17 October 2013
ISSUE 17
Pensions and Employment:
Pensions Bulletin
Legal and regulatory developments in pensions
In this issue
New Law
Increase in SPA: bridging pensions: modification ...more
regulations in force
Directors’ pay: new reporting requirements for ...more
pensions now in force
Countdown to Auto-Enrolment
Technical changes: Regulations made
...more
Cases
Age-related contributions to DC schemes: CJEU ...more
decision in Kristensen v. Experian A/S
Age discrimination in redundancy and retirement ...more
entitlements: Dansk Jurist v. Indenrigs
Back issues can be accessed by clicking here. To search
them by keyword, click on the search button to the left.
Misinformation on AVC investment: Pensions
Ombudsman’s determination in relation to Mr
White
...more
Failure to implement pension sharing order:
Pensions Ombudsman’s determination in
relation to Mrs Morton
...more
Points in Practice
New fair deal guidance takes effect
Regulator’s framework for regulation of DC
schemes: Regulator’s strategy and draft
compliance and enforcement policy published
Find out more about our pensions and employment
practice by clicking here.
...more
...more
To access our Employment/Employee Benefits Bulletin
click here. Contents include:
covenants – Dos and don’ts to protect an
• “Restrictive
employer’s interests”
• Maximum awards for unfair dismissal
SPC in relation to non-guaranteed contractual
• TUPE:
activities
a team move breached implied duty of
• Orchestrating
fidelity
• Constructive dismissal
status: lack of day-to-day control is not
• Employment
fatal
consults on executive remuneration changes to UK
• FRC
Corporate Governance Code
• FCA consultation on implementation of new bonus cap
• Women on boards: the latest
finally… John McCririck age discrimination claim
• And
against Channel 4
For details of our work in the pensions and
employment field click here.
For more information, or if you have a query in relation to any of the above items, please contact the person with whom you normally deal at Slaughter and May or Rebecca Hardy.
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PENSIONS AND EMPLOYMENT: PENSIONS BULLETIN
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New Law
Increase in SPA: bridging pensions: modification
regulations now in force
The regulations1 that allow trustees to modify scheme
rules by resolution to take account of increases in
state pension age (“SPA”), with employer consent,
came into force on 1st October, 2013. More detail is in
Pensions Bulletin 13/13
Action point: Schemes that offer bridging pensions
will, if they have not already done so, need to consider
whether, and if so how, their schemes rules should be
adjusted to take account of increases in SPA.
For advice on the impact of the increase in SPA on
your particular scheme, please get in touch with your
usual pensions contact at Slaughter and May.
Directors’ pay: new reporting requirements for
pensions now in force
A.Overview
1. On 1st October, 2013, the provisions of the
Enterprise and Regulatory Reform Act 2013
relating to the disclosure and approval of
remuneration for directors of quoted companies
came into force.
2. For financial years ending on or after 30th
September, 2013, the annual directors’
remuneration report will need to contain:
2. The methodology used to calculate these sums
is set out in regulations2. For DB schemes
the regulations import the methodology for
calculating pension inputs for annual allowance
purposes with the following changes:
2.1 the “input” is measured over the company’s
financial year, and
2.1 a statement by the chair of the remuneration
committee,
2.2 the valuation assumptions are applied on a
leaving service basis.
2.2 the company’s policy on directors’
remuneration, and
2.3 information on how the remuneration policy
was implemented in the previous financial
year.
B. Directors’ remuneration report: pensions
1. The directors’ remuneration report must
include (in table form) a single figure for total
remuneration for each director. The total
figure is to be broken down to include, in a
separate column, all pension-related benefits,
including payments made in cash or otherwise
in lieu of retirement benefits and benefits from
participating in pension schemes.
Point to note: Scheme administrators may be asked
to assist in calculating the figure for pension-related
benefits. The calculation is not straightforward,
especially for DB schemes with non-uniform accrual.
Countdown to Auto-enrolment
Technical changes: Regulations made
A.Overview
1.Regulations3 taking effect on 1st November, 2013:
2
1
The PPF and Occupational Pension Schemes (Miscellaneous
Amendments) Regulations 2013 (S.I. 2013/1754).
3
Schedule 8 to the Large and Medium-Sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013 (S.I.
2013/1981).
The Automatic Enrolment (Miscellaneous Amendments) Regulations
2013 (S.I. 2013/2556).
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1.1 provide an alternative definition of a “pay
reference period”:
1.1.1 for the purpose of assessing whether a
jobholder has earnings over the threshold
requiring automatic enrolment, and
1.1.2for the purposes of assessing whether a
pension scheme is a “qualifying scheme”,
1.2 extend and introduce consistency in
contribution payment deadlines for everyone
joining a pension scheme,
1.3 clarify the form and content of the opt-out
notice,
1.4 extend the window employers have to enrol
eligible jobholders into a pension scheme
from 1 month to 6 weeks, and
Note: This change takes effect from 6th April,
2014.
1.5 implement minor changes to the quality
requirements for DB pension schemes.
