Court of Appeal rules on the proper exercise of trustee powers in BA pension increase case

In May 2017 the High Court ruled that it was lawful for the trustees of the Airways Pension Scheme (APS) to exercise their (unilateral) power of amendment to introduce a discretionary power to increase pensions in payment.  The judge also ruled that the exercise of this power in 2013 to award a discretionary increase of 0.2% was lawful.

The employer, British Airways Plc, appealed on two grounds.  First, that the introduction and exercise of the discretionary increase power was in breach of APS’s objects as a trust, which bans “benevolent or compassionate payments”.  Secondly, that said introduction and exercise was for an improper purpose.

On 5 July 2018, by a two to one majority, the Court of Appeal allowed the appeal on the improper purpose grounds (they unanimously rejected the first ground), holding that:

• The amendment, which gave the trustees “unlimited power, in effect, to design the scheme” went beyond the function of the trustees which was “to manage and administer the scheme; not to design it”
• The true purpose of the amendment power was to “give the trustees a wide power to…. make those changes which may be required by the exigencies of commercial life”, but “was never intended to permit them to impose discretionary increases upon BA”
• The amendment “resulted in a scheme with a different overall purpose, in which the trustees effectively added the role of paymaster to their existing responsibilities as managers and administrators”

The dissenting judge found for the trustees, holding that he could find no “purpose-based limitation” on the scope of the amendment power preventing the trustees exercising it in the way that they did.  He also held that if the true purpose of the amendment power was as outlined above it “would place the Trustees in a position of complete uncertainty about the scope of their powers”.

Comment

While this case is novel for a number of reasons it does provide a useful insight into how the exercise of any amendment power needs to made with regard to the legal concept of proper purpose.  It seems that this case is unique in that the effect of the amendment was to potentially increase the scheme’s liabilities, at a time when the scheme was in deficit, but the logic used by the Court and the references made to other cases where an amendment power was used would seem to be of wider note.

GMP inequalities – the Lloyds’ case starts to be heard in the High Court

On 5 July, more than a year after the trustee of the DB pension schemes across the Lloyds Banking Group announced to scheme members that it had started proceedings in the High Court on the issue of unequal GMPs (see Pensions Bulletin 2017/22), the hearing began.

According to reports from pension lawyers, the High Court’s direction is being sought on the following:

• Is the Trustee obliged to increase benefits in excess of GMP to give equal treatment in the overall pension?
• Is the equal treatment obligation only engaged if the affected member has an actual comparator?
• Is there a single correct method of equalising or a choice of acceptable methods?
• If there is a choice, which one should the Trustee adopt?

The hearing is likely to last for two weeks with judgment expected by the end of 2018.

Comment

For a number of years successive Governments have taken the view that schemes must increase benefits to affected members in order to give equal treatment in the overall pension, and in determining who is affected it is not necessary to find an actual comparator.  This view is now being tested in the Courts and it will be fascinating to see how the High Court responds.

As the questions being asked are of relevance to virtually every DB scheme that was contracted-out for any time from 17 May 1990 (the date of the ECJ decision in Barber v GRE) to 5 April 1997, this has the potential to become a very important test case.  But if there is to be an equal treatment adjustment it will be very modest for most of those affected.

Autumn Finance Bill clauses now published

Last Friday much of what will be this autumn’s Finance Bill was released for consultation.  Despite running to over 200 pages, with a couple of exceptions there is not much proposed that looks likely to affect pension schemes.

