15 November 2018
Supreme Court says no to RPI switch
On 7 November, in a concise and unanimous judgment, the Supreme Court dismissed an appeal by the charity Barnardo’s regarding its proposal to move to the CPI measure of inflation from RPI (see Pensions Bulletin 2016/45).
The pension scheme rules defined RPI as including “… any replacement adopted by the Trustees without prejudicing [Inland Revenue] Approval”. The case turned on whether, as a matter of construction, this aspect of the definition meant:
- The RPI or any index that replaces the RPI and is adopted by the trustees; or
- The RPI or any index that is adopted by the trustees as a replacement for the RPI
The lower courts had both held that the former was the correct interpretation and the Supreme Court has now unanimously upheld these decisions, setting out eight reasons for reaching this view.
The case is confirmation, from the highest authority in such matters, that whether it is legally possible to switch from RPI to CPI or not depends almost exclusively on the wording of the scheme governing documents. Disputes about the meaning of particular scheme rule formulations will therefore be adjudicated on the basis of a textual analysis.
Accordingly, this case does not have wide general application except that schemes with similar wording about a replacement index may be in the same position. The judgment also included the statement that “…the court must construe the scheme without any preconceptions as to whether a construction should favour the sponsoring employer or the members…” which makes it clear that it is the actual words in the documents that are paramount.
Part-time workers – European Court rules past service protected by later change in the law
A long running legal battle seems to be coming to a conclusion with the judgment on 7 November of the Court of Justice of the European Union in the case of Mr O’Brien.
Mr O’Brien was a part-time judge from 1978 to 2005 when he retired aged 65. As he was a Crown Court recorder during this time he was paid a daily fee rather than a salary. On retiring he requested a retirement pension but was told that he was not entitled to one. He took his case all the way to the CJEU where, in March 2012, it was ruled that, as a consequence of the EU Part-Time Workers Directive (which the UK had implemented on 7 April 2000), he had to be regarded as a part-time worker and as no objective justification had been shown for discriminating against him vis-à-vis full-time judges, he was entitled to a retirement pension on terms equivalent to a circuit judge.
There you would have thought it would have ended, but Mr O’Brien then found he had to argue that his judicial service before 7 April 2000 should be pensionable. This went all the way to the Supreme Court (linked with the important Walker case about same sex survivors’ pensions (see our 2017 News Alert), where it was decided that there was enough uncertainty for the issue to be referred to the CJEU.
The CJEU has now ruled that Mr O’Brien should have his pre 7 April 2000 service pensioned, drawing a distinction between situations such as Barber v GRE, where the CJEU had acknowledged the possibility of needing to limit the temporal effects of its judgment and O’Brien, where the UK Government had not made such a request. In doing so, the CJEU also concluded that a worker’s pension rights become fixed when they can take their benefits, rather than (as the UK Government had argued) at the end of each period of pensionable service.
This judgment appears to confirm an important backdating principle which could have an impact in other areas. Apart from being good news for Mr O’Brien, the judgment also backs up the view of the Supreme Court in the separate Walker case (which was to do with sexual orientation) that pension rights accrued (or previously thought not to have accrued) before a change in EU driven law are subject to the protections of the new law.
Transparency of investment costs moves into implementation phase
Following on from the recommendation of the Institutional Disclosure Working Group to the Financial Conduct Authority in June 2018, the Cost Transparency Initiative was launched on 7 November to take forward the implementation of new templates to standardise costs and charges information for institutional investors. The working group’s long awaited recommendations report (see Pensions Bulletin 2018/28) was also published at the same time.
The initiative is a partnership between the Pensions and Lifetime Savings Association, the Investment Association, and the Local Government Pension Scheme Advisory Board, with a broadened scope compared to each individual organisation to cover the full market, including alternatives. Its aims are to provide a clear voice for the interests of asset owners, and run a pilot phase to test the new cost transparency templates and supporting technical and communications materials until January 2019.
After this they will roll out the templates to the asset management and pensions industries to encourage fully transparent and standardised cost and charge information for institutional investors.
This transparency initiative remains a voluntary response to the FCA’s 2017 Asset Management Market Study and as such it is now most important that it achieves buy-in from both the asset managers who will need to supply the data and institutional investors, such as pension schemes, who are hoping to be able to use this cost information to make better value assessments of the services they receive.
DB transfer fever begins to subside, particularly among younger members
LCP continues to monitor the pattern of transfer quotations and payments for the DB schemes we administer, and the practices adopted by trustees, to see how things have been changing following the introduction of Freedom and Choice in April 2015.