2. The changes follow a consultation by the DWP
launched on 25th March, 2013 (Pensions Bulletin
13/06) responding to practical issues identified
during implementation.
3. There will be further consultation on a number of
issues identified in the consultation process.
B. Pay reference periods: eligibility
1. The changes to the definition of a “pay reference
period” for eligibility are intended to make it
easier to assess whether a jobholder is eligible for
auto-enrolment.
2. When assessing eligibility, it is necessary to look
at the jobholder’s earnings in the relevant pay
reference period. In this context, “pay reference
period” means:
2.1 where the worker is paid by reference to a
period of a week, the period of 1 week, and
2.2 where the worker is paid by reference to a
period longer than a week, that longer period.
3. Some employers have found it difficult to match
the payment of earnings under payroll systems
developed to work for PAYE and NICs to the autoenrolment “pay reference period”. For PAYE and
NICs purposes, payroll systems are linked to tax
periods (tax weeks and tax months), pay days and
pay frequency.
4. Tax weeks/months may not be the same as the
period by reference to which the worker is actually
paid. For example the worker may be paid
monthly on the last day of the calendar month in
respect of that calendar month but the tax month
for PAYE and NICs purposes may start on the 6th
of the month.
5. An alternative definition of “pay reference period”
permits employers to align the worker’s pay
reference period with payroll tax periods. But the
current definition remains in place indefinitely for
schemes that wish to continue using it.
6. The Pensions Regulator is updating its detailed
employer guidance and guide for software
developers to reflect the change.
C. Pay reference periods: “qualifying schemes”
1. The quality requirement for money purchase
schemes uses a definition of “pay reference
period” that generally runs in one year sequences
starting with the anniversary of the employer’s
staging date.
2. In some case, for example where earnings
fluctuate, money purchase contributions
calculated on a monthly or weekly basis are lower
than annual contributions so schemes may need
to do an annual reconciliation for each jobholder
to make sure that minimum contributions have
been paid.
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3. The amending regulations import the same
revised definition of “pay reference period” as
applies when assessing eligibility (see B. above)
so as to remove the possibility of a mismatch
between contributions calculated on the basis of
pay periods and contributions calculated annually.
4. The existing definition linked to staging dates
remains in place indefinitely for those employers
and schemes who wish to continue using it.
5. A further change reinforces the DWP’s message
that there is flexibility within the auto-enrolment
legislation to allow existing processes to
continue working. Employers will be able to
start contributions from the start of a pay period
rather than from the first day, on or after the
staging date, that a person is a member. This will
enable schemes to start deducting contributions
from a date other than the automatic enrolment
date in order to avoid part period contribution
calculations.
D. Contribution payment deadlines
1. The extended deadline for payment of
contributions that applies during the opt-out
period will apply to all new joiners irrespective of
their enrolment circumstances i.e. whether they
join the scheme under the terms of their contract
of employment or under auto-enrolment.
2. From 1st November, 2013 all contributions
deducted during the first 3 months of scheme
membership must reach the scheme by the 19th
day (or the 22nd where payments are transferred
electronically) of the 4th month.
3. For example, for an employee auto-enrolled on 1st
January, 2014, contributions deducted via the 31st
January, 2014 payroll must be paid to the scheme
by 19th May, 2014.
E. Opt-out notices
1. The Regulations are amended to replace the
current sample opt-out notice in the Regulations
with minimum information requirements for optout notices. This is to allow schemes to amend
their opt-out notice:
1.1 to add branding and supplementary
information, and
1.2 to make it suitable for online completion and
submission.
2. Until the change is made, the regulations still
require that any opt-out notice must be in exactly
the form set out in the sample, with an additional
statement included if the jobholder submits the
form electronically. If the opt-out notice is not in
this required form, then it will be invalid.
3. From 1st November, 2013, the opt-out notice
must contain the specified information set out in
the amended Schedule 1 to the auto-enrolment
regulations (which is to replace the sample form),
as well as including the other information required
under Regulation 9(6). This includes information
about the jobholder (his name, and his date
of birth or national insurance number) and
statements from the jobholder to the effect that
he wishes to opt out and understands that, in so
doing, he will lose the right to employer pension
contributions and may have a lower income on
retirement.
4. The changes are to allow for schemes to add
branding and flag additional information about
pensions and savings to the opt-out notice, if they
so wish, without the need to keep to a specified
sample form.
5. Additionally, and helpfully, the regulations
provide that any opt-out notice accepted by an
employer as valid prior to 1st November, 2013
will be deemed to be valid once the regulations
are amended. So opt-out notices accepted by an
employer prior to the relaxation will be validated
even if they did not follow the exact form of the
sample opt-out notice.
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F. Extending the joining window
1. The employer currently has one month from
the auto-enrolment date to ensure that the
statutorily required information is given to the
member and to achieve active membership.
2. The Regulations extend the joining window from
one month to 6 weeks with effect from 1st April,
2014, although the DWP says this should be
regarded as the exception not the norm.
