Conservatives indicate direction of travel for DB regulation

In an interview with the BBC over the bank holiday weekend Theresa May gave us a foretaste of the Conservative election manifesto regarding DB pension regulation.  She said that if elected “we would bring in new rules and new powers for the pensions regulator so that if in certain circumstances where companies were being taken over there would be new powers for the regulator to make sure that the issue around people’s future pensions was being addressed so they had reassurance of the future of their pensions”.

More detail was provided by Conservative Campaign Headquarters on the same day.  The key proposals are that:

• Any company pursuing a merger or acquisition valued over a certain amount or with over a certain number of members in the pension scheme would have to notify the Pensions Regulator, who could then apply certain conditions
• In cases where there is no credible plan in place and no willingness to ensure the solvency of the scheme, the Pensions Regulator could be given new powers to block a takeover. This would include the power to issue punitive fines for those found to have wilfully left a scheme under-resourced
• If fines proved insufficient, the company directors in question could be struck off for a period of time and a new offence could be introduced to make it a criminal act for a company board to intentionally or recklessly put at risk the ability of a pension scheme to meet its obligations

Comment

An early blueprint of what we might expect to come out of the post BHS Green Paper (see our February News Alert).  Tough talk and draconian measures indeed, but it looks a bit less tough from the point of view of members of schemes which are too small to figure in the grand scheme of things.

Royal Assent for the Pension Schemes Act 2017

The Pension Schemes Act 2017, which provides for the future regulation of master trusts, received Royal Assent last Thursday.  Thankfully the Bill, introduced in the House of Lords on 19 October 2016 had reached the “ping-pong” stage of Parliamentary progress shortly before Easter and so was not lost as a result of the Prime Minister’s decision to call an early General Election.

Changes since the Bill was introduced include the following:

• Regulations can now exempt certain entities wishing to act as scheme funder from only carrying out activities related to that role
• Trustees of a failing master trust can now transfer member benefits to certain pension schemes (to be specified in regulations) and not just other master trusts
• The six month long stop on a “pause order” (imposed by the Pensions Regulator on a master trust) has been removed; and
• Various technical amendments have been made to the requirements applying to master trusts operating before the Act came into force

Other than this the key provisions are very similar to when the Bill was introduced (see Pensions Bulletin 2016/43 for details).

Comment

There will inevitably now be an interregnum, but post 8 June we can expect the new Government (of whatever colour) to bring the new master trust regime into operation, almost certainly in line with the original October 2018 timetable as signalled recently by Lord Henley.

Trustees of scam scheme banned

The Pensions Regulator has published a ”Section 89” report on its actions in the sad case of the 5G Futures Pension Scheme – a scheme registered with the Pensions Regulator in 2009 as a trust-based DC occupational pension scheme.

John Williams and Susan Huxley were both trustees of the scheme and directors of the dormant principal employer.  There are 529 members of the scheme, contacted via cold calling or text messages, and offered financial incentives to transfer their pension into the scheme.  The scheme’s administrator, also owned by Williams and Huxley, was responsible for advising some members to transfer and received eight to ten years’ worth of members’ fees in advance, in addition to a percentage of the fund transferred.

The trustees authorised payment of these monies to the administrator, with a portion being paid to the relevant introducer.  During the period Williams and Huxley acted as trustees, the funds were transferred into a number of unregulated investments, including leases in a plantation in Ghana, land in Brazil, tree plantations in Fiji and biofuel bonds in Singapore.  Out of a total of £16 million invested, the value was reduced to approximately £991,000.

Following an application by the Regulator in May 2013 the Determinations Panel suspended Williams and Huxley as trustees and appointed an independent trustee to take over the running of the scheme.  Given the seriousness of their failings, the Regulator considered that Williams and Huxley were not fit and proper persons to be trustees of any pension scheme and, after extending the suspension for a further year, began prohibition proceedings resulting in Williams and Huxley being so prohibited in July 2016.  At both stages Williams and Huxley initially challenged these actions in the Upper Tribunal but their challenges were later withdrawn.

Meanwhile the independent trustees “have succeeded in recovering interest on some of the investments, and are actively working on trying to receive compensation for victims”.

Comment

A depressing and sadly familiar (see Pensions Bulletin 2016/28) story.  We have some sympathy with the Regulator having limited powers to stop this sort of activity.  But our sympathy is limited.  The fact remains that between 2009 and 2013, on the Regulator’s watch, over £16m of pension assets were funnelled beyond the reach of the English courts and regulators with no serious expectation that the members would ever see much of this again.

The Section 89 report would be more informative if it went back before 2013.  Was 2013 really the earliest date on which the Regulator got wind of the problem?  If so, why?  And if not why was no action taken before?  Either way, it does not reflect well on priorities within the Regulator in those days.

Hopefully the latest Government proposals, when eventually implemented, to combat pension scams (see Pensions Bulletin 2016/47) will make life harder for the scammers.

And if the Regulator’s powers are limited then what about the police?  After all, Williams and Huxley were reportedly arrested for pension fraud in widely publicised police raids in 2013.  But it seems to be very hard to get prosecutions, never mind convictions.  We respectfully suggest that the criminal justice system remains not fit for purpose when it comes to pension scams.

