Pensions Bulletin 2023/31
Pensions & benefits Pensions dashboards Policy & regulation
- High Court supports trustee decision to wind up scheme sponsors
- Regulator imposes £2m Contribution Notice on individual
- BBC case offers a reminder about the importance of scheme documents
- FCA revises its pensions dashboards connection rules
- Research reveals low awareness of HMRC’s Managing Pension Schemes service
- Pensions Regulator promotes Midlife MOT website
High Court supports trustee decision to wind up scheme sponsors
An interesting case before the High Court has resulted in a corporate trustee of a DB scheme being supported in a decision of “momentous consequence”, given the adverse impact on jobs, to petition for the winding up of the scheme’s sponsoring employers and so create an insolvency event that will enable PPF compensation to replace scheme benefits.
The Biwater Retirement and Security Scheme is in very significant deficit and the Biwater companies that are its sponsors, who owe the scheme a substantial amount of money, are in serious financial trouble due to non-performance of a number of overseas projects. Until recently, BRASS Trustees Limited, the corporate trustee, held out in the hope that money would come to the scheme, but has now reached the point where it has become of the view that it is very unlikely to see any injection of funds.
The scheme’s deficit and membership profile is such that it is experiencing a significant level of ‘scheme drift’. This is where the funding level deteriorates with the passage of time, particularly due to benefits coming into payment and having to meet ongoing expenses. But whilst this is discouraging the trustee from continuing with the scheme, the longer they delay their wind-up decision the greater the PPF compensation that will eventually be provided. This is due to ‘PPF drift’ – ie as members reach their normal pension age, full increases are awarded and revaluation is granted by the scheme, and as more members die, full survivor pensions are paid by the scheme, with each then being used as the baseline for higher PPF compensation.
In reaching its decision to petition for wind-up, the trustee took account of the scheme drift issue, but not the PPF drift issue. On the latter, the trustee said (amongst other things), that any interests of the PPF were not relevant considerations for the trustee exercising its fiduciary powers. The trustee was backed up by the Court that, amongst other things, held that the trustee could not have sought to take advantage of the existence of the PPF to justify failing to take steps to prevent the scheme’s deficit and drift increasing further.
The case was joined by a lawyer acting as the Representative Beneficiary and by the PPF, both of whose representations didn’t conflict with the trustee’s decision. In concluding, the Court held that the trustee had no alternative but to take steps to protect the members of the Scheme as a whole and so it approved the trustee’s decision.
Comment
This case provides more support for the premise, first tested in Independent Trustee Services Ltd v Hope, that trustees should not take advantage of the existence of the PPF to justify acting in a way that would otherwise be improper when reaching their decisions. The judgment also reveals the trustee’s concern about the Biwater companies’ conduct towards them, the Pensions Regulator and the PPF. Could the Regulator have something to say about this soon?
Regulator imposes £2m Contribution Notice on individual
The Pensions Regulator has publicised a Decision of the Upper Tribunal that upholds a June 2020 determination made by the Regulator to impose a Contribution Notice of nearly £2m on an individual associated with a now failed DB scheme that is in the process of being assessed for PPF entry.
The case was brought under the Regulator’s pre-Pensions Act 2021 powers and originally resulted in a Contribution Notice of £3.69m issued on a joint and several basis against two individuals – Mr Rohin Shah and Mr Anant Shah, both of whom appealed to the Upper Tribunal. Shortly before the hearing in May 2023 the Regulator reached a settlement with Mr Rohin Shah.
The case concerned the Meghraj group of companies, one of whom was the sponsoring employer of the DB scheme and which entered a creditor’s voluntary liquidation in October 2014 leaving the scheme with a buyout deficit of around £5.85m at this point.
The Regulator investigated a series of payments made from the sponsoring employer to its parent company between 2012 and 2014, and onwards to companies controlled by the Shahs, and became of the view that these payments should have been used to fund the scheme and the failure to do so met the material detriment test for the purpose of issuing a Contribution Notice.
What makes this case of interest is examining the logic employed by the Upper Tribunal as it steps through the five issues that need to be determined in order to support the Regulator’s side of the argument, in particular on whether it was reasonable for the Regulator to issue a Contribution Notice and the approach taken by the Regulator in determining the amount required to be paid. On the latter there was reference to the 2011 Bonas case where, in obiter remarks, the judge in that case had suggested that the amount ought to take into account the loss to the scheme as a result of an act or failure to act. The Upper Tribunal put this to one side as the Bonas case related to a Contribution Notice issued under the debt avoidance test and such considerations were not relevant under the material detriment test.
Comment
Over the years there have been a number of cases in the public domain where the Pensions Regulator has used or threatened to use its Contribution Notice powers. However, only a handful have ended up in Court where one can see the Regulator’s logic being tested.
Having said this, there was little by way of defence put up by the respondent, nor was he legally represented. It is also not clear whether Mr Shah has, directly at least, sufficient resources to meet the payment now required of him. However, it is useful to have the question of quantum addressed. The Regulator will be gratified that the notion that a Contribution Notice is limited to a measure of loss appears to have been consigned to history, at least where the material detriment test applies.
