment boosts occupational scheme membership again

Active membership of occupational pension schemes has risen once more to 17.3 million people, according to the 2018 ONS occupational pension schemes survey published on 20 June. This is the sixth consecutive year that active membership has grown (from the 2012 low point) and is likely to be due to the impact of the Government’s auto-enrolment legislation. However, in the private sector, nearly all the growth is in DC provision, with DB active membership in the private sector being broadly comparable with 2017, at 1.1 million.

Deferred pension entitlements continue their significant rise, with fears that the auto-enrolment policy is creating many DC pots (an increase of 2m pots in 2018 alone) that fail to follow their owners when individuals change jobs.

The sharp divide between DB and DC is once more illustrated in average contribution rates – with private sector DB schemes having an average total contribution rate of 25.6% of pensionable earnings, split between members (6.4%) and employers (19.2%), whilst their DC counterparts have an average total contribution rate of 5.0% of pensionable earnings, split between members (2.7%) and employers (2.4%).

Comment

The pensions landscape continues its apparently inexorable trend towards lower value DC provision and away from the DB ‘gold standard’. Although it does now seem that a steady state of DB active provision in the private sector is in view, public policy will likely continue its shift of focus away from DB to DC. For example, delivery of a fully functioning dashboard is becoming increasingly important as a means by which individuals can ‘join up’ what is likely to be a disparate collection of DC pension provision.

DB scheme funding level steady three years on

The increase in technical provisions matched the increase in assets over the three-year period to 2016/17, with lower expected bond yields wiping out positive gains on investments and excess employer contributions. This is the main message in the Pensions Regulator’s latest annual scheme funding statistics (see also the technical annex), which reports on the funding position of DB pension schemes with valuation dates between 22 September 2016 and 21 September 2017 (ie “tranche 12” schemes with an average valuation date around 31 March 2017).

For schemes in tranche 12 that have submitted their valuations, the average funding level is 89% on a technical provisions funding basis, a 1 percentage point deterioration from the same valuations submitted three years ago. As with last year’s tranche 11 results, the most mature schemes (those whose liabilities are 75% or more in respect of pensioners) are over 90% funded on average.

Within these averages, the ratio of technical provisions to buyout liabilities levels is generally lower for schemes with stronger employers, and more mature schemes have a higher ratio of technical provisions to buyout liabilities than less mature schemes.

The average (median) recovery plan length is 6.5 years for those schemes in deficit, with median recovery plan end dates extending by 2 years since the previous valuation. The average deficit reduction contributions of 2.1% of technical provisions, is relatively unchanged from the 2.2% seen three years ago.

The average real discount rate for all these schemes has dropped down to -0.67%, from +0.92% three years ago. The average assumed life expectancies for tranche 12 are lower compared to the equivalent valuations three and six years ago.

Comment

All three valuation groups of schemes have now completed four valuation cycles under the current funding regime. Despite the volatile market returns and reduced long-term investment expectations that have played out over this period giving unsteady and certainly not decreasing deficits, it seems all three groups have, on average, slow but steadily decreasing recovery plan lengths. This perhaps unsurprising trend will surely give some comfort to many schemes’ long-term plans to achieving self-sufficiency.