Significant changes, with a very wide impact, are being proposed to HMRC’s penalty system for failure to make certain returns, deliberately withholding information and failure to pay certain taxes.  But insofar as pension schemes are concerned, right now they appear to only impact both of the following in relation to failure to pay tax and the second in relation to deliberately withholding information:

• Where the manager of a qualifying recognised overseas pension scheme (QROPS) needs to pay the 25% overseas transfer charge (the exposure to which arises when transfers are made from a UK registered pension scheme to a QROPS); and
• Where any tax is due following the filing of a UK registered pension scheme’s quarterly accounting for tax return

The changes around returns and information look to introduce a “points based” system to replace the current system whereby fixed penalties are automatically charged if filing is not achieved by the initial and subsequent deadlines.  Under the proposed system, if a deadline is missed a point will be given and a penalty will only be charged when a specified number of points are accrued.  There is also provision for points to “expire”.  The proposal is designed to be proportionate – penalising the small minority who persistently fall foul of the rules, while encouraging consistent compliance with the opportunity to clear penalty points without actually incurring a penalty.

The proposals around failure to pay relevant taxes on time look to introduce a new two-tiered penalty model, designed to incentivise timely payments, but also to ensure that those who have a reasonable excuse for late payment, or who engage with HMRC with the aim of resolving the issue, are not negatively affected.

Other proposals look to amend the tax exemption which concerns employer paid premiums into life assurance products and employer contributions to provide retirement benefits through a QROPS.  Currently, such payments are only exempt from benefit in kind tax charges if the named beneficiary is the employee or a member of the employee's family or household.  In future the named beneficiary can be any individual or registered charity.  This delivers on a promise made in Autumn Budget 2017 to modernise tax relief in relation to such schemes (see Pensions Bulletin 2017/49).

Consultation runs until 31 August 2018.

Comment

The publication of the draft Finance Bill does not mean that this year’s Budget will be a non-event, but at least, should there be any surprises for pension schemes, under this Chancellor’s new way of doing things, there should be no rush to legislate.

We are pleased to see that the Government is delivering on the tax exemption as this will close off a long-standing technical issue of whether there should be a benefit in kind tax charge on premiums to certain life cover policies held outside registered pension schemes.  It was, in any event, an impractical tax because often it would not be known who was nominated on an expression of wish form until after the member’s death.

Economic Affairs Committee calls for evidence into the use of the RPI

The House of Lords Economic Affairs Committee has expanded its inquiry into the use of the Retail Prices Index as an appropriate measure of UK price inflation by making a public call for evidence.  As before (see Pensions Bulletin 2018/25) the Committee will assess the suitability of using RPI, the alternative indices available and the potential implications of altering or abolishing RPI for the people and organisations who use it.

Consultation closes on 25 July 2018 which suggests that the Committee is now unlikely to issue its report until after the summer recess.

Comment

This inquiry could yet prove to be a turning point in the debate as to whether the RPI should be retained, with potentially a significant impact on many private sector DB schemes should it be replaced.

Transparency of investment costs takes a step forward

An Institutional Disclosure Working Group, set up in 2017 to support consistent and standardised disclosure of costs and charges levied by the fund management industry to institutional investors (such as pension schemes) has now delivered its report.

Although the report is not yet being made public, the summary shows that the IDWG is placing a lot of store on fund managers providing data that can be shown to institutional investors through a number of standardised templates.  Although the provision of this data is to be voluntary, in reality fund managers are expected to be under commercial pressure to participate – from institutional investors, investment consultants and industry bodies.

The IDWG would also like to see improvements in investor education on the matter of cost disclosure and its benefits, a new body convened by autumn 2018 to curate and update the proposed reporting framework and for the FCA not to write any rules at this time that either mandate submission of data by providers using the templates or mandate the collection of data from providers by institutional investors.  However, the IDWG says that the FCA should consider writing rules if there is poor adoption of the templates by institutional investors or their providers, or institutional investors report difficulties in obtaining cost data to the level proposed in the templates from their providers, or providers are found to have misrepresented data via the templates to clients.

The FCA has given a supportive response to the IDWG’s recommendations and is to take the work forward.

Comment

We welcome the progress that has been made and await the details that will assist clients in understanding, comparing and communicating the costs of investing pension scheme assets.

