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Pensions update
Introduction
In this combined update for May and June 2013, we look in detail at the Pensions Regulator’s annual scheme funding statement, which is of interest to all trustees and employers of defined benefit schemes.
We also set out the key points in the Pensions Regulator’s 2013-2016 Corporate Plan, and its publications in relation to auto-enrolment and scheme contributions, which will be of interest to trustees and employers of all schemes.
Our case law reports look at decisions on:
• the AG’s opinion that VAT paid by employer on management advice to
pension fund is non-recoverable;
• the recovery of benefit overpayments and whether living “improved and
more generous lifestyle” was a change of position;
• a ruling on relief from the consequences of mistake and guidance on the
rule in Re Hastings-Bass;
• whether an employer’s pension contributions amount to “wages” for the
purpose of an unlawful deductions claim;
• benefit changes to scheme documents and whether it is unconscionable
Updater
News
TPR publishes annual scheme funding statement 2013 and encourages greater
use of flexibilities
On 8 May 2013, the Pensions Regulator (TPR) published its annual funding statement, aimed primarily at trustees and employers of defined benefit (DB) pension schemes that are due to undergo triennial valuations in the period September 2012 to September 2013 (a group referred to by the Regulator as “tranche 8”).
TPR builds on its message from 2012 that the statutory funding regime incorporates a number of flexibilities, making clear that trustees may need to take advantage of these to a greater degree than in previous years. Overall, trustees should allow for a level of funding and investment risk that is “neither overly prudent nor overly optimistic”.
TPR’s approach to regulating scheme funding is likely to change in the light of the proposed new statutory objective due to be enacted in the Pensions Bill 2013, which was published on 10 May 2013 (see legislation section below). This will expressly require TPR to take into account the employer’s position in relation to funding matters in that TPR will be required to “minimise any adverse impact on the sustainable growth of an employer”.
The key points in the statement are:
• Discount rates
When setting discount rates for the calculation of technical provisions and investment return assumptions under a recovery plan, trustees should adopt the approach most appropriate for their scheme. TPR reminds trustees that they may use future expected returns on assets, and are not limited to a gilts-based approach;
• Contribution levels
Trustees should consider whether contributions are reasonably affordable for the employer. The starting point must be whether existing contributions can be maintained. If there are “significant” affordability issues, trustees should consider amending
contribution rates, including agreeing a longer recovery period. Trustees must analyse the origin of affordability issues: if an employer is investing in its business, they should ask whether this investment will improve the strength of the employer covenant. Overall, the scheme’s treatment should reflect its status as a significant creditor of the employer.
• Integrated risk management
Trustees should take an integrated approach to dealing with the risks associated with funding, investment and the employer covenant. Good governance requires the steps taken to be documented. Trustees should allow for an appropriate level of risk that is “neither overly prudent nor overly optimistic”.
News
• Risk indicators
As indicated in 2012, TPR is moving away from using a set of fixed triggers to decide when it should intervene in schemes. Instead, TPR will decide whether intervention is appropriate according to a range of risk indicators, including:
— whether recovery plan contributions and the amount of investment risk appropriately
reflect the relative strength of the employer and the affordability of contributions;
— whether there has been a deterioration in the strength of the employer covenant or
possible avoidance activity;
— the shape of recovery plans;
— the assumed investment performance over the recovery plan as a whole; and
— any significant issues with previous valuations.
Comment
This year’s funding statement builds on and extends the relaxations introduced last year. This time round, TPR makes clear that, while the starting point in relation to future contribution levels is that they should be maintained at the existing level, trustees do have scope for varying contribution rates if affordability issues are “significant”. Arguably this may put trustees and employers at loggerheads, since few employers are likely to maintain there are no affordability problems with the current contribution schedule, and may also want to take advantage of the move away from triggers to lengthen the recovery period.
The statement in our view indicates a change in TPR’s approach, taking into account the new statutory objective, although the statement does not overtly say so. What some have described as a “more lenient approach” from TPR indicates that TPR is shifting towards being more accommodating to employers, although there are fears that the knock-on effect could be increased levies from the PPF.
However, TPR’s approach to overseeing DB schemes has yet to be finalised, and it is not entirely clear what is meant by “sustainable growth” in the new TPR objective. The relevant code of practice is still to be updated, probably in 2014, to reflect the requirement for TPR to take into account the growth concerns of sponsoring employers.
TPR publishes its Corporate Plan for 2013-2016
On 21 May 2013, TPR published its 2013-2016 Corporate Plan (Plan), which sets out its strategic approach to regulating defined benefit (DB) and defined contribution (DC) schemes and maximising employer compliance with new automatic enrolment duties.
The following strategic themes have been adopted:
• Reducing risks to DB scheme members – TPR’s primary focus for the next three years will
be on supporting trustees and sponsoring employers in their decisions on maintaining or improving DB scheme funding and on adopting a more integrated approach to risk management.
• Improving outcomes for DC scheme members – key challenges include preparing effectively for the anticipated increase in DC members as auto-enrolment progresses, in accordance with the six principles for good DC work-based schemes published in December 2011.