3. The extended joining window will apply to
automatic enrolment, automatic re-enrolment
and enrolment following opt-in. It will also apply
to the deadline for the joining process at the end
of the transitional period for defined benefit and
hybrid schemes and the deadline for providing
information to workers applying to enrol.
4.Consequential changes will be made to the
deadlines for issuing information to postpone the
auto-enrolment process, the registration and reregistration deadlines with the Pensions Regulator,
and the deadline for providing annual benefit
statements under the disclosure requirements.
G. Test scheme standard
1. The test scheme links to a specified level of
pension commencing at the “appropriate age”.
The amending regulations link the appropriate
age directly to state pension age to deal with
forthcoming increases in state pension age.
H. Further consultation (1): excluding certain
categories of worker from the automatic enrolment
duty
2. Responses suggested that, although there was
little appetite for this for the lighter-touch, there
remains scope better to align contractual joining
and automatic enrolment processes. The DWP
says it will explore these issues further.
J. Further consultation (3): DB quality requirement
1. The Pensions Bill 2013 includes a clause providing
a regulation-making power to exclude workers of
a prescribed class or description from the scope of
automatic enrolment.
Comment: The power is expected to be used to
exclude individuals with enhanced or fixed tax
protection.
2. The DWP has had a substantial number of
responses on the use of the proposed power
and is analysing the results. It plans to publish
these, alongside the Government’s proposals, in a
further consultation.
I. Further consultation (2): contractual enrolment
1. An employer that is contractually enrolling
all workers into an auto-enrolment qualifying
scheme is arguably doing more than the
legislation requires. The DWP invited comments
on whether such employers should be subject to a
lighter-touch regime.
1.Currently, where an individual is in contractedout employment in a DB scheme, the quality
requirement is automatically satisfied. Where the
scheme is not contracted-out, it must meet the
“test scheme standard”.
2. Following the ending of contracting-out in April,
2016, all formerly contracted-out DB schemes will
have to certify that they meet the standard. The
DWP asked whether, for the purpose of automatic
enrolment, a quality requirement was needed for
DB schemes at all.
3. The majority of respondents felt that at least
some form of quality requirement was needed
in order to avoid low value DB schemes being
designed in future.
4. The Government will further explore the options
for simplifying the ways in which the quality
requirements for DB schemes can be met.
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The DWP response to its March, 2013 consultation is
on the DWP website
Comment: These are welcome easements although
some come too late for the largest employers. It
is helpful that the existing rules remain in place
alongside the easements, so those schemes that have
adapted their processes to comply with them will not
have to make further changes.
Tax
New requirements for QROPS
A.Overview
1. Since 6th April, 2006, it has been possible to
transfer pension benefits built up in UK registered
pension schemes to certain qualifying non-UK
schemes (qualifying recognised overseas pension
schemes or “QROPS”). Transfers can be made by
UK or non-UK residents.
2. In order to qualify, the QROPS has to meet a
number of detailed criteria. The policy aim is that
the majority of the pension fund transferred to
QROPS should be used to provide an income for
life that is accessible only from the age at which
benefits could be drawn in the UK.
3. On 14th October, 2013, new HMRC powers in
the Finance Act 2013 to exclude schemes from
being QROPS and to strengthen evidence and
information requirements came into force. These
include:
transfer should, in our view, make additional checks
over and above checking the HMRC QROPS list. The
QROPS list is no guarantee of a scheme’s true QROPS
status.
3.1 new 5 yearly re-notification requirements
imposed on QROPS,
For a note on QROPS generally, and the issues for UK
trustees, please get in touch with your usual pensions
contact at Slaughter and May.
3.2 new reporting requirements and a penalty
regime for former QROPS, and
Fixed protection 2014 and annual allowance: HMRC
update
3.3a new requirement for UK registered pension
schemes to include information on their
event report where a member who requests a
QROPS transfer is no longer resident.
HMRC Newsletter 59, published on 4th October,
2013, covers:
•
applying for fixed protection 2014 (“FP 2014”)
(noting that this can be done online and that
those who have already applied can expect to
receive their certificate from the beginning of
November onwards), and
•
the new annual allowance checking tool,
available on HMRC’s website, which aims to help
individuals to work out whether they may be
affected by an annual allowance charge.
Comment (1): It is not clear how a scheme will know
whether, and if so when, a member is non-resident.
Comment (2): If a trustee makes a transfer in
respect of a member to an arrangement which is not
permitted by the terms of the trust deed, the starting
presumption is that the trustee has not discharged
itself of liability to provide the member’s benefits to
which the transfer relates.
HMRC Newsletter 59 is on HMRC’s website.
Comment (3): It remains the fact that, even after the
Finance Act 2004 changes, QROPS transfer requests
are high risk for registered pension schemes. A
registered scheme which is asked to make a QROPS
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Cases
Age-related contributions to DC schemes: CJEU
decision in Kristensen v. Experian A/S
A.Overview
1. On 26th September, 2013, the CJEU held
that age-related contributions to a Danish DC
occupational pension scheme were not precluded
by either the EU Charter of Fundamental Rights
or the EU Framework Directive (2000/78/EC) so
long as the difference in treatment on grounds of
age was appropriate and necessary to achieve a
legitimate aim. That was for the national court to
establish.
