Developments in Employee Benefits law and practice

09 December 2018

New contracting-out countdown bulletin published

Proposals to give millions of people their pension facts and figures at their fingertips have been unveiled by the government.

New free, user-friendly ‘pensions dashboards’ would allow people to access their information from most pension schemes in one place online for the first time.

Pension’s dashboards – an idea welcomed by consumer groups and pension providers - would:

  • Give people accurate, easy to understand, secure information

  • Show people clearly how much they have in their pension pots and what they can expect to have to live on in retirement

  • Put people in control of when and how they check their data and who has access to it

  • Help people to find ‘lost’ pension pots

It is envisaged the first pension’s dashboard will be established in 2019 , with multiple dashboards to be introduced in the following years subject to the necessary consumer protection being in place.

AE thresholds 2019/20

The auto-enrolment earning threshold will stay frozen at £10,000 for 2019/20 . The lower limit qualifying earning band would increase from £6,032 to £6,136 and the upper limit will increase from £46,350 to £50,000.  

Purple Book 2018 

In the thirteenth edition of the Purple Book , the Pension Protection Fund (PPF) points to significant risk in the defined benefit (DB) pension universe, despite an increase in the aggregate funding level in DB schemes in the last financial year (March 2017-March 2018).

The Purple Book provides a comprehensive view of the universe of DB pension schemes that are protected by the PPF.

Scheme funding

The aggregate funding level of DB pension schemes is the highest it has been since 2014, having increased to 95.7 per cent (on an s179 basis). The result is the aggregate deficit in the 2018 dataset is £70.5 billion, less than half that in March 2017 when it was £161.8 billion. The reasons for improvements in final salary scheme funding are due to higher gilt yields driving down liability values, a rise in equity markets in the year to March 2018, and the use of more up-to-date valuations, along with the continued shrinking of the DB universe.

Scheme demographics

The Purple Book data reveals that the proportion of company DB schemes open to new members has stayed steady at 12 per cent, but the number of PPF eligible DB schemes has decreased from 5,588 schemes in 2017 to 5,450 in 2018.

Large company schemes with over 5,000 members make up only seven per cent of the total number of schemes in The Purple Book 2018 dataset, but represent almost 75 per cent of total assets, liabilities and members.

Asset allocation and de-risking

There has been a continuation of de-risking trends, with the number of equities held decreasing and bonds increasing. Within equities there has also been a shift in the share of UK quoted equities which has decreased to 18.6 per cent, from 20.5 per cent, while exposure to overseas equities has increased.

Pension transfers

A rising trend highlighted in this year’s data has been DB pension transfers, with the highest number recorded since the introduction of Pensions Freedoms in April 2015, amounting to £10.6bn in the first quarter of 2018. While this number sounds high, it is relatively small in the context of the pension universe which has liabilities totalling around £1.6 trillion.

Southern Water to pay £50m more into pension following TPR investigation

Southern Water will pay more money into its pension scheme over a shorter recovery period following an investigation by The Pensions Regulator (TPR) . TPR took action over what it felt was an imbalance between the funds contributed to the Southern Water Pension Scheme and the level of dividends paid to shareholders in 2016 and 2017.

TPR’s action helped bring about a settlement which will now see Southern Water pay £50m more money into the scheme over a shorter recovery plan period. Initial payments will be up to twice as much as before, with every subsequent payment also higher.

A dividend sharing mechanism will ensure future dividend payments do not lead to unfair treatment of the scheme.

A report published by TPR says Southern Water could have afforded to pay off the scheme’s deficit far sooner, especially given the £190m it paid in dividends in 2016 and 2017. TPR considered this amounted to unfair treatment of the scheme.

TPR began regulatory proceedings and issued a Warning Notice to the trustee and company to say it was seeking to exercise its Section 231 funding power over its concerns about the level of payments to the scheme, and later opened an anti-avoidance investigation following the dividend payments by the company.

The report sets out exactly how much more will be paid into the scheme, and when the payments will be made.

Southern Water has now introduced a dividend sharing mechanism, which means that if dividends are paid to shareholders above a certain threshold the company will increase the amount it pays into the pension, ensuring the scheme shares more fairly in the company’s success.

Charges, returns and transparency in DC: what can we learn from other countries?

The Pensions Policy Institute has published a report which compares UK workplace pension charges with data for defined contribution (DC) workplace pensions from Australia, the United States, the Netherlands and Sweden to see if they are high or low, transparent and offer good investment returns.

The report looks at the level of disclosed costs and charges in each country in the context of the country’s pensions system, the investment returns achieved and also the transparency and effectiveness of the governance oversight of charging.

Key findings include -

  • UK pension fund charges are generally toward the lower end of those in the countries studied.

  • The UK does not exhibit a ‘long tail’ of high charging schemes.

  • Understanding the underlying economies of scale in the UK could help improve outcomes.

  • Overall UK pension fund investment returns generally compare favourably with those from other countries.

  • Fee transparency initiatives can be successful when industry works closely with regulators.

  • Transaction costs data disclosure is patchy but developing.

BT loses RPI/CPI case

In this case, British Telecommunications plc v BT Pension Scheme Trustees Ltd and another, the Court of Appeal rejected an appeal by British Telecommunication plc (BT) and upheld a High Court ruling that RPI had not become an ‘inappropriate’ measure of inflation for the indexation of pension benefits for ‘Section C’ members of the BT Pension Scheme.