State Pension Age announcement deferred

According to the Pensions Act 2014, before this Sunday 7 May, the Secretary of State for Work and Pensions (currently Damian Green) is required to publish a report that reviews whether the rules about State Pension Age are appropriate, having regard to life expectancy and other factors that the Secretary of State considers relevant, and prepare and set out the outcome of the review.

But it seems that we will need to wait until the other side of the General Election and the formation of a new Government to find out whether State Pension Age is to increase.

The two reports which will assist the Secretary of State were published in March (see Pensions Bulletin 2017/14).  If John Cridland’s recommendations are adopted State Pension Age will rise to age 68 over a two year period starting in 2037 and ending in 2039 and the triple lock will be withdrawn in the next Parliament, with State Pension increasing in line with earnings.

Comment

It appears that purdah trumps the letter of the law (although we are not sure on what grounds).  Adjusting State Pension Age will clearly be one of the top priorities of the incoming Secretary of State, whoever he or she may be.

Time running out for Barber claims?

In a summary judgment Chief Master Marsh has upheld an application for dismissal of a claim for damages made by the trustees of a DB scheme against its former administrator and actuary about the incorrect payment of early retirement pensions and equalisation errors.

The reported facts are these.  Prudential administered the Job Earnshaw & Bros Limited Staff Pension Scheme from its inception in 1956 until 2012.  Prudential also provided actuarial services to the scheme until 2008.

The trustees sued Prudential for breach of duty (the amount of damages sought being about £450,000) on two main grounds:

• Pensions were put into payment for members who had retired before their normal retirement date without the necessary actuarial reduction because of early payment; and
• Prudential made errors with the date from when male and female retirement ages were equalised and thus paid out pensions incorrectly

Prudential applied for a summary judgment to dispose of these claims under Part 24 of the Civil Procedure Rules (which provides for a claim to be rejected if it has no real prospect of succeeding at trial) on the following grounds:

• The payments were in accordance with the rules
• The claims are time-barred under Section 14A of the Limitation Act 1980 (broadly six years from when the cause of action accrued or, if later, three years from when the claimant had both the knowledge of and the right to bring such an action)
• The trustees failed to mitigate their loss by continuing to pay the unreduced pensions after discovering the problem
• Equalisation was a legal matter on which the Prudential had no duty to advise; and
• It was all so long ago (early 1990s) that the equalisation claims are time-barred anyway

The first three related to the early retirement claim and the last two to the equalisation claim.

The Chief Master agreed with Prudential that the early retirement pensions were paid in accordance with the rules.  Also the equalisation claims had no chance of success because they are time-barred under the “15 year long stop” rule which prevents negligence claims 15 years after the act or omission complained of.  The trustee’s claim was therefore summarily disposed of without a trial.

Comment

We would not usually report a case about the rules of litigation.  It is not our area of expertise.  But for pension practitioners of a certain age, 17 May 1990, the date of the Barber judgment requiring equal pensions for men and women, is etched in memory.  So seeing the first publicly reported case where it has been held that a Barber claim is time-barred is worth noting.  No doubt there are still some claims in the pipeline, but it looks like they are coming to an end.

Cases of this type should not be confused with the need for trustees to pay benefits to members in accordance with the scheme’s rules and any overriding legislation – whether this is retirement age sex equalisation or the ongoing saga of how to equalise benefits for GMPs.

DWP delivers quick fix for pensioners trapped within schemes in financial difficulty

Regulations were laid before Parliament last week delivering the quick fix proposed by the DWP last month (see Pensions Bulletin 2017/16).  Under them pensioners with contracted-out rights can be transferred, with their consent, to a receiving scheme that has never been contracted-out, but only where the transferring scheme is in financial difficulty.

The Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2017 (SI 2017/600) come into force on 3 July 2017.

The DWP has also published its response to the consultation.  No material changes have been made to the regulations.

Comment

This is a missed opportunity.  Changes to this area of DWP law have been necessary for more than a year in order that schemes with contracted-out liabilities can pass them to schemes that have never been contracted-out, including, by definition, schemes newly established since contracting out came to an end on 5 April 2016.  Instead, further complexity has been added, in order to deal with events, with BHS pensioners likely to be the first to benefit.

The Government should have been bolder and extended its proposals to all transferring schemes, not just those in financial difficulty.  After all, the pensioners still need to consent to the transfer.

Will the Pensions Ombudsman increase the upper limit for distress and inconvenience awards?

In the High Court ruling in the case of Baugniet vs Capita Employee Benefits Limited, the Pensions Ombudsman has been directed to reconsider its upper limit for the award of compensation for non-financial injustice, such as distress and inconvenience.

The £1,000 current upper  limit  for such awards appears to stem from the 1998 case of City and County of Swansea v Johnson  in which the High Court ruled that an award in excess of £1,000 should be not be made other than in very exceptional circumstances.

The latest ruling makes the point that after nearly two decades this figure is out of touch with the value of money and should be rebased to a current sterling equivalent, which in line with the Bank of England online inflation calculator would be in excess of £1,600.

The Pensions Ombudsman has therefore been urged to rebase the upper limit for such awards at £1,600.  However, at present, there is no change to the guidance it makes available online in this respect.

Comment

It seems that the Pensions Ombudsman took his cue from the Court when setting the upper limit for compensation in 1998 and so is presumably likely to do the same in 2017.  This may have wider implications as trustees, advisers and administrators could well be citing this upper limit in their dealings with members who raise complaints.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.