The latest quarterly analysis for Q3 2018 (available on our website) shows that quotation rates have dipped since the previous quarter, and still further below the record level of activity in 2017. The key findings from our latest analysis include:
- The rate of quotation requests fell to 1.6% of deferred members in Q3 2018 compared to 1.7% in Q2 2018 and 1.9% in Q3 2017 – though this is still nearly three times the level in 2014 before the introduction of Freedom and Choice
- The number of payments in respect of quotations given in Q1 2018 (the latest quarter for which all transfers have now been paid out) was 46 payments per 10,000 members. This is the lowest payment rate since Q3 2016 and is significantly lower than the all-time high of 66 payments per 10,000 members in Q3 2017
- Around a quarter of the schemes included in our analysis include an estimated transfer value in the retirement packs provided to members. 16% of members aged over 55 in these schemes requested transfer values between 1 April 2017 and 31 March 2018, compared with 12% of members in other schemes. Furthermore, 44% of these quotes were paid, compared with 33% in other schemes
The recent High Court ruling relating to the Lloyds Banking Group GMP equalisation case has significant implications for most UK defined benefit schemes on many fronts, including transfer value payments. The update covers some immediate considerations for trustees.
Finance Bill published
On 7 November the Finance Bill that comes after the Budget was published. It had its second reading in the House of Commons on 12 November. The Bill follows that issued for consultation in July (see Pensions Bulletin 2018/28) – with additions and subtractions from the then draft Bill.
In the Bill laid before Parliament the only item of relevance to pension schemes is a short clause relating to 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. From 6 April 2019 the named beneficiary can be any individual or registered charity. HMRC has published a policy paper giving a little more background about this measure.
Missing from the Bill are the significant changes to HMRC’s penalty system for failure to make certain returns, deliberately withholding information and failure to pay certain taxes that were proposed in July.
The Bill also swaps over the income tax personal allowance uprating linkage from the national minimum wage (that had been intended to operate once the allowance reached £12,500 pa) to the Consumer Prices Index.
HMRC consults on overseas transfer charge repayment legislation
HMRC is consulting on two sets of regulations that are concerned with the repayment of the 25% overseas transfer charge, which itself arises when transfers are made from UK occupational pension schemes to certain overseas schemes, other than in limited circumstances.
- The first set introduces provisions for the repayment of the charge including setting out the conditions for making a claim, the procedure for processing a claim, the appeal provisions and specifying to whom the repayment must be made
- The second makes changes to existing regulations in order to align them with the new requirements in the first set
Consultation closes on 7 December 2018 and the intention is that the regulations will come into force on 24 April 2019, after which HMRC promises to update the Pensions Tax Manual with guidance on the detailed process for claiming and reporting repayments of this charge.
The overseas transfer charge was brought in with the March 2017 Budget in order to stem the tax losses to the Exchequer caused by the growing popularity of transferring to “QROPS” outside the UK. The charge appears to have largely succeeded in this aim with the volume of transfers to QROPS materially declining. In certain cases this charge needs to be repaid, such as where the charge was paid in error, or the individual’s circumstances changed so the original transfer is now exempt. Although HMRC has had processes in place for some while to deliver on this, they have only been set out in guidance. These regulations now formalise them.
More schemes leave the DC master trust market
In its latest update on the state of play in the DC master trust market, the Pensions Regulator says that as at the end of October 33 master trusts are exiting and 3 master trusts have left the market (up from a combined 30 at the end of September – see Pensions Bulletin 2018/39). Of the remaining 54 master trusts identified, the Regulator says that 53 must either apply for authorisation or exit the market shortly, and one application for authorisation has been received. As with the previous update, the Regulator anticipates more schemes will choose to leave the market before the authorisation window closes on 31 March 2019.
Five months to go and we are seeing only one application – but this is perhaps unsurprising given the Regulator has recently advised potential master trusts to take time to get their applications correct. Once an application is received the Regulator will have six months to approve the application or otherwise.
As this process unfolds the Regulator is coming under pressure to name those schemes that are exiting. So far, the Regulator is resisting such pressure, arguing that it is a matter for schemes to communicate to their customers, but as time marches on surely who is leaving will need to become public knowledge?
Pensions Regulator refreshes its website
As promised when it had its re-launch in September (see Pensions Bulletin 2018/37), the Pensions Regulator has now announced a modernisation of its website. The new platform is intended to deliver a better user experience as well as showcasing its new branding.
As material has almost certainly been moved around, those who link into the Regulator’s website to source key documents will have to check to see whether their “favourites” continue to work.
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.