UK: Pensions Snapshot - April 2018

Last Updated: 13 April 2018
Article by Mark Catchpole and Alex Rush

This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of March 2018 in relation to occupational pension schemes. The topics covered in this edition are:

  • Time to master the Code?
  • Pensions Ombudsman Determination - Mr Y (PO-10171): recovery of overpayments
  • From Green to White
  • Court of Appeal upholds High Court decision in Shannan v Viavi

Time to master the Code?

On 27 March 2018, the Pensions Regulator (TPR) published, for consultation, a Code of Practice no.15. The Code, that spans some 85 pages, relates to the authorisation and supervision of master trusts and sets out TPR's expectations of the operators of master trusts.

Broadly speaking, a master trust is an occupational pension scheme which provides money purchase benefits (whether alone or in conjunction with other benefits), is used (or is intended to be used) by two or more unconnected employers, and is not a relevant public service pension scheme. From 1 October 2018, master trusts will have to apply to TPR for authorisation.

To be authorised, a master trust must satisfy TPR that it meets, and continues to meet, the authorisation criteria introduced in the Pension Schemes Act 2017. The Code sets out TPR's expectations in this regard:

  1. That the persons involved in the scheme are fit and proper persons - This criteria applies to various roles including scheme trustees, scheme funders and scheme strategists. More detail about these roles is set out in the Code. TPR expects that, before applying for authorisation, those running master trusts will carry out due diligence to determine whether the fit and proper criteria is met and identify any action needed.
    TPR explains in the Code that it will consider current and past behaviour, its impact on others and whether there has been a pattern of behaviour which creates concern. TPR will take an interest in matters that occur both within and outside of the UK; a declaration and criminal conviction certificate will be required for each individual undergoing the fit and proper person assessment.    
  2. That the scheme is financially sustainable - To demonstrate that the scheme is financially sustainable, TPR expects the master trust to demonstrate that it has enough financial support to ensure it can set up and operate on a day-to-day basis and cover the costs subsequent to a triggering event (without increasing the cost to members). TPR states that a key part of demonstrating that the authorisation criteria are met is by having a business plan in place setting out the expected activities and growth of the master trust and how it will be funded. This will be "critical" to TPR's assessment of whether a master trust meets the authorisation criteria.    
  3. That each scheme funder meets prescribed requirements - A scheme funder must be a body corporate or partnership and, broadly, only carry out activities relating directly to master trusts. TPR will look for clear evidence in relation to the scheme funder's business activities that it can do this.    
  4. That the systems and processes used in running the scheme are sufficient to ensure that it is run effectively - The Code states that the master trust must have sufficient IT systems and processes in place to run efficiently and have robust processes to effectively govern the scheme and comply with all the relevant requirements. In undertaking this assessment, TPR must, for example, be satisfied as to:
    4.1The standards, functionality and maintenance of the IT systems used in scheme administration and governance.
    4.2 The processes and controls that are used in scheme administration.
    4.3 The governance arrangements and processes used to ensure sufficient oversight of the master trusts activities.    
  5. That the scheme has an adequate continuity strategy - A continuity strategy is a high level plan setting out how members' benefits will be protected following a triggering event (broadly speaking, a triggering event is one of a number of events set out in the Pensions Scheme Act 2017. The issue of warning or determination notices by the TPR, the insolvency of a scheme funder or notification by TPR that a master trust is not authorised may be triggering events).
    A continuity strategy must consider two possible outcomes from a triggering event – continuity option 1 (to wind up and transfer out) and continuity option 2 (to resolve the triggering event). TPR will look for a credible strategy on how members will be protected if there is a triggering event and how a master trust may be closed down or how the triggering event will be resolved.

Once the Code is settled, relevant individuals involved in master trusts will need to have regard to it when making their application for authorisation. The Code sets out the information that TPR expects to see before it will authorise a master trust.

The consultation runs until 8 May. TPR has said it will publish Guidance to accompany the Code in due course. The significance of the Code to the authorisation regime makes it a must-read for all operators and managers of master trusts.

Pensions Ombudsman Determination - Mr Y (PO-10171): recovery of overpayments

Mr Y was a member of the Armed Forces Pension Scheme (AFPS), which is administered by Veterans UK. Equiniti is contracted to provide payroll services in respect of AFPS benefits.

Mr Y was made redundant on 5 June 1983 and began to receive his AFPS pension on 6 June 1983. The pension was initially reduced to provide Mr Y with a resettlement lump sum but was reinstated at its full amount when Mr Y reached aged 55 on 5 June 2005. In June 2015, Equiniti realised that, between 5 June 2005 and 20 May 2015, Mr Y had received a net pension overpayment of £20,978.36. Equiniti therefore contacted Mr Y to request recovery of the overpayment.

My Y objected to the request and made a complaint through the AFPS internal dispute resolution procedure. However, Mr Y's complaint was not upheld and so he referred it to the Ombudsman. He argued that he had made financial commitments based on the higher pension and that repayment would have a detrimental effect on his life. In particular, Mr Y claimed that he made a number of purchases he would not otherwise have made had it not been for the overpayment, such as an 18-foot Seahawk boat and a Land Rover Freelander.