Once again, the length of time for the Regulator to get to this point has been extraordinary.
BBC case offers a reminder about the importance of scheme documents
In a third case, marking the end of the legal year, the BBC has been prevented, at least for the time being, from closing its DB scheme to future accrual, or reducing the future service accrual rate. It had closed the scheme to new members in December 2010.
The judgment was concerned with the construction of the scheme’s power of amendment which is worded as follows:
‘the Trustee, with the consent of the BBC, may "alter or modify any of the trusts, powers or provisions of the Trust Deed or the Rules …", provided that no such alteration or modification shall "take effect as regards the Active Members whose interests are certified by the Actuary to be affected thereby” unless one of the relevant conditions (in sub-paras (a)-(c)) is met. These include the actuary certifying that the alteration or modification does not substantially prejudice the interests of such members.
The Court was asked a series of questions about the meaning of the “interests” of active members and whether they included the right to accrue future service benefits. The answer to all of these was “yes” which means that the requisite actuarial certificate cannot be provided and changes of the nature mentioned above cannot be made. A further question was put, the answer to which also prevented such changes from taking place.
Comment
It is possible that this ruling will be appealed but in the meantime the interpretation put on the restriction on the amendment power (which dates back to 1949) stands, leaving the BBC stuck with a contribution rate of 42.3% of pensionable salary for DB members, compared to seven or eight percent for DC members.
The case illustrates that every scheme is different and unusual provisions may lurk in the archaeology of older schemes. The case also serves as a reminder to sponsors and trustees planning to make changes to scheme benefits to be fully aware of key provisions, such as amendment powers and any restrictions on them.
FCA revises its pensions dashboards connection rules
Following on from the recently laid amending regulations (see Pensions Bulletin 2023/30), the Financial Conduct Authority has revised its pensions dashboards connection rules that had been issued in final form on 1 November 2022 (see Pensions Bulletin 2022/40).
Previously, these rules had set one date, 31 August 2023, by when FCA-regulated pension providers had to complete connection of their personal and stakeholder pension schemes to the MaPS digital architecture and be ready to receive requests to find pensions, search records for data matches, and return pensions information to the consumer’s chosen pensions dashboard. Pension providers with fewer than 5,000 DC pots in accumulation and who rely on a third-party integrated service provider to achieve compliance had a later connection deadline of 31 October 2024, so long as they notified the FCA by 30 April 2023.
All the above has now been replaced with a requirement to connect by 31 October 2026. However, the FCA also says that FCA-regulated pension providers must have regard to the forthcoming connection guidance from the Government and the Pensions Dashboard Programme, which will contain a staging timeline.
Comment
This is a just-in-time adjustment, so FCA-regulated pension providers don’t fall foul of the FCA rules at the end of this month. However, the staging timeline is still to come, and it seems possible that when it does such providers will be expected to connect well before the 31 October 2026 deadline.
Research reveals low awareness of HMRC’s Managing Pension Schemes service
Recently published research, carried out for HMRC, reveals a very low level of awareness, by certain pension scheme administrators, of HMRC’s programme of transitioning online reporting of certain tax aspects of registered pension schemes, from the Pension Schemes Online service to the replacement Managing Pension Schemes service. This is despite the latter being launched in 2018 and numerous reminders and updates in HMRC’s pension schemes newsletters since then. However, the ability to migrate existing schemes to the new service has only been available since April 2022.
Among those surveyed, awareness of migration was particularly low for in house administrators, but there were also gaps with third party administrators. Survey participants generally did not have any understanding of migration requirements and responsibilities, and once alerted through this research, preferred to receive written guidance directly from HMRC before taking any action. Those who had sought to migrate also experienced a number of challenges.
Comment
There are likely to be a number of reasons why the migration to the new platform is proving to be a long-drawn-out affair. These include the very slow pace at which all the necessary functionality of the new service has become available and that not all schemes need to carry out regular reporting. But it hasn’t helped that, according to the research report, most pension scheme administrators had not received any direct communication from HMRC about migration. However, a health warning about this survey – it has been focussed on the very small end of the market where awareness levels can be expected to be low, with the large-scale professional pension scheme administration services excluded as they are “more likely to already be aware of migration and to have engaged with HMRC”.
Pensions Regulator promotes Midlife MOT website
The Pensions Regulator is urging pension schemes to signpost to members the recently relaunched midlife MOT website (see Pensions Bulletin 2023/28). In her blog, Louise Davey, Director of Regulatory Policy, Analysis and Advice at the Pensions Regulator, highlights that pensions cannot be seen in isolation, but should be considered as part of saving and debt, day-to-day household finances, and how long people expect to work. She suggests that schemes particularly target those in the 45 to 65 age range, fully integrate the Midlife MOT into the support already offered to members and provide this link in signposting, so that the DWP can capture where visitors are being referred from.
Comment
This is a worthy initiative but the comparison with an MOT is somewhat misleading. At least with a car an MOT provides some reassurance that it is roadworthy for another year. Being issued with some context-sensitive links is more akin to what may need to be fixed in order to have an enjoyable retirement journey.
