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PENSIONS: An Introduction

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Chambers UK Guide 2020

Pensions Legal Overview 

With much parliamentary time diverted elsewhere over the last year, it has been an uncharacteristically tranquil year on the pensions legislation front. Whilst a new Pensions Bill is set to arm the Pensions Regulator (TPR) with hefty new powers, there is no firm date for its publication at the time of writing.

But there is no such thing as a dull year in pensions, with significant case and regulatory developments stepping in to fill the relative legislative void.

GMPs were always on my mind… 

From 6 April 1978, individuals could accrue an entitlement to an earnings-related addition to their basic state pension. An employer could contract its scheme out of this element of state pension (with both employers and employees paying lower National Insurance contributions) if it was designed to provide a pension at least as good as a statutory minimum, known as “the guaranteed minimum pension” (GMP). The method for calculating GMPs is set out in legislation and results in unequal treatment between men and women for a number of reasons, not least of which is that GMPs are payable from different ages (65 for men, 60 for women).

In 1990, a European court decision in the Barber case established that pension schemes are required to treat men and women equally. However, as GMPs are a creature of statute designed to integrate with a former element of state pension, it was unclear whether Barber applied. All that changed in October 2018 when the High Court confirmed in the Lloyds case that pension benefits do need to be equalised for the effect of GMPs. (The duty to equalise for the effect of GMPs only applies in respect of GMPs accrued on and from 17 May 1990 up to and including 5 April 1997, i.e. from the date of the Barber decision to the day before GMPs were abolished).

While the Lloyds case addressed several key issues, including possible methods for achieving equalisation and limitations on claiming arrears of benefit, it left some unanswered. For example, the judge stopped short of reaching any conclusions about the position of pensions which have previously been transferred out of a scheme, and whether there are any circumstances in which a “de minimis” argument can be deployed (namely, where the cost of equalising a GMP outstrips the benefit to the individual). A further hearing is on the cards (although perhaps not until 2020) which, at the very least, is expected to address the transfer issue.

In April 2019, the government published guidance on using a mechanism already built into legislation to help trustees and employers wrestling with GMP equalisation. This facility (known as “GMP conversion”) allows GMPs to be changed into normal scheme benefits on an actuarially equivalent basis. For trustees and employers interested in following the GMP conversion route, the Pensions Bill is expected to introduce changes to make the current process easier.

Autumn 2019 will hopefully bring further developments in cracking the GMP equalisation conundrum, with a cross-industry working group (spearheaded by the Pensions Administration Standards Association) set to issue practical guidance on a wide range of issues, including dealing with data gaps and impacted transactions. But, perhaps most significantly of all, HM Revenue & Customs is expected to divulge its thinking on the pensions tax implications of adjusting benefits to achieve equalisation.

TPR’s boots were made for walking 

2018’s Pensions White Paper put forward a number of proposals for bolstering TPR’s powers, as well as improving the protection of members’ benefits in defined benefit (DB) schemes more generally. Following the government’s response to a specific consultation on TPR’s powers published earlier in 2019, when it finally lands, the Pensions Bill is scheduled to pave the way for the following:

• Fresh additions to the “notifiable events regime”, the early warning system designed to alert TPR of possible calls on the Pension Protection Fund. For example, TPR will need to be notified of the sale of a “material proportion” of the business or assets of a sponsoring employer which has funding responsibility for at least 20% of the scheme’s liabilities. The granting of security on a debt to give it priority over a pension scheme will likewise need to be notified.

• Despite concerns that it could delay transactions and deter buyers, a new requirement for sponsoring employers to produce a “declaration of intent” (to be addressed to the scheme’s trustees and shared with TPR) prior to certain business transactions. Transactions in the frame here include the sale of a controlling interest in a sponsoring employer.

• Additional powers to sanction, including:

• A civil penalty of up to £1 million for more serious breaches which have resulted in actual harm to the pension scheme, or have the potential to do so if left unchecked.

• A new criminal offence of “wilful or reckless behaviour” in relation to a DB pension scheme, punishable by a maximum penalty of up to seven years’ imprisonment and/or an unlimited fine.

Potential targets for the above penalties include sponsoring employers, any associated or connected persons and, in some circumstances, the trustees themselves.

Stand by your governance 

Moves to improve standards of pension scheme governance and transparency have come from different sources over the last few years, including the government (on costs and charges in defined contribution schemes) and various TPR campaigns and consultations. TPR’s latest offering is an industry consultation on the “Future of trusteeship and governance”, posing several questions including whether there should be a legal requirement for trustees to meet minimum standards of knowledge, understanding and ongoing learning.

Looking further afield (and despite Brexit), the government is committed to implementing the second pensions directive (known as “IORP II”), the detailed requirements of which will be set out in a TPR code of practice. As well as building on existing legislative obligations, IORP II will impose new requirements on occupational pension scheme trustees to:

• establish and operate an effective system of governance

• have written policies in relation to outsourcing activities

• put in place remuneration policies, and

• carry out an “own-risk assessment”, under which schemes will need to identify long-term and short-term risks that could affect the scheme’s ability to meet its obligations (including conflicts, funding, investment and operational risks).

Walk the GDPR line 

May 2018 marked the dawn of a new era in the protection of personal data, with the General Data Protection Regulation (GDPR) raising the stakes for all UK businesses. For trustees of occupational pension schemes, processing personal data in respect of members and beneficiaries is essential to the effective running of that scheme, enabling the right benefits to be paid to the right people at the right time.

But compliance with the GDPR and guidance issued by the Information Commissioner’s Office is an ongoing process, not a one-off event. Data protection therefore needs to remain high on pension scheme agendas, with trustees regularly taking stock in light of their own experiences, and as best practice and security measures continue to develop and improve.