B.Facts
1. K joined Experian on 19th November, 2007 at age
29. Her employment contract required her to join
Experian’s compulsory pension scheme.
3. K resigned with effect from 31st October,
2008 and claimed back payment of pension
contributions at the rate applicable to employees
of 45 years of age and over on the basis that the
unequal contributions under the pension scheme
constituted unlawful age discrimination.
4. The Danish court referred to the issue to the CJEU.
C.Law
1. Article 6 of the EU Framework Directive provides:
1.“… member states may provide that
differences of treatment on grounds of age
do not constitute discrimination, if, within the
context of national law, they are objectively
and reasonably justified by a legitimate aim,
including legitimate employment policy, labour
market and vocational training objectives, and if
the means of achieving that aim are appropriate
and necessary …
2. The contribution rates were as follows:
Age
Employee
contribution
Employer
contribution
Under age 35
3%
6%
35 – 44
4%
8%
45 and over
5%
10%
2.… member states may provide that the fixing
for occupational social security schemes of
ages for admission or entitlement to retirement
or invalidity benefits, including the fixing under
those schemes of different ages for employees
or groups or categories of employees, and
the use, in the context of such schemes, of
age criteria in actuarial calculations, does not
constitute discrimination on the grounds of age,
provided this does not result in discrimination
on the grounds of sex”.
2. Article 6(2) was transposed into Danish law as
follows:
“… the present law does not preclude the fixing
of ages for admission to occupational social
security schemes or the use, in the context
of such schemes, of age criteria in actuarial
calculations. The use of age criteria must not
result in discrimination on the grounds of sex”.
3. The CJEU had to consider whether an
occupational pension scheme under which an
employer pays, as an element of pay, pension
contributions which increase with age, fell within
the scope of the exemption in Article 6(2).
D.Decision
1. The CJEU referred to the principle of nondiscrimination on grounds of age as being
a “general principle of European Union
law”, founded in Article 21 of the Charter of
Fundamental Rights of the EU and given specific
expression in the Framework Directive.
2. Having found that the differential employer
contributions amounted to direct age
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discrimination, the court went on to consider
whether this came within the exception in Article
6(2). It concluded that Article 6(2) should be
interpreted restrictively and that it applied only
to the cases specifically listed therein i.e. only to
occupational social security schemes that cover
the risks of old age and invalidity.
3. In this case the differential pension contributions
did not involve as such the “fixing . . . of ages
for admission or entitlement to retirement .
. . benefits”. The court refused to extend the
exception to “less severe” forms of discrimination
such as that at issue here:
3.1 the pension contributions formed part of
Experian employees’ pay. The age-related
increases in the contributions were liable
to produce effects going beyond the mere
fixing of ages for admission or entitlement to
retirement benefits,
4. It followed that the age-related increases did not
fall within the exception in Article 6(2).
5. However, the court found that the differential
contribution rate would not amount to
discrimination if:
5.1 it was objectively and reasonably justified by a
legitimate aim, and
5.2 the means of achieving that aim were
appropriate and necessary.
6. The court found that the differential contribution
rates did reflect legitimate aims, namely:
6.1 to allow older workers who joined Experian
at a later stage in their lives to build up
reasonable retirement savings over a relatively
short contribution period,
3.2 not all aspects of a pension scheme, including
the setting of the contribution rate, fell within
the scope of Article 6(2), and
5.2 to include young workers in the same scheme
at an early stage, while making it possible
for them to have at their disposal a larger
proportion of their wages,
3.3 setting of the amount of contributions did not
amount to a “use of age criteria in actuarial
calculations”.
5.3 part of the contributions served to cover the
risks of death, incapacity and serious illness
and the cost of these increased with age.
6. On whether the measure was “appropriate and
necessary” it did not appear unreasonable to
the court to regard the age-related increases
as enabling the legitimate aims to be achieved.
The court noted that the measure would be
appropriate only if it genuinely reflected a concern
to attain the legitimate aims in a consistent and
systematic manner.
7. In considering this point, the national court should
consider whether the detriment resulting from the
difference in treatment is offset by the benefits of
the occupational pension scheme. In particular
could it be shown that the lower amount of the
employer contributions corresponded to the lower
amount of the employee contributions such that
the percentage of basic salary that K had herself
to pay into her pension scheme was lower than
that payable by a worker of over 45 years of age?
Comment (1): Relying on the Article 6(2) exemption,
the legislation implementing the EU Framework
Directive in the UK includes a specific exception4
permitting age-related contributions to money
purchase schemes where the aim is:
4
In paragraph 4 of Schedule 1 to the Equality Act (Age Exceptions to
Pension Schemes) Order 2010.
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•
to equalise the amount of benefit for comparable
periods of pensionable service for members of
different ages, or
•
to “make more nearly equal” the amount of
benefit for comparable periods of pensionable
service which members of different ages will
become entitled.
a provision under Danish law under which a civil
servant is denied a redundancy payment where he
has reached the age at which he is able to receive a
retirement pension. Although the provision pursued
legitimate aims, it went further than was necessary to
achieve those aims so was not justified under Article
6(1) (see above).