• Improving governance and administration – TPR’s strategy in this area is to focus on:
educating trustees through the online trustee tool kit; raising awareness of pension liberation fraud; improving internal controls including record-keeping, and preparing for its new role in public service pensions.
• Maximising employer compliance with auto-enrolment – TPR will work with employers
by helping them to prepare for the new regime 18 months prior to their staging date. It will also work with suppliers of auto-enrolment products and services, ensuring that they understand their role and that they are able to provide the necessary tools to employers and trustees.
• Delivering operational efficiency and effectiveness – TPR plans to focus on its people, its
systems and processes and its infrastructure. It will aim to reduce its energy usage and carbon emissions as well as maintaining an effective and motivated workforce. TPR has produced five strategic principles to guide its regulatory approach:
• to adopt an evidence-based approach to segment the market according to the risk
presented to member benefits;
• to ensure its approach is proportionate to the risks presented to its objectives;
• to ensure there is clear accountability for member outcomes;
• to engage the market at the most appropriate part of the value chain; and
• to work closely with the Government and other regulators to maximise the overall
effectiveness of its approach.
In undertaking this work, TPR will have regard to what it sees as the principles of good regulation, which are to be proportionate, accountable, consistent, transparent and targeted (PACTT).
Key priorities for the current financial year These include:
DB regulation
• Review and consult on revisions to the scheme funding code of practice as well as on
its approach to the regulation of DB schemes, which will be published as a regulatory strategy.
• Proactively engage with selected schemes in a risk-based manner early in the valuation
News
• Continue to encourage trustees, when judging the risks to the scheme, to take an
integrated approach to addressing covenant, investment, and funding risks, taking advice where appropriate, and be in a position to provide evidence as to how this has been done. DC regulation
• Finalise its regulatory strategy for DC schemes, including the publication of a formal
response to its DC consultation, a new code of practice and accompanying guidance for DC schemes, and a compliance and enforcement strategy.
• Raise trustee and provider awareness of its principles and features for good work-based
DC schemes.
• Develop its approach to thematic reviews with a view to measuring the extent to which
schemes meet the standards it has set out. Governance and administration
• Review the Trustee Knowledge and Understanding code of practice and update the
Trustee toolkit.
• Work with other agencies to continue to raise awareness of, and disrupt, pension
liberation fraud.
• Take forward its new responsibilities under the Public Service Pensions Bill to regulate
governance and administration of public service schemes, including developing a regulatory strategy and publishing codes of practice covering key areas.
Automatic enrolment
• Provide information, tools and guidance to help raise awareness among employers, and
the intermediaries and advisers supporting them, of the new duties. It will also continue to engage with suppliers including payroll software providers and pension providers to encourage the availability of products that help employers to comply.
• Take regulatory action, where required, in line with its compliance and enforcement
strategy and policy.
• Publish an updated code of practice on reporting late payment of contributions to
DC occupational and work-based personal pension schemes.
• Publish periodic statistical reports, including employer registration figures and use of
compliance and enforcement powers. View the Plan.
Pensions Regulator’s new auto-enrolment and contributions – related
publications
TPR has created a ‘timeline planner’ to help employers meet the necessary deadlines for the
changes required by the auto-enrolment regime. The planner is aimed at employers who have between 50 and 250 employees and who have one PAYE scheme. An employer can type its staging date into the planner, which will then show the steps it must take and the deadlines it must meet.
TPR has published its revised Code of Practice 5 and 6, which relate to reporting late payments of contributions to occupational money purchase and personal pension schemes. The changes are designed to help trustees and managers of schemes monitor the payment of contributions, and deal with and report late contributions. These draft Codes of Practice were put before Parliament on 7 June 2013, and, if approved, are expected to come into force in September 2013.
The following are the three main changes to the Codes of Practice:
• Trustees or managers of schemes must have processes in place to check whether
contributions which are due to be paid under the payment schedule have in fact been paid. The draft codes state that this can be a risk-based process and the guidance contains some practical suggestions to help trustees with this process.
• Before reporting a payment failure to TPR, the trustees or managers should contact the
employer to try to resolve the overdue contributions. The trustees should contact the employer at least three times (and at least once by phone) to request the payment and an explanation for the non-payment.
• Only “material payment failures” need to be reported. A “material payment failure” is
one “which is likely to be of material significant to the regulator in the exercise of its functions”. When contributions have been outstanding for 90 days from the due date, this will be a “material payment failure”.
TPR has also created a guide to help employers ensure that they pay the correct level of
contributions at the correct time. It covers the calculation of contributions and relevant deductions, and the deadlines and record-keeping requirements for the payment of contributions.
PPF publishes its 2013-16 Strategic Plan
On 20 May 2013, the Pension Protection Fund (PPF) unveiled its strategic objectives for the next three years which it says are aimed at reflecting a mature organisation which is experienced in managing risk and is able to meet the challenge of significant growth and change.
