Stephenson Harwood partner comments on occupational pension scheme developments

Fraser Sparks, pensions partner at Stephenson Harwood, has commented on some of the recent key legal and regulatory developments that have occurred in relation to occupational pension schemes.

On the latest decision in the long-running saga of the BBC pension scheme and the BBC’s efforts to change the benefit structure, Sparks said: ‘The relevant complaint was brought by Mr Bradbury who put forward various arguments as to why the BBC could not impose a cap on his pensionable salary under the final salary benefit structure. One of his arguments was that the way in which the cap was imposed breached the BBC’s duty of trust and confidence towards its staff. This matter was not fully argued in the High Court and so was remitted back to the Pensions Ombudsman for a determination.

‘In deciding that the BBC had not breached this duty, the Ombudsman noted that: an employer may take its own interests into account when making such decisions in relation to its pension arrangements; an employer’s conduct would have to have a pretty good chance of destroying the relationship between employer and employee in order to breach the duty; the BBC’s actions had to be seen in the context of the substantial scheme deficit and the BBC’s financial position; the BBC had offered a career average pension scheme as an alternative to the cap on pensionable salaries; employees were not improperly coerced into making a decision; capping pensionable salary was not irrational or perverse, nor a proposal that no reasonable employer would have made in this position; and employees were not entitled to a salary increase and offering increasing on terms they did not like was not sufficiently destructive conduct to amount to a breach.’

According to Sparks, an employer’s duty of trust and confidence towards its employees has become a popular basis on which to challenge changes to pension arrangements, particularly those changes introduced other than by using the scheme’s amendment power. ‘We are now waiting for the much anticipated High Court decision in relation to the closure of the IBM pension scheme, which should give us a much clearer idea of the extent to which such argument might, or might not, succeed.’

On the news that the Pensions Ombudsman has upheld the trustee requirement for discharge form, Sparks said: ‘The trustees of a self-invested personal pension [SIPP] arrangement had required the beneficiary of a discretionary death benefit to sign a discharge form before they would transfer the money. The beneficiary did not wish to sign the discharge because of a separate complaint that was being pursued and complained that it was not reasonable for the trustees to insist on such a form to be signed before paying out the benefit that had become due.

‘In agreeing with the trustees’ approach, the Pensions Ombudsman commented that it was reasonable for trustees to seek to protect themselves against future complaints. The Ombudsman also noted that the trustees had clearly explained to the beneficiary their reasons for requiring the discharge form to be signed and there was no logical reason why the beneficiary had refused to sign the form.’

The High Court has backed the Pension Protection Fund’s (PPF’s) approach to levy calculation. Sparks said: ‘The High Court has upheld an appeal by the PPF against a determination of the PPF Ombudsman regarding the calculation of PPF levies.

‘The original complaint was brought by a company against the PPF levy on the grounds that its Luxembourg subsidiary had not been given an accurate failure score by D&B. There did not seem to be any doubt that the failure score was not accurate but the question was whether the onus is on companies to furnish D&B with up-to-date financial information or whether it is for D&B to find all publicly available financial information about a company and to take that information into account when providing a failure score.

‘The High Court, reversing the PPF Ombudsman’s determination, concluding that the company should have taken proactive steps to ensure that D&B had all the relevant information on which to base its failure score.

‘It is, therefore, important that sponsors of defined-benefit schemes check their failure scores well in advance of the relevant levy deadline and engage with D&B to ensure that the failure score has been assessed using the most up-to-date information available.’

On pensions legislation for same-sex marriages, Sparks commented: ‘Further regulations have been published in connection with the introduction of same-sex marriages from March 2014. In particular, in relation to pensions, a new provision has been introduced to allow trustees and employers to amend their schemes by resolution so as to insert provisions regarding the payment of survivors’ benefits to same-sex spouses. This route avoids any section 67 issues as well as any restrictions contained within a scheme’s amendment power.

‘The main issue regarding same-sex marriages in relation to occupational pension schemes is to decide whether benefits for same-sex spouses should be restricted in the manner permitted under the equality legislation. Sponsors should consider what approach has been taken previously in relation to civil partners and assess whether providing “full” spouses’ benefits to both civil partners and same-sex spouses would have any meaningful impact on the scheme’s funding.’

The Pensions Regulator has added new questions to this year’s scheme return. The key points to note, said Sparks, are hybrid schemes, asset-backed contribution arrangements and incentive exercises.

He added that trustees of hybrid schemes will be required to answer new questions about the status and structure of the scheme, including the nature of any benefit underpin. They will also be required to specify the number of members with defined-contribution (DC) benefits, including the number of members aged between 50 and 59 or aged 60 and over. Sparks continued: ‘Similar information is required in relation to DC benefits derived from members’ voluntary contributions. Trustees must also state how many members left the AVC or DC section of the scheme in the 12-month period up to the latest scheme year-end date, whether they retired, transferred their benefits to another scheme or left the scheme for some other reason, and the amount of money leaving the scheme.

‘Where an asset-based contribution arrangement has been put in place, trustees will be required to provide details of how the scheme’s interest has been funded, the term of the income stream and the net present value of the income stream in the scheme accounts.

‘Trustees will be required to disclose whether the scheme completed an incentive exercise or made an invitation to members to transfer or modify their scheme benefits in the 12-month period ending with the latest scheme year-end date. If so, trustees must state what type of incentive exercise was involved, the number of members offered the incentive and the number of members who accepted.’

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