The CJEU held that:
There are a number of difficulties with the exception
where, as is normally the case, contribution rates are
banded.
Comment (2): Although the CJEU appeared to
suggest that the differential contribution rates in this
case were an “appropriate and necessary” measure to
achieve what it accepted were legitimate aims, that
is for the Danish courts to decide. In order to avoid
the uncertainty of whether a particular differential is
objectively justifiable, it may be preferable to have a
level contribution rate, notwithstanding the economic
arguments for higher contributions to those closer to
retirement to reflect the fact that the contributions
will be invested for a shorter period of time before
being converted into retirement income.
Age discrimination in redundancy and retirement
entitlements: Dansk Jurist v. Indenrigs
•
•
as in the Kristensen case (referred to above),
the exception in Article 6(2) should be strictly
construed and apply only to “retirement or
invalidity” benefits. The pay at issue in this case
was neither and so could not fall within the
exception, and
the pay scheme was justifiable under Article 6(1)
only if it went no further than was appropriate
and necessary to achieve a legitimate aim. The
aims here were legitimate but could have been
met by a less discriminatory measure (for example
only excluding civil servants who actually chose
to take their pension benefits not those who were
eligible but chose to carry on working).
Misinformation on AVC investment: Pensions
Ombudsman’s determination in relation to Mr
White
A.Overview
1. On 30th August, 2013, the Pensions Ombudsman
held that W, a member of the BAE Systems
Pension Scheme AVC, who opted for a fund
described as “secure” and a “cash fund”, received
misleading information and could not have
known that the fund was in fact invested in assetbacked securities.
2. The Ombudsman directed Standard Life, the
AVC provider, to pay the member £500 as
compensation for his financial loss, as well as
for the inconvenience of pursuing a “relatively
modest” claim. The Ombudsman dismissed W’s
complaint against the trustees.
B.Facts
1. In 2001, the scheme trustees appointed Standard
Life as AVC provider in place of Equitable Life.
Members could switch from their existing fund to
a choice of Standard Life funds the trustees had
selected, including a unit-linked pension sterling
fund, later called the Standard Life Money Market
Pension Fund (the “Fund”).
On 26th September, 2013, the CJEU held that the
EU Equal Treatment Framework Directive prohibits
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2. In 2002, the trustees sent W a leaflet listing
the Fund under “secure funds” and stating that
it “invests not only in bank/building society
deposits but also holds other short term sterling
assets”. They also sent a letter describing the
Fund as a “cash fund”. W opted to invest all his
contributions in the fund.
6. W complained to the Pensions Ombudsman that
the Fund had been misleadingly promoted as
more secure than it was and that its falls in value
had caused him financial loss beyond the single
day fall on 14th January, 2009.
3. In July, 2007, the trustees sent another leaflet,
which W said he had not received, stating
that “cash investments” in the Fund were “not
guaranteed” and “in extreme circumstances, it
is possible that the value of the fund may fall”.
The information was repeated in another leaflet,
received by W in November, 2008.
1. The Ombudsman upheld the complaint as against
Standard Life but dismissed it as against the
trustees.
4. During the financial crisis in 2007, the fund fell
in value because half of its investments were
in mortgage-backed securities that incurred
significant losses. After complaints it had been
marketed as low risk, Standard Life made a
payment into the Fund to restore investors to the
same position as if a particular single day fall of
4.8% on 14th January, 2009 had not happened.
W continued to make significant payments into
the scheme until 31st July, 2009.
5. W retired on 1st August, 2009 when his fund was
valued at around £141,500.
C.Determination
2. W had invested in the Fund because he was risk
averse and wanted a secure fund with a modest
return. The references in the literature to the
Fund as “secure” and as a “cash fund” were
misleading.
3. However, by November, 2008, W knew or ought
to have known that the Fund could fall in extreme
circumstances. He nonetheless continued to
pay contributions meaning that he had in effect
accepted the risk. Despite this, and despite also
finding that “extreme circumstances” could not
be read so narrowly as to only mean a bank
or building society default, the Ombudsman
concluded that case that the fall in November,
2008 could not have been expected and that W
should be compensated for it.
4. Standard Life had issued misleading information
about the Fund and that if W had been provided
with clear information he would not have
invested in it.
5. The Ombudsman ordered Standard Life to pay W
compensation of £500 for the loss caused to him
by the fall.
Comment (1): Strictly speaking, where a trustee
distributes the information about an investment
option produced by the investment product provider
to the member, the trustee can incur liability if there
is a mis-statement or mis-representation in the
information produced by the investment product
provider. It is advisable to include an appropriate
disclaimer with such literature to the effect that the
trustee has not separately verified the accuracy of
the information contained in the literature and does
not accept liability for any errors or omissions which
remain those of the investment product provider.
Comment (2): Please contact the person you
usually deal with at Slaughter and May for further
information about appropriate wording.