In its Strategic Plan for 2013-16, it also sets out its vision for 2016 which describes how the PPF will be equivalent in size to one of the five largest pension funds in the country, with 500,000 members, assets of £22 billion and how it will be on course to meet its long-term funding target.
News
The updated strategic objectives are:
• Meeting its funding target through prudent and effective management of its balance sheet.
• Delivering excellent customer service to its members, levy payers and other stakeholders.
• Pursuing its mission within a high calibre framework of risk management.
View a full copy of the Strategic Plan here.
HMRC pension schemes newsletter 57 highlights pensions liberation
information
HMRC published issue no. 57 of its pension scheme newsletter on 14 May 2013. In addition to highlighting the reduction in annual allowance to £40,000 and in the lifetime allowance to £1.25 million from the tax year 2014/15, the newsletter emphasises the dangers of what is known as “pensions liberation”.
The key points in this context are:
• HMRC has amended its online pensions pages to clarify the tax consequences of pension
liberation for scheme members. HMRC emphasises that, with very few exceptions, members accessing pension benefits before age 55, will be liable to pay tax of more than 50 per cent on the liberated funds;
• Schemes are asked to consider including information on the dangers of pension liberation
in any member newsletters, with a link to the relevant HMRC and TPR online guidance; and
• HMRC points out that it is not able to advise a scheme whether or not to make a particular
transfer, although it may investigate transfers to check whether schemes are following tax rules.
View HMRC’s pensions liberation pages.
View TPR’s pensions liberation pages.
Legislation
Proposed amendment to the Occupational Pension Schemes (Employer Debt)
Regulations 2005
On 10 May 2013, the Department for Work and Pensions (DWP) published a consultation paper setting out proposed amendments to the Occupational Pension Schemes (Employer Debt) Regulations 2005 (the Employer Debt Regulations).
In 2010, the Employer Debt Regulations were amended to include restructuring provisions as new regulations 6ZA to 6ZD. These amendments introduced provisions to cover circumstances in which a sponsoring employer in a multi-employer scheme could undergo a company restructuring process without this being considered an employment-cessation event which would give rise to a section 75 debt.
In 2011, further amendments were made to introduce provisions allowing exiting employers to re-allocate their liabilities to continuing scheme employers under flexible apportionment arrangements.
The policy intention of the 2010 amendments was to ensure that, where an organisation was undergoing restructuring but merely changing its status (for example, from an unincorporated to a corporate entity) the exiting employer would be considered to be the receiving employer under its new legal guise, thus avoiding a section 75 debt.
However, concerns were raised that the provisions as drafted were unclear and did not meet the policy intention. The newly proposed amendments aim to correct the drafting error by removing the new legal status definition entirely and simply retaining the existing requirements for associated employers.
The consultation period ends on 7 June 2013 (an extension from the original date of 31 May 2013), with the amendments due to come into force in October 2013.
View the consultation paper and the draft amending regulations.
The Queen’s Speech confirms introduction of Pensions Bill this
Parliamentary session
The Queen’s Speech confirmed that the Pensions Bill, which was published on 10 May 2013, will form part of the legislative programme for the 2013/14 Parliamentary session. It was confirmed that the Bill will include provisions for:
• a single-tier State pension system from April 2016, as announced in the Budget,
with the resulting abolition of contracting-out for occupational pension schemes;
• the increase in State pension age to 67 to be brought forward so that it is effected between 2026 and 2028; and
• a framework under which the State pension age is reviewed regularly in the light of
Legislation
Additional provisions which did not appear in January’s draft Bill relate to:
• the automatic transfer of small pension pots;
• the abolition of short service refunds from defined contribution schemes to member
with less than two years’ service;
• the new statutory objective for TPR, which is to consider the impact of scheme funding
negotiations on the sustainable growth of sponsoring employers; and
• the exclusion of various individuals from the employer auto-enrolment provisions.
This is to include those with tax protection which would be lost if they did not opt out of auto-enrolment in time, and members who are working out a notice period on their auto-enrolment date.
Public Service Pensions Act 2013 published
The Public Service Pensions Act 2013 has been published following Royal Assent on 25 April 2013.
The Act sets out a common framework for the creation of new public-sector schemes in light of recommendations by the Independent Public Services Commission, chaired by Lord Hutton, and negotiations since then between the Government, trades unions and industry bodies. The individual design of each scheme will be set out in regulations. The key provisions of the Act are:
• the creation of new career average public-sector schemes to replace the current final salary
schemes. Except where transitional protection has been agreed, existing schemes will close to future accrual from April 2015 (April 2014 for the Local Government Pension Scheme (LGPS));
• normal pension age to be linked to state pension age, other than for the armed forces, police
officers and firefighters where normal pension age will be 60 (subject to regular reviews);
• a new employer cost cap to share the risk of changes in scheme costs between employers
and scheme members; and
• a transitional period of protection for members that are closest to retirement – those ten
years from their normal pension age on 1 April 2012 will not see any change in when they can retire, nor any decrease in their pension.
