9 July 2018

Pensions: what's new this week

Court finds against trustee decisions on pension increases: British Airways case

The Court of Appeal has overturned the decision of the High Court, finding in favour of British Airways (BA) in its dispute with the trustees of the Airways Pension Scheme. The court ruled that the trustees did not act for proper purpose in using their unilateral power to amend the scheme rules to allow discretionary pension increases to be paid to members and subsequently using the power to award an increase. The court held that the role of trustees is to manage and administer a scheme, not to design it.

In this case, the scheme had provided uncapped RPI-based pension increases on the basis of annual Pension Increase Review Orders, in line with its historic public sector origins. The indexation rule was unchanged when British Airways was privatised in 1987. In July 2010 the government announced the move to CPI as the measure for both revaluation and indexation in relation to public sector schemes (also affecting minimum statutory requirements for private sector schemes, subject to scheme rules). In March 2011 the trustees amended the scheme rules to introduce a discretionary power allowing the trustees to award discretionary pension increases. This power was then exercised in 2013 to introduce a 0.2% discretionary increase to the scheme’s pensioners, which in part reinstated the application of RPI.

BA challenged both the validity of the amendment (arguing that it fell outside the amendment power and/or was an abuse of that power) and the decision to exercise the power (arguing among other things that it was an abuse of the discretionary power and that there had been no genuine exercise of discretion). However, the High Court ruled last year that both the amendment to the rules and the use of the new power were valid and effective.

The focus of the appeal was on whether the trustees had gone beyond the proper purpose of the scheme’s power of amendment. It is a long-established principle of trust law that a discretionary power conferred on trustees must not be exercised for improper purpose. The court emphasised the importance of considering the amendment power in the context of the purpose of the scheme as a whole. The scheme’s trust deed and rules described the function of the trustees as one of managing and administering the scheme, which Lewinson LJ said limited the trustees ‘to do all acts which are either incidental or conducive to that management and administration’. However, Lewinson LJ found that, rather than merely managing and administering the scheme, the trustees gave themselves, via the amendment, responsibility for designing the scheme’s structure when the situation was such that the scheme was in deficit and the employer would have to fund the additional benefits, decided upon by the trustees not the employer. The court rejected BA’s argument that the pension increase awarded breached a restriction in the scheme preventing ‘benevolent or compassionate’ payments.

As a result of the judgment, the pension increase awarded is blocked and the introduction of the power to grant discretionary increases is unwound. It has been reported that the trustees are considering an appeal to the Supreme Court.

Final Master Trust code of practice

The Pensions Regulator has finalised the code of practice on the authorisation and supervision of master trusts and it has now been laid before parliament. The code sets out in detail the Regulator’s expectations for how each of the five key authorisation criteria should be demonstrated by trustees applying for authorisation, and encourages trustees of master trusts to work with their scheme funder and strategist to submit the application.

The Regulator also published its response to the consultation on the code, which sets out the changes made to the final code. The response confirmed that the Regulator will consult on its policy on the supervision and enforcement of master trusts over the summer. The intention is to publish the final policy in advance of 1 October 2018, the date from which master trust applications can be made. The Regulator is also expected to publish checklists for the business plan and continuity strategy and a process map of the application procedure and to consider whether further guidance is required.

EMIR update: proposed extension to pension scheme exemption

The European Securities and Markets Authority (ESMA) has released a statement noting that there are proposals to extend the pension scheme exemption from central clearing requirements for over-the-counter derivative transactions under the European Market Infrastructure Regulation (EMIR), which is due to expire on 17 August 2018. However, there will be a short timing gap between the expiry of the current exemption and the date that the extension (under EMIR REFIT) comes into force. ESMA’s statement sets out that it does not expect national authorities to require pension schemes and their counterparties to start putting processes in place to clear derivatives for which they are currently exempt from clearing under EMIR during the timing gap. The Financial Conduct Authority has confirmed it will take this approach, subject to any further statement issued by itself or ESMA.

New voluntary code of practice on transfers

A new code of practice on transfers has been published by the Transfers and Re-registration Industry Group (TRIG). The code, which does not apply to transfers out of DB schemes or transfers to recognised overseas pension schemes, proposes a two-week standard timeline for the completion of a pension transfer. The code is intended to reflect current good practice, and adherence is voluntary – but TRIG notes that it expects the Financial Conduct Authority, the Department for Work and Pensions and the Pensions Regulator to use it as a benchmark.

The main focus of the framework is on the timing of the process, or of individual steps within it, and on communications with members. For transfers between two occupational schemes involving cash assets, the framework suggests that the end-to-end process from receipt of a completed instruction to transfer, to the receipt of the transferred funds, should be 15 calendar days (subject to any additional due diligence required under the Code on Combating Pension Scams). Where there are additional counterparties (for example, multiple fund managers) a step by step approach is suggested, with a maximum of two full business days for the relevant organisation to complete each step. This gives a more specific timeline than the Regulator’s guidance about what ‘prompt’ means in relation to core financial transactions, but is consistent with the Regulator’s overall approach. The principles of the code could be reflected in decisions by the Pensions Ombudsman, as has been the case with the Code on Combating Pension Scams, so it’s worth schemes being aware of the framework and testing their practices (and those of their administrators) against it.

Consultation to amend PPF compensation regime following Beaton v PPF

The Department for Work and Pensions (DWP) is consulting on amendments to the Pension Protection Fund (PPF) compensation regime to ensure that the PPF can continue to apply the compensation cap for ‘relevant fixed pensions’ that have been transferred into a scheme which then enters the PPF. In this context, a relevant fixed pension means a pension, transferred into a scheme, where the initial amount of the pension was determined at the time the transfer payment was received and which is not attributable to a pension credit, or payable as a result of a person’s death.

In the High Court judgement of Anthony Beaton v The Board of the Pension Protection Fund last year, it was held that, contrary to PPF practice, such benefits could not be aggregated with other relevant pension benefits attributable to pensionable service in the scheme for the purposes of applying the compensation cap because they are not attributable to pensionable service in the scheme. This means that where a relevant fixed pension is derived from a transfer-in it should be treated separately for PPF compensation payments, which may result in higher PPF compensation. For example, in this case the appellant would be entitled to two tranches of uncapped benefits that in aggregate exceeded the PPF compensation cap. The DWP considers this treatment of pension benefits to be contrary to policy intent, which is to treat PPF individuals in a fair and consistent manner. The consultation further sets out the wider detrimental implications that the judgment could have to the application of indexation and revaluation of relevant fixed benefits and to certain survivor benefits. The proposed regulations aim to bring the compensation regime back in line with policy intent and PPF practice by clarifying that relevant fixed pensions derived from a transfer-in fall within the definition of pensionable service for the purposes of calculating and applying PPF compensation. The DWP are also taking the opportunity to align the definition of pensionable service with the definition set out in the Pensions Act 2004. The consultation closes on 24 July 2018.

PPF update

The PPF has published issue 10 of its ‘Technical News’. This edition covers the changes to PPF compensation made by the PPF (Compensation) (Amendment) Regulations 2018, which enables the PPF to reduce compensation to account for bridging pensions payable under scheme rules. The edition also covers how this change affects the compensation cap, early retirement, survivors’ entitlement, late retirement, commutation and the lifetime allowance. There is also a section on the PPF’s role in supporting schemes in assessment with meeting their obligations in respect of audited accounts.

Helen Powell +44 203 088 4827
PSL Counsel, London helen.powell@allenovery.com

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