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Failure to implement pension sharing order:
Pensions Ombudsman’s determination in relation to
Mrs Morton
On 28th August, 2013, the Deputy Pensions
Ombudsman decided that Scottish Life was guilty
of maladministration when it transferred-out
a member’s entire benefits at a time when the
member’s fund was subject to a pension sharing order.
Although Scottish Life had been unable to implement
the pension sharing order at the time of the
transfer-out (because it did not have the necessary
implementation details from the ex-spouse), its
failure to spot the existence of the order was
maladministration causing the member’s ex-spouse
injustice.
Scottish Life’s administrative errors included failure
properly to record that a pension sharing order
applied to the member’s fund, omitting to notify the
ex-wife that the member had made a transfer request,
and failing to ask her for the missing implementation
information.
The Deputy Ombudsman directed Scottish Life to pay
50% of the fund value to the ex-wife’s chosen pension
scheme, regardless of whether Scottish Life could
recover this sum from the member, and to pay the exwife £400 for distress and inconvenience.
Comment: Schemes should ensure that they record
details of any pension sharing order as soon as they
are notified of it, even though they cannot implement
the order until they receive the necessary information
from the member’s spouse.
Points in Practice
New fair deal guidance takes effect
A. Overview and background
1. On 8th October, 2013, HM Treasury published its
new fair deal policy.
2. Fair deal is a non-statutory policy setting out how
pensions issues are to be dealt with when staff are
compulsorily transferred from the public sector to
independent providers delivering public services.
3. Fair deal was introduced in 1999. “Staff transfers
from central Government: a fair deal for staff
pensions” was published by HM Treasury in June,
1999 and was followed by a further guidance note
“Fair deal for staff pensions: procurement of bulk
transfer agreements and related issues” in June,
2004.
4. Where staff were compulsorily transferred from
the public sector, the guidance required their new
employer to give them access to an occupational
pension scheme which was “broadly comparable”
to the public service pension scheme they were
leaving. Staff were also to be offered the choice
of becoming a deferred member of the scheme
they were leaving or transferring their accrued
benefits to the new scheme, by way of a bulk
transfer. Staff who were compulsorily transferred
from the public sector were also to have the same
protections on subsequent compulsory transfers.
5. The Government announced on 4th July, 2012
that fair deal was to be reformed following
consultation. From 8th October, 2013, staff
compulsorily transferred from the public sector
will be offered continued access to a public
service pension scheme rather than being offered
a broadly comparable private pension scheme.
6. The new guidance takes effect immediately (8th
October, 2013) and, the Government says, must
be reflected in procurement practice as soon as
is practicable without disruption to projects that
are already at an advanced stage. However, the
earlier guidance remains in force and applies in
some circumstances (see below).
B. New policy
1. The new policy applies when staff who are
members of a public service pension scheme
move from the public sector to an independent
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contractor by way of a compulsory transfer (i.e. a
transfer to which TUPE applies).
2. Such staff should continue to be members of
the public service pension scheme they were
in immediately prior to the transfer. They will
continue to be members of the scheme on the
same terms as other members of the scheme.
They should also continue to be members
following any subsequent compulsory transfer.
3. The contract for business transfer must
specifically require the independent contractor
to provide transferred staff with continued access
to the relevant public service pension scheme
while they remain employed on the public service
contract.
4. The contracting authority must also ensure
that the contracts of employment of staff who
are compulsorily transferred to an independent
contractor as a result of an outsourcing of
services provide they have a right to continued
membership of their public service pension
scheme and therefore a right to have employer
and employee contributions paid to the scheme.
These rights will be enforceable by staff against
their employer.
5. A participation agreement between the
independent contractor and the relevant public
service pension scheme will be required for each
public service contract requiring independent
contractors to participate in that scheme. The
contracting authority should ensure that the
contract for the business transfer expressly
provides that breach of the participation
agreement entitles the contracting authority to
terminate the contract.
6. There may be “exceptional” circumstances
where there are special reasons for not providing
continued access to a public service pension
scheme to staff who are compulsorily transferred
from the public sector. It would then be
necessary to comply with the old fair deal and
ensure that staff are provided with a broadly
comparable pension scheme (see 8. below).
7. When a contract involving the compulsory
transfer of employees already transferred out
under the old fair deal is retendered, contracting
authorities should require the bidders to provide
employees with access to the appropriate
public service scheme while they continue to be
employed on the public service contract.
8. Where the incumbent would face significant costs
if required to transfer staff from their existing
broadly comparable schemes, the incumbent
should have the option of providing either access
to a public service pension scheme or to a broadly
comparable pension scheme.
C. Access to the public service pension schemes
1. The guidance says that scheme regulations and
internal controls must include provisions to
manage the risk associated with allowing a wider
range of employers and employees to participate
in the public service pension schemes.
2. Both employees and employers will be required
to pay contributions to the pension scheme, the
level of which is to be determined under scheme
regulations and may change following an actuarial
valuation of the scheme. Employer contributions
will normally be set at the same level as the
employer contribution rate paid by all other
employers in the scheme.