The new LGPS will be introduced from April 2014. The Department for Communities and Local Government recently consulted on draft regulations setting out the benefit structure to apply in the new-look LGPS. Further provisions were published for consultation in March 2013 but will not come into force until April 2014, but the Government hopes to finalise them by the end of spring 2013 so that the new scheme provisions can be taken into account when conducting the 2013 LGPS scheme valuation.
The Pension Protection Fund, Occupational and Personal Pension Schemes
(Miscellaneous Amendments) Regulations 2013
These Regulations came into force on 30 April 2013 and amend various existing regulations. The main points to note are:
• Pension Protection Fund (PPF) members can now defer their compensation up to age 75.
The PPF recently published the late retirement factors to be used in calculating such compensation.
• Pension credit members may now take early compensation.
• The review period for a section 143 valuation is now 28 days, rather than two months.
• The limit of trivial commutation of PPF compensation has been increased to match the
limit applying to registered pension schemes (currently £2,000).
• There are amendments to regulations regarding payments to surviving children and
money purchase lump sums.
HMRC publishes guidance on the scope of pensions exemptions under FATCA
In our update for September 2012, we reported that HM Treasury had announced its
agreement with the United States to improve international tax compliance and implement the US Foreign Account Tax Compliance Act (FATCA). The agreement provides for the US and the UK to exchange automatically specified information on reportable US and UK financial accounts maintained by FATCA reporting financial institutions. This followed the publication in July 2012 of a model intergovernmental agreement to implement FATCA. HM Revenue & Customs (HMRC) then issued a consultation document setting out how the Government intended to implement the agreement.
Guidance has now been finalised by HMRC confirming the scope of the exemptions for UK pension schemes from the new information-sharing and reporting obligations on financial institutions arising under FATCA.
All UK registered pension schemes will fall outside FATCA’s reporting requirements, according to the guidance. The exemption will, in addition, cover “separate nominee companies of exempt pension schemes”. Reporting UK financial institutions will not be required to review or report on accounts held by such pension schemes, arrangements or companies.
A reporting UK institution must also identify and report on “Financial Accounts” it holds. However, for this purpose, most retirement accounts will not qualify as “Financial Accounts” and so no reporting obligations will arise. This exemption covers all retirement accounts or products established under:
• a UK registered pension scheme;
• a non-registered pension arrangement where annual contributions are limited to
£50,000 and the funds contributed cannot be accessed before the age of 55, except in circumstances of serious ill health.
Legislation
The guidance confirms that the exemption applies to both the accumulation and decumulation phases of a scheme, contract or arrangement. In addition, a deferred annuity buyout contract which secures benefits that have arisen under a registered pension scheme will be treated as a registered scheme from the date it is purchased.
HMRC has also published revised draft regulations implementing FATCA in the UK. These are expected to come into force in August 2013.
View the draft regulations and guidance notes.
The draft Registered Pension Schemes (Provision of Information)
(Amendment) Regulations 2013 – new reporting requirements
HMRC has published draft amending regulations that will make changes to schemes’ reporting requirements to HMRC, in order to aid HMRC in monitoring compliance with the reduced annual allowance (from £50,000 to £40,000 from the tax year 2014-15 onwards). The change places a requirement on pension scheme administrators where they have supplied a scheme member with a pension savings statement. The pension savings statement is given to a member of a registered scheme by the administrator when the member’s savings for that year exceed the annual allowance. This must be reported to HMRC in the scheme’s event report.
The regulations also set out the information that scheme administrators and members must provide to HMRC in return for the individual listing for “fixed protection 2014” in relation to the standard lifetime allowance being reduced from £1.5m to £1.25 million on 6 April 2014. The information is broadly the same as that required in respect of “fixed protection 2012”. The deadline for comments on the draft regulations was 14 June 2013.
Case law
AG releases opinion that VAT paid by employer on management advice to
pension fund non-recoverable
In our pensions update for March 2013, we reported on the Wheels case, in which the Court
of Justice in the European Union (CJEU – formerly known as the European Court of Justice) held that a common investment fund in which the assets of several defined benefit (DB) schemes were pooled for investment purposes could not claim exemption from VAT on third-party management fees.
In Wheels, the CJEU decided that the starting point was that the VAT exemption under European law should apply only in the case of funds which display characteristics similar to those of a special investment fund (SIF), or which are considered sufficiently similar to SIFs so as to be in competition with them. The reasons the CJEU gave for finding that DB schemes differ from SIFs were that:
• the investment risks were not borne by the scheme members, but by the employer;
• the “return” for the employee’s investment (that is, the eventual pension), did not depend
on the value of the scheme’s assets, as pension benefits were dependent on the employee’s final salary; and
• the employer, which bore the investment risk, was not in a situation comparable with that
of a SIF investor because the employer’s scheme contributions arose as a consequence of a legal obligation to the employee to fund the scheme sufficiently to provide a DB pension, rather than in the course of investment activity.
On 18 April 2013, the Advocate General (AG) released its opinion in the case of PPG Holdings BV (PPG), a Dutch employer. The case concerned input VAT recovery in relation to costs incurred by PPG for the benefit of its own pension scheme. The two questions referred to the CJEU were whether:
• an employer is allowed to recover input VAT on costs incurred in relation to the
implementation of the scheme and its operation; and
• a pension scheme could be regarded as a SIF, the management of which qualifies for
VAT exemption.