PLSA to undertake further work on its national retirement income targets

In publishing its final recommendations following a consultation launched last October (see Pensions Bulletin 2017/43), the Pensions and Lifetime Savings Association is to take forward its proposals to develop a set of retirement income targets with the assistance of an unnamed independent research institute that is to identify and build the targets.  The intention is to release them in early 2019.

The lengthy report covers a wide range of other pension issues that are of current interest to policymakers and opinion-formers and will clearly be used as a reference point by the PLSA when interacting with Government.  Amongst these are the following:

• The Government should raise the minimum contribution levels for automatic enrolment from 8% of band earnings to 12% of total salary between 2025 and 2030, with at least 50% of this coming from employers to ensure it is affordable for savers
• Pension schemes should signpost people to appropriate product options at retirement to ensure those who have difficulty making active decisions are still able to access a suitable, good value product
• It should be easier for people to supplement their retirement income with income from borrowing against their home, and to keep working in later life, if they wish. The Single Financial Guidance Body’s guidance sessions should therefore both cover property assets and how a salary can supplement someone’s pension income
• The pensions sector should develop a set of metrics to assess whether a scheme offers good value for money, and all schemes and providers should be well-governed and have a remit to support savers into retirement

Once the retirement income targets are available the PLSA will lobby for their inclusion in member communications, such as the pensions dashboard, and by the Single Financial Guidance Body.

Comment

We supported the idea of developing national retirement income targets when the consultation was launched and continue to do so – and the support garnered by the PLSA as part of its consultation strengthens its case for delivering them.  However, it is disappointing that its report does not provide any further detail as to what they may look like and how they will be curated, although it seems clear that the approach suggested last year will be the basis on which the PLSA will go forward.

It may become easier for people to legally change gender

This seems to be the direction in which the Government is moving judging by the consultation launched, on 3 July 2018, by the Government Equalities Office on reforming the Gender Recognition Act 2004.

This Act enables trans people to receive legal recognition of their acquired gender and since it came into being 4,910 people have done so.  This is fewer than the number of trans respondents to the Government’s recent LGBT survey, who were clear that they wanted legal recognition but had not applied because they found the current process too bureaucratic, expensive and intrusive.

The consultation is accordingly concerned with how the existing process can be improved to provide a better service to trans people.

Currently, to obtain a gender recognition certificate, the individual must provide evidence that they have gender dysphoria and have lived as the acquired gender for two years.  They must also declare that they intend to live in the acquired gender until death.  One of the options being considered is to move to a “non-assessment model” under which recognition of the acquired gender may be obtained by simply completing a form.

Legal recognition of people who identify as non-binary is also a subject of the consultation.

Consultation closes on 19 October 2018.

Comment

There are still differences in the treatment of men and women in pension schemes.  We have seen little in the way of complications for schemes caused by members changing gender so far because of the small numbers who have done so.  If the reforms result in a lot more people legally transitioning then this could create additional costs for schemes.

EMIR – now national regulators are asked to look the other way

The continuing delay in implementing the EU regulation of pension scheme derivative trades looks set to descend into farce as it has become clear that the fourth proposed delay in bringing pension schemes into the scope of the 2012 European Markets Infrastructure Regulation (EMIR) is running out of time to turn into EU law.  Currently, pension schemes must submit their over the counter derivatives trades to central clearing from 17 August 2018.

The latest proposed extension (to 16 August 2021) is only possible if EMIR itself is amended, as part of an “EMIR Refit” review, which has been underway since last May (see Pensions Bulletin 2017/20), but has yet to conclude.

A statement from the European Securities and Markets Authority (ESMA) on 3 July 2018 acknowledges all this and suggests that when the current extension expires on 17 August 2018, national regulators should “not prioritise their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner”.

In the UK the Financial Conduct Authority, the relevant regulator, stated on 6 July 2018 that it “will not 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 such timing gap.  This approach is subject to any further statements that may be issued by ESMA or the FCA”.

Comment

Wonderful language from the EU that clearly cannot get its act together, but at least for UK schemes it is a case of keep calm and carry on.

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.