In line with the decision in Webber v Department for Education and another [2016], the Ombudsman held that the cut-off date for limitation purposes was 23 December 2016 when the Ombudsman received Veterans UK's formal response to Mr Y's complaint. As such, Veterans UK is only able to recover overpayments dating back six years from that date. Overpayments made in the period from June 2005 to December 2010 are statute-barred.

The Ombudsman noted that there might have been further defences available to Mr Y in respect of the remainder of the overpayment. In particular, Mr Y might have had a defence if he could show that, because of the overpayment, he changed his position such that it would be unjust to require him to repay the overpayment. However, the Ombudsman considered that Mr Y's additional expenditure would have happened in any event and did not occur due to the overpayment. As such, it would not be inequitable to require Mr Y to repay the overpayment.

The Ombudsman also directed that a £500 compensation payment offered by Veterans UK to Mr Y be offset against the remainder of the overpayment and that Veterans UK and/or Equiniti liaise directly with Mr Y to agree a reasonable period for the recovery of the overpayment.

It is also worth noting that the Ombudsman reached a similar conclusion in its recent determination in relation to a complaint by Mr N (PO-15945).

From Green to White

The Department for Work and Pensions (DWP) issued its white paper, "Protecting Defined Benefit Pension Schemes", following on from its Green Paper of February 2017.

The focus of the paper is on measures that the Government intends to implement to strengthen TPR and protect defined benefit members' benefits (as opposed to measures to assist scheme sponsors or trustees). DWP forewarns that it will take a number of years to implement the various proposals made in the White Paper, with primary legislation unlikely to be tabled until the 2019-20 parliamentary session at the earliest. Prior to that, we can expect a number of consultations from DWP and TPR. Certain key measures from the paper are summarised below.

  1. Scheme funding - The White Paper proposes some clarifications to, and strengthening of, the scheme funding regime. This includes a new DB funding code with clearer funding standards and more teeth, insofar as trustees and scheme sponsors will be legally obliged to comply with all or at least some of the new code (with fines and sanctions for non-compliance). In addition, the Government proposes to make it a mandatory requirement for schemes to have a Chair of trustees who must provide a statement that needs to be submitted with each full scheme valuation (the content of that statement will be set out in the new code).
  2. Enhancements to TPR's powers - The White Paper sets out an intention to give TPR enhanced powers to, among other things, guard against those who put DB schemes at risk. These enhancements include the following:

    • new fines and criminal sanctions with scope for TPR to impose penalties for conduct arising on or after the date of the White Paper (19 March 2018).
    • a potential update of the current notifiable events regime.
    • a potential update to the Pensions Regulator's clearance guidance.
    • enhancements to TPR's information gathering powers, including the ability to compel individuals (including professional advisers) to attend interviews, and new fines for a failure to comply with TPR's requests for information.
    • the requirement for companies to make a "statement of intent" before certain "relevant business transactions", the content of which would require consultation with the scheme's trustees.
  3. Consolidation - The White Paper also blows wind into the sails of creating a new DB consolidator vehicle to enable DB Schemes to be brought into a larger body (as opposed to being bought out through an insurance vehicle). In addition to key commercial driver for this initiative, namely enabling the sponsor to pass on its DB scheme liabilities to the consolidator vehicle without necessarily having to pay a "premium" at buy-out level, it is hoped that consolidators will bring the benefits (and efficiencies) of shared functions and enhanced governance. The DWP has promised further detail in the form of a consultation later this year.

While a number of measures set out in the Green Paper are being taken forward, some material suggestions have been set aside. The items dropped, for now at least, include:

  • a mandatory clearance regime for certain types of transactions.
  • a shortening of the period to submit triennial valuations.
  • an RPI/CPI override.
  • changes to the employer debt regime.

Court of Appeal upholds High Court decision in Shannan v Viavi

The Court of Appeal has upheld the High Court decision which found that there had been a substitution of principal employer by the time of execution of a 1999 trust deed and rules (the 1999 Deed). In the High Court case, the judge had decided the 1999 Deed itself was sufficient to allow for the substitution with the new principal employer and the trustees being party to that deed. In the High Court, the judge relied on the principle in the Re Duomatic case to provide that the relevant consent of the outgoing employer (which was also required) had been given as the new principal employer was the sole shareholder of the outgoing employer. This was despite the fact that the outgoing principal employer had not been party to the 1999 Deed.

In the Court of Appeal the argument advanced by the Appellant that no substitution of principal employer had taken effect under, or by the time of, the 1999 Deed was dismissed. The Appellant had argued that the parties believed that such substitution had taken place in 1994 so could not have intended such substitution to take place subsequently. Moreover, the consent of the outgoing principal employer had not been given as that entity was not a party to the 1999 Deed.

The Court of Appeal dismissed these arguments on the facts noting that events leading up to the execution of the 1999 Deed demonstrated that the relevant intention was to change principal employer and the principal employer had been changed by the time of the 1999 Deed, meaning that the 1999 Deed was effective. The Court of Appeal however diverged from the High Court in finding that the Re Duomatic principle was not applicable and, instead, simply relied on the events that had occurred up to the execution of the 1999 Deed to demonstrate that the outgoing principal employer had consented to its substitution as principal employer of the scheme.

Stephenson Harwood LLP acted for the successful representative beneficiary in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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