PPG incurred costs relating to pension fund administration services, audit support services, investment management services, and actuarial services. It sought to recover VAT on all these services on the basis that the costs were incurred for its own benefit and qualified as its own expense. The costs were not charged to the pension scheme.
The Dutch tax authorities took the view that the costs were not incurred for the benefit of PPG, but for the benefit of the pension scheme which was a separate legal entity. VAT was therefore not recoverable.
The AG opined that, following Wheels, VAT charged on management services provided to a pension scheme could not be recovered. However, PPG’s VAT expenditure resulting from establishing the scheme had been incurred for the purposes of its business and might therefore be recoverable.
Case law
Comment
The CJEU is not bound to follow the opinion of the AG but it may well do so. It will be interesting to see whether the CJEU takes this additional opportunity to further clarify the definition of “special investment fund” for the purposes of the VAT exemption.
Pensions Ombudsman: Wytch – recovery of overpayments – living
“improved and more generous lifestyle” was a change of position
Summary
A member who lived an “improved and more generous lifestyle than she would otherwise have had” in reliance on pension overpayments could use this as a defence of change of position to a demand for recovery by the Pearl Group Staff Pension Scheme (the Scheme). The Pensions Ombudsman (PO) upheld a complaint by a pensioner member who received overpayments totalling just over £3,000 over six years because of maladministration. The PO held that the member and her husband had made decisions based on their financial situations, which had included the overpayments. This was the case despite the fact that the member was able to make savings of over £100 a month. The PO also noted that if gifts exceeding the overpayment would not otherwise have been made by the member, the overpayment would be unrecoverable for this reason alone.
Noting that the second respondent, the scheme administrator, had not been responsible for the maladministration, the PO directed the trustees not to pursue the overpayment and to pay the member £300 for her distress and the disappointment of receiving a reduced income in future.
Background
Mrs Wytch was a deferred member of the Scheme. In 2006, she received a benefit statement from the Scheme’s new administrators, First Actuarial, and chose to begin her Scheme pension when she reached age 55, in October 2006.
Five years later, in 2011, First Actuarial informed her that following an audit, it had discovered that her pension had been overpaid by a total of £3,128.45 since it began as her Scheme service had been overstated. First Actuarial reduced her monthly benefits to the correct level and proposed that she repay the overpayment through 63 monthly instalments of £50.52. Mrs Wytch’s subsequent appeal under the Scheme’s internal dispute resolution procedure was unsuccessful.
Mrs Wytch complained to the PO that the respondents should be prevented from recovering the £3,128.45 overpayment and pay her £1,000 for her stress and inconvenience. She had taken her benefits in 2006 based on the incorrect benefit statement and would otherwise have delayed doing so. Her husband had decided to retire in 2009 based on their expected combined income and after seeing a financial adviser. In reliance on the overpayments, they had also given £3,000 to one adult son as a deposit for a house purchase, helped their other adult son with accommodation costs and held a 60th birthday party for Mrs Wytch costing £752. Mrs Wytch also submitted that she made some monthly savings from her income, including £75 into an AVC arrangement and £30 into a “sharesave” plan with her current employer.
First Actuarial submitted among other things that it was not responsible for the overpayment, as the 2006 benefit statement had been based on calculations made by the previous scheme administrator in 2001 when Mrs Wytch left service. It was not usual practice to carry out an audit on change of administrator or to check pension calculations when they came into payment.
Determination
The PO upheld the complaint as against the trustees. The overpayment was maladministration and there was no suggestion that Mrs Wytch could have been aware of the error. However, the trustees had a legal right under the Scheme rules to reclaim money to which Mrs Wytch was not entitled, unless she had a defence that her financial position had changed as a result of the overpayment.
The PO held that Mrs Wytch had changed her financial position in this way. She and her husband had made decisions based on their financial situations and had “been living according to her means – ultimately the overpayment ha[d] enabled her to live a somewhat improved and more generous lifestyle than she would otherwise have had.” The PO also noted that if Mrs Wytch would not otherwise have made the gifts to her sons, which exceeded the £3,128.45 sought by the respondents, the overpayment would be unrecoverable for this reason alone.
However, the PO did consider that First Actuarial was not liable for the previous
administrator’s miscalculations and that the trustees bore ultimate responsibility for the Scheme. He therefore directed the trustees not to pursue Mrs Wytch for the overpayment and to pay her £300 for distress caused by the overpayment and the disappointment of receiving a reduced income in future.
Comment
This decision highlights the difficulties trustees may encounter when they attempt to recover pensions overpayments. The established legal position is that overpayments cannot be recovered where the member has changed his or her position on reliance on receiving the higher benefits, but this has previously been a difficult defence to argue successfully, and it has often been rejected.