3. The contracting authority and employer may wish
to agree in advance that the contracting authority
will provide additional funding or reduce funding
as appropriate in the event of a change in the
employer contribution arising from a valuation.
4. A large number of people covered by the new
fair deal policy have final salary pension rights as
a result of pre-2015 service. The Government’s
decision to provide transitional protection to
those closest to retirement, and to maintain the
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final salary link for service in the existing public
service pension schemes, means that pay in
the final years of an employee’s career will have
a direct impact on the cost of providing that
employee’s pension.
5. Scheme regulations or a direction may provide
that an employer will be liable for the additional
costs arising from increases in pensionable
pay beyond any specified limits. Participation
agreements may set out how additional costs
arising from the early termination of employment,
employer decisions and the exercise of employer
discretions and any other matter that may give
rise to additional pension costs are to be paid for.
D. Response to consultation on re-tenderings
1. Also on 8th October, 2013, HM Treasury
published a response to its 4th July, 2012
consultation on how new fair deal should apply to
staff that have already compulsorily transferred
out of the public sector under old fair deal into
“broadly comparable” schemes.
2. As a result of the consultation, the Government
decided to give existing employers the option
of providing staff with access to a “broadly
comparable” pension scheme.
3. The Government’s preference in these
circumstances is that the broadly comparable
scheme should be broadly comparable to the
relevant public service pension scheme i.e. to a
career average revalued earnings scheme. This
will ensure that, as far as possible, employees
who transferred out of the public sector in the
past will be treated in the same way as their
counterparts who have remained in the public
sector throughout i.e. that they are not better off
by virtue of remaining in a final salary scheme.
The guidance and response to consultation are on HM
Treasury’s website.
Comment (1): The Regulations setting out the detail
of the participating agreements are awaited; in the
meantime, anyone involved in outsourcing from
the public sector should read the new guidance and
consider how it may affect tendering or re-tendering
exercises.
Comment (2): The pension aspects of outsourcing
are potentially high risk and specific legal advice
should be taken.
Regulator’s framework for regulation of DC schemes:
Regulator’s strategy and draft compliance and
enforcement policy published
A.Overview
1. On 3rd October, 2013, the Pensions Regulator
published as part of its framework for regulating
DC schemes:
1.1 its strategy for regulating DC schemes, and
1.2 a draft of its compliance and enforcement
policy.
2. The strategy document says the Regulator will
require trustees of occupational DC trust-based
schemes to produce a governance statement
explaining the extent to which the scheme has
embedded the Regulator’s 31 DC quality features.
B. Regulator’s strategy
1. The Regulator’s strategy for occupational DC
trust-based schemes is “to educate and enable”
those involved in their provision to meet the
standards the Regulator expects and, where
necessary, to enforce.
2. The Regulator’s strategy for work-based personal
pensions is to work closely with employers,
providers and the FCA to ensure there are
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consistent quality standards and levels of member
protection across all work-based DC pension
arrangements.
3. The strategy document replaces the existing
approach set out in the Regulator’s document,
“Delivering successful automatic enrolment – the
Pensions Regulator’s approach to the regulation
of employers and schemes”, first published in
February, 2012.
4. The strategy reiterates the 6 DC principles and 31
quality features which the Regulator expects to
see present in all DC schemes.
C.Education
1. The Regulator’s online trustee toolkit is its primary
tool for educating trustees. The Regulator expects
all trustees to be able to undertake their role
competently. They must have the appropriate
level of knowledge and understanding required
under the Pensions Act 2004 and the Regulator
expects them to be able to demonstrate how it
has been gained.
2. The Regulator says it will use its website to
provide user-friendly guidance and support the
trustees involved in managing DC schemes.
D. Governance statement
1. The Regulator is asking trustees to produce a
governance statement explaining the extent
to which their scheme has embedded the 31
DC quality features. Trustees should make this
statement available to members and employers,
for example by publishing it in the annual report
and accounts or on their website. The Regulator
will provide a sample template of a governance
statement on its website. Trustees can adapt
this to reflect the specific circumstances of their
particular scheme.
2. Production of the governance statement should
be underpinned by an assessment. Again, the
Regulator will provide an assessment template on
its website that will support ongoing assessment
of the scheme against the quality features. The
Regulator does not expect trustees to publish this
but for trustee boards to use it as an opportunity
to review and refresh systems and controls,
monitor risks and prioritise actions.
3. Although recognising that governance statements
are voluntary, the Regulator expects trustees
and the industry fully to embrace its “comply
or explain” approach and will monitor the take
up, effectiveness and quality of governance
statements.
4. In addition to producing a governance statement,
master trusts are expected to obtain independent
assurance further to demonstrate the presence
of governance and administration standards
that meet the DC code and DC regulatory
guidance. It is to develop, with the ICAEW, the
audit profession and master trust providers, an
independent assurance framework for master
trusts.
5. The Regulator expects independent assurance to
be carried out annually by all master trusts once
the framework goes live in 2014.