The BT Pension Scheme was established by British Telecommunications Corporation in March 1983. BT was then privatised in 1984. Before the privatisation, the scheme took a bulk transfer from the Post Office scheme. Sections A and B of the scheme were originally established to mirror the equivalent sections of the Post Office scheme. In 1986, BT established the British Telecommunications plc New Pension Scheme. This was merged into the scheme in 1994 and became Section C of the scheme. Despite there being three Sections (A, B and C), the scheme had a single pool of assets. BT brought an action against the pension scheme trustees concerning the provisions on pension increases in the scheme rules for Section C. The relevant rule stated, in relation to pension increases, that –

‘The cost of living will be measured by the Government’s published General (All Items) Index of Retail Prices or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides.’

In the High Court ruling, the judge held that as a matter of construction, the question of whether RPI had become inappropriate was a question of objective fact and, in the absence of agreement between BT and the trustee, it had to be determined by the court. He addressed the effect of various factors and concluded that they did not, either individually or cumulatively, cause RPI to become inappropriate.

The Court of Appeal agreed with the High Court and held that the question of whether RPI had become inappropriate was an objective state of affairs, which was inevitably fact-sensitive and a matter of evaluative judgment. In default of agreement by the employer and the trustees, the question had to be decided by the court. There was no basis for concluding that the High Court judge's decision was flawed and he was right to come to the conclusions he did.

Lloyds Bank GMP equalisation case update

On 3 December 2018, Justice Morgan, the High Court judge in the Lloyds Bank GMP equalisation case, heard submissions on consequential matters.

The parties involved in the case provided Justice Morgan with a draft order with a view to him making a declaration in relation to ‘Method D2’ (for addressing GMP inequalities). Method D2 was not, at present, available to be adopted by the Lloyds Bank pension schemes as the Banks had not consented to that being done. Nevertheless, the draft order provided:

“…in principle, Method D2 is a lawful method to which the Banks could consent [provided that benefits are first adjusted for GMP inequalities using Method C2].”

The words in square brackets were suggested by the representative beneficiaries for the pension schemes but were opposed by the Banks and by the Crown (both DWP and HM Treasury were parties to the case).

Justice Morgan held that, on the basis of his earlier findings, the right order to make should be as per the draft order but without the words in square brackets.

In other words, where a scheme is utilising the GMP conversion legislation to convert GMPs into ordinary scheme benefits (D2 in the table), trustees can undertake equalisation (for future payments) in a single step; they are not required to first determine the level of each member’s equalised pension benefit using method C2 before calculating the actuarial value of the benefits to be converted. The trustees equalise by determining the higher of the actuarial equivalent of the unequalised female and unequalised male pensions and then take the higher of these figures as the “equalised” amount to be converted.

Justice Morgan also confirmed that it is for the actuary rather than the Courts to determine how the actuarial equivalent of the unequalised pensions is calculated using such assumptions (interest or discount rates and other matters) as the actuary considers appropriate.

A JLT Alert is available.

ScamSmart prompt tens of thousands of pension holders to seek information

The number of people seeking information about pension scams has soared since the launch of the first joint campaign by the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) this summer.

In the 55 days before the launch around 31,000 people visited the ScamSmart website at an average of 562 per day. In the 55 days after the launch this rose five-fold (462%) to more than 173,000 people – an average of 3,145 per day and the equivalent of one every 27 seconds. Additionally, over 370 pensions holders were warned about an unauthorised firm after using the Warning List, an online tool that helps consumers check a list of firms operating without authorisation.

The campaign urges all pension holders to be on their guard against pension scams as new research suggests that half (52%) of 45-65 year olds with a pension do not think they are likely be targeted by a pension scam. The most common reasons given were that they are too savvy to be scammed (21%) or that they didn’t have enough money saved in their pension (18%).

Victims of pension scams last year lost an average of £91,000 each to fraudsters. They reported receiving cold-calls, offers of free pension reviews and promises that they would get high rates of return – all of which are key warning signs of scams.

Research from the FCA estimates over 10 million UK adults received an unsolicited pension offer in just one year. The Treasury has laid regulations that will ban pension cold calling early in 2019.

The FCA and TPR are urging the public to be ScamSmart with their pension and always check who they’re dealing with. The regulators recommend four simple steps to protect yourself from pension scams:

  1. Reject unexpected pension offers whether made online, on social media or over the phone

  2. Check who you’re dealing with before changing your pension arrangements – check the FCA Register or call the FCA contact centre on 0800 111 6768 to see if the firm you are dealing with is authorised by the FCA

  3. Don’t be rushed or pressured into making any decision about your pension

  4. Consider getting impartial information and advice

Brexit and implications for private pensions

This House of Commons briefing updates an earlier publication on the potential implications of Brexit for EU pensions. A separate briefing on Brexit and State pensions is available too.

DC consolidation consultation

Consolidating defined benefit pension schemes into superfund entities so that they benefit from improved funding, economies of scale and better governance will provide more security for members of some pension schemes.

Advantages of superfund schemes are they:

  • protect savers through a capital buffer, which will provide greater security by reducing the risks associated with future employer insolvencies

  • provide an alternative way for employers in certain circumstances to separate themselves from legacy pension arrangements by moving closed pension schemes into a superfund, freeing them to focus on the day-to-day running of their business

  • improve the likelihood of members’ benefits being paid in full

  • enable access to a wider and potentially more innovative mix of investment opportunities

This consultation seeks views on a new legislative framework for authorising and regulating defined benefit superfund consolidation schemes as described in Protecting defined benefit pension schemes, published in March 2018. It gives an indication of the government’s policy intentions and likely focus of the legislation.

On a related note, DB superfunds seeking to enter the market need to talk to The Pensions Regulator (TPR) about their plans before opening for business, according to new guidance.

To ensure pension savers are protected, TPR has set out its expectations of DB superfunds which intend to operate before any authorisation regime is put in place and whilst the authorisation framework planned by government is under consultation.

In light of the range and potential scale of emerging business models, the guidance makes clear that TPR will scrutinise all DB superfunds that enter the market to ensure any risks are identified, assessed and mitigated.