Here, the PO accepted that Mrs Wytch had incurred expenditure and made changes to her lifestyle and, had she known the correct amount of her pension, she would not have done so. Unlike previous cases, the fact that the trustees were seeking to recover the overpayment by instalments over a 63 month period carried no weight with the PO.
A legal paradox that arises when a court or tribunal is considering whether an overpaid pension is recoverable is that the recipient who spends an overpayment is usually in a better position than his counterpart who saves it. However, this determination is notable for two reasons:
• the complainant did not spend the entirety of the overpayment and was able to make
monthly savings, but the PO still upheld her change of position defence; and
• in assessing the complainant’s overall financial situation, the PO took into account her
husband’s financial position as well as her own, in particular his decision to retire in 2009. This is probably sensible on the facts, since the complainant would say that her own decisions reflected her husband’s, but it is not entirely clear this outcome reflects
Case law
The PO’s decision seems to extend the scope of the defence of reliance to circumstances which may not have been argued successfully in the past. If overpayments are to be more difficult to recover in future, trustees and administrators may wish to discuss any possible extra steps they could take to ensure that overpayments are less likely to occur at all.
Futter v HMRC and Pitt v HMRC [2013]: ruling on relief from the consequences
of mistake and guidance on the rule in Re Hastings-Bass
In March 2011, the Court of Appeal (CA) allowed the appeals of HMRC against the two first-instance decisions in which the rule in Hastings-Bass was applied to set aside the actions of trustees or a fiduciary. As both cases involved the application of the rule in Hastings-Bass, the appeals were heard together in the CA.
This so-called rule provided that when trustees exercise a discretionary power, the court can overturn their action if:
• the effect of exercising the power is different than the trustees intended; and
• the trustees would not have acted as they did if they had not:
— failed to take into account considerations that they ought to have taken into account; or
— taken into account considerations that they ought not to have taken into account.
The principle was used most commonly by trustees, on their own application to the Court, to set aside their own mistaken decisions that had unfortunate tax consequences, which could have been avoided had all relevant matters (and no irrelevant matters) been taken into account. The CA also held that:
• the cases that had followed the case of Hastings-Bass itself had developed and formulated
the principle incorrectly. HMRC’s appeals against the application of the rule in Hastings-Bass were therefore allowed in both Pitt v Holt and Futter v Futter; and
• in Pitt v Holt, the CA also considered the alternative ground of mistake, finding that the
tests to qualify for the equitable remedy for mistake had not been met. On 1 August 2011, permission was granted to appeal to the Supreme Court (SC).
On 9 May 2013, the SC handed down its judgments in the appeals against the CA rulings in the jointly heard cases.
Lord Walker, giving the Court’s unanimous judgment, dismissed both the appeals to have the actions of the trustees set aside on an application of the rule in Hastings-Bass. The trustees’ appeal in Futter was dismissed, as in acting on the advice they had received, they had committed no breach of duty.
However, in Pitt v Holt, the SC found that the test for setting aside a voluntary disposition on the ground of mistake was satisfied and set aside the trust on that basis. HMRC has therefore
Comment
This decision means that where trustees make mistakes based on an incorrect assessment of, for example, the resultant tax consequences, relief may be available. However, such relief would be granted on the basis of the mistake jurisdiction, rather than under the so-called
Hastings-Bass rule.
As noted in the High Court judgment in Futter, the Hastings-Bass rule appears to be regarded once again as merely a “stout shield” against an attack upon the validity of trustee decisions, for example, as in these cases, by HMRC. This is as opposed to using the rule as a weapon by which trustees could attack their own decisions in the face of unforeseen objections by HMRC. This means that the Court will now look at matters in a broad sense and consider whether granting relief would be fair in all the circumstances. Therefore, in future, wider policy issues will be taken into account when determining whether relief may be granted from the consequences of trustees’ mistaken decisions.
View the judgment.
Somerset County Council v Chambers: employer’s pension contributions do not
amount to “wages” for the purpose of an unlawful deductions claim
On 25 April 2013, the employment appeal tribunal (EAT) held that pension contributions made by the employer on behalf of an employee are not “wages” for the purposes of an unlawful deduction of wages claim.
Background
Mr Chambers (C) was a social worker employed by the council, and a member of the pension scheme to which both he and the council made contributions. Following his retirement, he worked for the council on an aoc basis as a locum. However, a subsequent change to the pension scheme rules in 2008 flowing from regulations made in 2007 meant that an employee could not be a member of the scheme unless his employment contract was for longer than three months. The council regarded C as a casual worker and suspended its contributions. C contended that he was an employee with the necessary service and appealed the Council’s decision not to make contributions. On 8 September 2008, C was reinstated into the scheme, without explanation and later treated as ineligible and his contributions were refunded. There was then a dispute concerning pay, holiday pay and whether C was entitled to membership of the scheme and to the employer’s pension contributions relating to the membership suspension period.
The employment tribunal held that C’s employment was continuous throughout his period as a locum, and that C was entitled to the employer’s contributions to the scheme during this period.
EAT decision
The council appealed to the EAT. One of the questions was whether the employment tribunal was correct to award repayment of the employer’s pension contributions on the basis that these were deductions from “wages”.