E. Draft compliance and enforcement policy for
occupational DC trust-based schemes
1. This applies to trustees and advisers of all
occupational DC trust-based schemes with 2 or
more members which offer:
1.1 money purchase benefits, including AVCs
under occupational DB trust-based pension
schemes or sections, or hybrid schemes, and
1.2 money purchase benefits with a DB underpin.
2. It does not apply to work-based personal
pensions/stakeholder schemes or other contractbased schemes.
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3. Key risk areas in DC schemes are identified as
including poor governance standards, poor
investment governance and decision-making,
poor administration practices, and fraud.
4. Monitoring activity is split into reactive
(responding to whistleblowing complaints) and
proactive work.
5. The proactive process will involve selecting a
sample of schemes to review. Those which have
not met the expected standards will be subject
to a further detailed review and possible further
action.
6. Where the Regulator decides to investigate a case
further, it may require trustees and their advisers
to provide it with information or other evidence
of compliance with the legal requirements. The
Regulator may also contact other persons or third
parties if it believes they may be in possession of
relevant information or documents, for example
third parties giving advice or providing business
services to trustees, or participating employers
and scheme providers.
7. Once an investigation is complete, the Regulator
will decide what enforcement action should be
taken. It will take into account factors such as
the immediacy and materiality of the risk or issue
and the behaviour of the parties involved. The
policy statement includes examples of the types
of factor it may consider.
8.Enforcement options include:
8.1 formal action (engagement by telephone,
email, letter and in person),
8.2statutory notices (such an improvement
notices under Section 13 of the Pensions Act
2004 or third party notices under Section 15
of the Pensions Act 2004), and
8.3imposition of civil penalties under Section 10
of the Pensions Act 1995.
The draft compliance and enforcement policy, on
which comments are invited by 31st October, 2013,
and the strategy for regulation are here.
Comment: The framework is expected to take effect
in November, 2013, when Code of Practice No. 13
comes into force. Alongside that, the Regulator will
publish regulatory guidance (and, we assume, the
final version of the compliance and enforcement
policy and the governance statement and assessment
templates referred to in the strategy document). All
the framework documents should be required reading
for trustees of DC schemes, and training should be
considered.
517811179
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This Bulletin is prepared by the Pensions and Employment Group of Slaughter and May in London.
We advise on a wide range of pension matters, acting both for corporate sponsors (UK and non-UK) and for trustees. We also advise on a wide range of both contentious and non-contentious
employments matters, and generally on employee benefit matters.
Our pensions team is described in the 2012 edition of The Legal 500 as “extremely knowledgable” and as having “strength in depth”.
Our recent work includes advising:
•
The Trustee of the General Motors UK Retirees Pension Plan, on the surrender in October,
2012 of 2 insurance policies and the purchase of a bulk purchase annuity policy with
Rothesay Life. The transaction covered all or substantially all of the Plan’s benefit
obligations and had an aggregate value of approximately £230 million
•
The Trustee of ConocoPhillips Pension Plan, on the UK pensions issues arising from the
demerger of the ConocoPhillips “downstream” oil business in May, 2012, including
establishment of a new mirror image defined benefit pension scheme for the
“downstream” UK business. ConocoPhillips is a US company and a number of crossborder issues arose from the pension demerger as a result. We coordinated our advice on
these issues with legal advice from Cravath Swaine & Moore in the US
•
Global Infrastructure Partners, on the establishment of the Edinburgh Airport Pension
Plan, a new defined benefit scheme, in June, 2012
•
Unilever Plc on a benefit change exercise in June, 2012 involving the closure of the final
salary section of the Unilever UK Pension Fund and the provision of future benefits under
the career average and defined contribution sections of the Fund
•
Marks and Spencer plc on their new innovative master trust arrangement with Legal &
General to provide a new pension arrangement from 2012 which complies fully with the
auto-enrolment requirements. The master trust provides an overarching framework under
which multiple pension schemes from different companies can operate. Each scheme can
make independent decisions on factors such as investment funds and contribution rates,
while benefitting from an independent governance structure provided by the trust. This
new arrangement replaced the company’s DC pension scheme. We also advised on the
provision of outsourced administration services in connection with the trust
•
Royal London, the UK’s largest mutual life and pensions company, in connection with
the pensions aspects of the acquisition, on 1st July, 2011, of the business of Royal Liver
Assurance Limited, including structuring arrangements for change of principal employer
and a scheme apportionment arrangement
•
Uniq plc, the chilled convenience food group, on a regulated apportionment arrangement
with the Trustee of the Uniq pension scheme in February, 2011 under which Uniq group
was released from its liabilities in relation to Uniq’s £1bn legacy pension scheme in return
for a 90.2 per cent shareholding in Uniq plc, the group holding company, and a cash
payment to the pension scheme (before deduction of certain expenses) of £14 million
If you would like to find out more about our Pensions and Employment Group or require advice on a pensions, employment or employee benefits matters, please contact Jonathan Fenn
[email protected] or your usual Slaughter and May adviser.
London
T +44 (0)20 7600 1200
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Published to provide general information and not as legal advice. © Slaughter and May, 2013.
For further information, please speak to your usual Slaughter and May contact.
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