Pension Protection Fund director of legal services David Taylor is braced for a slump-fuelled boom in work for his organisation
Pension Protection Fund
Position: Director of legal services
Industry: Public sector
Reporting to: Chief executive Alan Rubenstein
Assets under management: £7bn
Global legal capability: 10 lawyers, one qualified secondee, three paralegals
Law firms: Addleshaw Goddard, Bond Pearce, Clyde & Co, Herbert Smith, Hogan Lovells, SNR Denton, Stephenson Harwood
Annual legal spend: Nearly £2m in 2010-11, but estimated to be up to £3m going forward
With public sector workers striking over changes to their final salary schemes and large employers across the UK gearing up for auto-enrolment, pensions are right at the top of the political and business agendas.
For Pension Protection Fund (PPF) director of legal services David Taylor, though, the economic situation is of far greater concern.
With the PPF acting as a safety net for the pensioners of bust employers, a looming recession and a dismal business climate suggest its services are likely to be in high demand. This means the legal team will be called on to deal with what Taylor terms “the hardcore pensions bit”.
“When an employer goes bust it triggers the PPF assessment period, which is like a wind-up,” Taylor explains. “It’s effectively a due diligence period where everything in the scheme gets checked and investigated. Data’s critical, but the sort of company that’s got into a mess and its scheme has ended up in the PPF often hasn’t got well-kept records.”
Aside from the relatively obvious task of tracking down scheme members, Taylor and his nine-lawyer team have to look at issues such as whether the scheme is involved in any litigation and whether it equalised benefits between male and female members – something all schemes were required to do in the 1990s. Then the scheme can be valued and a decision taken on whether it should enter the PPF.
“The question that has to be asked is, with the assets the scheme has, could it provide the level of compensation the PPF could?” says Taylor. “If the answer is yes we’ll try to buy out in the market; if it’s no we’ll transfer it to the PPF. One of the things we’ve been focusing on is how to bring schemes through in a short timescale. It’s about segmenting the schemes that come in – if it’s got practically no money we know it will come to the PPF; if the employer is bust but the scheme’s well-funded we know it should be okay. If the answer is blindingly obvious we can say that, rather than go through a long process.”
So far, so simple; but with successive governments tinkering with pensions legislation and a raft of case law leading to often contradictory interpretations of what schemes are expected to do, the reality is rarely that straightforward.
The George and Harding pension scheme is a case in point. In December 2010 the PPF refused to take over the scheme over a technicality relating to the status of its members’ employer. George and Harding had been taken over by joinery company Zejwa in 2002, and while Zejwa subsequently went bust, the fact that it was classed as the scheme’s principal rather than statutory employer meant the PPF was legally unable to step in.
Smoothing the way
“There was and still will be a loophole,” explains Taylor. “In order to come into the PPF the statutory employer has to go bust – the scheme has to satisfy the statutory employer test. Schemes over the years have knowingly or unknowingly done things to manage liabilities by moving things around, but they need to be aware of what that means for statutory employers.”
George and Harding pensioners will not be left high and dry, as the Department for Work and Pensions (DWP) has indicated that it will extend its Financial Assistance Scheme to let the George and Harding fund in, but that means the taxpayer will foot the bill rather than the pensions industry that funds the PPF through an annual levy.
Legislation affects everything the PPF does, and while the fund is not a government body, Taylor works closely with the DWP and the Pensions Regulator in a bid to make legal changes as manageable as possible.
With the DWP looking to introduce retrospective legislation in the wake of the Supreme Court’s judgment in Bridge Trustees Ltd v Yates (2011) (a Government-funded test case designed to clarify issues relating to certain benefits), Taylor is keen that the new rules do not muddy the water further.
“We’re working closely with the DWP to get legislative changes done in a way that doesn’t send schemes into a state of confusion,” he says.
In the pensions world confusion invariably leads to litigation, and this is something Taylor is keen to avoid when the PPF changes the way it calculates its levy in April.
Currently every UK defined benefit and hybrid scheme pays a levy based on its level of underfunding and the probability of its employer going insolvent. Beginning this year, the way a scheme’s assets are invested will also be taken into account.
“When levies go out people argue and we get involved in the appeals process,” says Taylor. “We have experience of most of the ways that can play out and we’ve pursued schemes through the courts. There’s a spectrum of validity to what people want to argue about, but it’s not a good use of scheme money if they don’t have a case.”
With the money raised via the levy invested to fund the PPF’s work, it would take a brave scheme to go down that route in the current economic climate.
senior policy adviser,
National Association of Pension Funds
CPI – it’s surprising how much angst just three letters can cause, but if there is one thing guaranteed to get a room full of pension scheme managers hot under the collar, it’s the mention of the Government’s decision to switch the rules on pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI).
The concept was simple enough: bring defined benefit (DB) pension schemes into line with a switch already delivered in the public sector and give them some breathing space by easing their funding positions. The practical ramifications, however, make the switch one of the biggest regulatory challenges workplace pension schemes face this year.
The problem is that many DB schemes cannot switch automatically from RPI to CPI, because their rules state that
they must use RPI for pension increases. Many have several sections with rules saying different things about inflation.
The CPI issue is just one of many regulatory challenges facing workplace pensions this year.
With between five million and nine million people due to start saving in workplace pensions as auto-enrolment is rolled out from October, the Pensions Regulator is running a review of whether our defined contribution pension systems are fit for purpose.
Then there is a host of major EU issues: a review of the main pensions directive; new rules on derivatives trading; and the EC’s latest proposal – the Financial Transactions Tax. All carry threats for UK pension schemes.
The pensions landscape we regulate is evolving fast. This year the first large employers begin enrolling staff automatically into workplace pensions. Eventually an estimated 1.3 million employers will be affected – most of them small and micro businesses with limited experience of providing pensions.
The goal of the Pensions Regulator is to establish a pro-compliance culture whereby businesses understand that the changes in pensions law will affect them. They will know where to find the support and information they need to comply, but they will also know that we will act against non-compliance.
The vast majority of members will be enrolled automatically into defined contribution (DC) schemes, where members bear most of the risks. We’re prioritising work with the pensions sector to ensure that all schemes – including those used for automatic enrolment – are well-run and capable of delivering good outcomes for savers.
Despite the trend towards DC schemes, the majority of pension savings are in the UK’s 6,500 defined benefit (DB) schemes and we will be talking in more detail next year about our approach to DB regulation.
We are under no illusions about challenges to employers and schemes posed by the eurozone crisis and global volatility. Nevertheless, we will not shy away from bringing regulatory proceedings where appropriate to ensure that members’ interests are protected and the risk of calls on the PPF is reduced.