Case law
Section 27(1)(a) of the Employment Rights Act 1996 (ERA 1996) defines wages as “any sums payable to the worker in connection with his employment.” The EAT held that:
“Although it is well recognised… that entitlement to a pension is deferred pay that does not mean that an employer’s contributions to the pension fund on behalf of an employee amounts to “wages”. As s.27(1)(a) makes clear, wages mean any sums payable to the worker in connection with his employment, it does not mean contributions paid to a pension provider on his behalf. On this footing, his [Wages Act] claim in relation to pension contributions necessarily fails, regardless of whether or not he was at the relevant times an employee entitled to membership of the scheme.”
The EAT rejected the council’s alternative argument that pension contributions were within the exclusion for pension payments in section 27(2) of the ERA 1996, which refers to “any payment by way of a pension, allowance or gratuity in connection with the worker’s retirement”. The EAT held that section 27(2) relates only to payments out of the scheme to a retired member, rather than payments into the scheme.
In reaching this decision, the EAT cited section 27 of the legislation, which, at section 27(5), provides that benefits provided to the worker are not wages unless they are money or can be exchanged for money, goods or services. Therefore, employer pension contributions are not wages for these purposes.
Brand (PO 581) – benefit changes – unconscionable for trustees to go back
on representations about normal pension age
Introduction
The Deputy Pensions Ombudsman (DPO) has held that the trustee of a scheme should be estopped from reducing a member’s pension in accordance with the normal pension age (NPA) under the scheme rules, because the member had received clear, unequivocal statements over a period of time up until her retirement that the NPA was an earlier age. The member reasonably relied to her detriment on these statements by retiring at the age she had been informed was the NPA. Following the test in Steria, it would be unconscionable for the trustee to alter her future pension payments.
Background
Mrs Brand (B) joined the Sequence (UK) Ltd Staff Pension Scheme (the Scheme) in 1987, when the NPA was 60 for women and 65 for men. Following Barber, the trustee passed a resolution in 1993 to raise the NPA to 65 for women who had not already retired in B’s membership category. The resolution purported to have effect from 6 April 1988. The trustee, however, later accepted that the amendment could not have retrospective effect, but that it was effective from 1993.
In 1997, for reasons which are unclear, the trustee passed another resolution, which purportedly amended NPA for women who joined the scheme before 1 April 1990 to age 60 until 30 September 1996, and to age 62 after that date. However, there was no record of the requisite company consent and the amendment was therefore invalid. Nevertheless, the trustee continued, until 2011, to administer the Scheme as if this amendment were valid.
In April 2000, the company sent B a letter with a copy of the scheme booklet, both of which stated that the NPA was now 62 for all members. Between 1993 and 1996, B’s benefit statements showed her NPA as 60, and between 1996 and 2004, they showed her NPA as 62 after 30 September 1996. B retired at 62 in 2004. She received a final retirement quotation for an annual pension of £10,446 from 1 May 2004.
In 2007, a new trustee was appointed, and in 2011 it informed B that her NPA had been 65 since 1993 (as the 1997 amendment was invalid). Her final quotation on retirement should therefore have been reduced by £1,173 to £9,272. The new trustee did not seek to recover past overpayments, but informed B that her annual pension would be reduced from 1 December 2011. The trustee stated its overriding duty was to administer the scheme according to the trust deed and rules. B, however, argued that the trustee should not have reduced her pension and should re-instate it on the basis of the 1997 resolution, as set out in the scheme booklet.
Determination
The DPO upheld B’s argument that the trustee should be estopped from going back on its representations. In Hutchinson v Steria, the Court of Appeal highlighted that the single factor a claimant has to establish for a successful estoppel claim is unconscionability. In a case of estoppel by representation, unconscionability would be unlikely to be satisfied unless the claimant could also satisfy the three classic requirements. The three-part test in Steria (promise, reliance and detriment) was satisfied in the Brand case:
1. the trustee had made clear representations in its correspondence with B and it was
reasonably foreseeable that she would rely on these representations;
2. B had reasonably relied on the representations by retiring at what she was informed
was her NPA. For this requirement to be satisfied, B needed only to show that the representations were a significant, and not the only, factor which she took into account when deciding to retire. The DPO upheld B’s argument that she would have continued to work until age 65, had she been told that this, and not age 62, was her NPA; and
3. B would suffer detriment if the trustee was not held to its representations. She would
have been in a better financial position if she had been told that her NPA was 65 and had continued to work to that age. Although the trustee argued that the difference in the quotation was ‘small’, the differential was about 10 per cent, which would be significant in the long-term. B was also denied the chance to make a fully informed choice about her retirement age, which the DPO held was also a form of detriment.
The trustee was estopped from going back on its representations, and was required to pay B a pension calculated on the basis of an NPA of 60 until 30 September 1996 and 62 after that date. It was also required to repay the amount that had already been deducted from B’s pension payments and, in addition, to pay £150 for the inconvenience she had suffered.
Case law
Comment
This decision may surprise many. It is well established that a scheme’s documentation consists not only of the definitive deed and rules but also the associated documentation such as the booklet, announcements, benefit statements and so on. While in practice there are often inconsistencies between the formal scheme documentation and the less formal member communications, in most cases, the formal trust deed and rules will prevail. However, there are circumstances, such as this case, where a member’s complaint is upheld, when it would have been unconscionable to allow the trustee to go back on its clear representations which were made to B over a number of years.
Factors that assisted B’s case were that the amendments to the Scheme had not been effected in strict accordance with the trust deed and rules. The equalisation amendment was held to be only partially effective (for future service only), and the 1997 purported reduction to NPA wholly invalid, as the required employer consent had not been obtained. It is likely that the DPO considered that the trustee had already informally acknowledged its own errors, as it had not sought to recover past pension overpayments to B, but simply to reduce her future benefit payments.
However, it remains difficult to establish an estoppel based on documents which are manifestly not intended to override the trust deed and rules. This case highlights once again the importance for trustees and employers of following a scheme’s amendment power to the letter when changes are made. Careful record-keeping of decisions made and changes effected is essential. In addition, updated composite scheme documentation should ideally be produced regularly, so that future trustees are able to administer the scheme correctly without referring to an archive of documents, as well as being able to provide members with accurate communications about their due benefits under the scheme.
The Trustees of the Olympic Airlines S.A. Pension and Life Assurance Scheme
v Olympic Airlines S.A. [2012] – PPF entry – Court of Appeal rules High Court
had no jurisdiction to wind up Greek company in liquidation
In our update for June 2012, we reported that the High Court had held that it had
jurisdiction to wind up Olympic Airlines in England under European insolvency legislation, notwithstanding that the company was already in liquidation in Greece.
Olympic Airlines, which was the principal employer of the Olympic Airlines S.A. Pension and Life Assurance Scheme (the Scheme), went into liquidation in Greece in October 2009. The Greek liquidation did not trigger a Pension Protection Fund (PPF) assessment period since foreign liquidation proceedings do not count as “qualifying insolvency events” for the purpose of section 127 of the Pensions Act 2004. Therefore, in July 2010 the trustees presented a petition to the High Court to wind up the company on the basis of its inability to pay the section 75 debt, estimated to be in excess of £115 million.
The High Court held that Olympic Airlines had an establishment in England on the date of the winding-up petition as the company remained in possession of its London office and had retained the services of two employees on an ad hoc basis. Further, there was no reason why the Court should not exercise its discretion to make the order since, in the circumstances, only a winding-up order would suffice.
However, in a decision handed down on 6 June 2013, the Court of Appeal (CA) has overturned the High Court decision, disagreeing with the High Court’s ruling that it had jurisdiction in the UK to wind up the Scheme’s principal employer, Olympic Airlines. This means that Scheme members will not be entitled to receive compensation from the PPF. The European Insolvency Regulation (Council Regulation (EC) 1346/2000) (the Insolvency Regulation), provides that a company incorporated in a European Union member state should be subject to main insolvency proceedings in the jurisdiction where it has its centre of main interests. This is where the debtor conducts the administration of its interests on a regular basis, which should be ascertainable by third parties, in the case of Olympic Airlines, Greece. Secondary winding-up proceedings can then only be opened in another member state where the company has an establishment which would be intended to run in parallel with the main insolvency proceedings for the purpose of dealing with assets only in the member state of the secondary proceedings. The Insolvency Regulation describes an establishment as any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.
The CA ruled that Olympic Airlines no longer had an establishment within the meaning of the Insolvency Regulation as, at the date of the winding-up petition, there was no business operation to justify secondary proceedings of winding-up and that economic activity would also have needed to be exercised externally such that it would be ascertainable by third parties.
The significance for the Scheme is that the Greek liquidation did not trigger a PPF assessment period, since foreign liquidation proceedings do not count as “qualifying insolvency events” under section 127 of the Pensions Act 2004. Without a qualifying insolvency event, the Scheme is barred from entering the PPF.
Case law
Comment
This case will be of interest to trustees of pension schemes where the employer is a foreign company which has become insolvent. The employer in this case was already subject to a liquidation process under Greek law, which prevented a winding-up order from being made in England unless there remained a business operation here. The Pensions Act 2004 (section 121) does not include overseas insolvency procedures as qualifying insolvency processes which would otherwise allow the Scheme to begin the process for entering the PPF.
Having paid PPF levies since 2005, and welcoming the High Court’s decision with some relief last year, the Scheme’s trustees and members are now in the distressing position of finding that they have no access after all to PPF compensation due to a gap in the UK regulatory regime. In practice, unless there is a legislative change to recognise overseas insolvency procedures as triggering PPF support, the case may encourage trustees to petition for winding-up far sooner following the opening of overseas proceedings in an attempt to catch the English operation whilst it still has an economic establishment warranting the issue of secondary winding-up proceedings under the Insolvency Regulation.
If Olympic Airlines had been operating and employing staff through an English incorporated subsidiary, the issue would not have arisen, so perhaps this should be borne in mind.
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