Pensions: The nest-eggheads

This year’s Budget introduced yet more changes to the way pensions operate. Will this squeeze out the specialist in-housers even more?

There’s a new buzz around pensions. Chancellor George Osborne’s so-called ‘pensions revolution’, outlined in the recent Budget, and developments such as auto-enrolment have blown the dust off the topic and thrust it into the spotlight. 

Feeling these changes keenly are lawyers working in the field of pensions. According to the Association of Pensions Lawyers (APL) there are about 1,200 of them in the UK. Of these, more than 90 per cent work in private practice, with the remainder employed in-house by the Government, pensions companies, insurers, regulators or by large private companies such as BP, Shell and BAE Systems. 

Osborne

The number of pensions lawyers working in-house is relatively small compared with those specialising in other parts of the legal profession. In fact, it is tiny considering that the Law Society asserts that a quarter of all the lawyers in the country are employed in-house rather than in private practice. 

The dearth of in-house pensions lawyers is largely due to the tendency of schemes to outsource legal advice. Those who have managed to secure a job in-house are largely employed by pensions insurers or regulators such as the Pension Protection Fund (PPF). 

Innovation

“It’s an area that is constantly changing,” says the PPF general counsel David Taylor. “There have been more opportunities to innovate in the past few years.

“With pensions you can never just tear up the old legislation and start again. It’s always a matter of layering something new on top of something else. It’s always changing, which makes it exciting.” 

The increased pace of the pensions world is partly thanks to a renewed interest in pensions among employers and individuals, who have a growing number of investment options available to them. 

Since the early 2000s there has been a gradual whittling away at the dominance of defined benefit pension plans (DBPP), sometimes known as final salary pension schemes. These put responsibility in the hands of employers, who are charged with the management of their employees’ pension funds. 

These traditional schemes have been increasingly replaced with defined contribution pension plans (DCPP), which vest power firmly back with the employee. 

According to professional services company Towers Watson, at the present rate of change every FTSE 100 DBPP scheme currently open to accrual will be closed by 2023. 

“We’re dealing with the death of defined benefits pensions,” notes Pensions Corporation general counsel Louise Inward, “although they still have another 20 or 30 years to run. The DBPP will see me out to my retirement.” 

There’s also the matter of auto-enrolment. The system, which swung into action in early October 2012, means that staff working for large businesses automatically have a chunk of their pay packet
diverted into a pension pot. The idea is gradually being expanded to smaller businesses and eventually will consume every worker in the country. 

The transition has gone relatively smoothly so far. The National Employment Savings Trust (NEST), a DCPP set up as part of the legislation that is designed for auto-enrolment, celebrated the registration of its millionth member last week. 

This is hardly small beer, and it is having an effect on the workload of pensions professionals. As Inward puts it: “Auto-enrolment has been a nice bonanza for pensions lawyers.” 

Reform

So, other than a general population taking an increasingly active stance, what other issues have been keeping lawyers busy? 

First, there’s debate surrounding the pensions reforms proposed in the Budget. As of April 2015 the need to buy an annuity will no longer stand, meaning those aged over 55 with a DCPP can withdraw their retirement funds without restriction. 

The concept is a bone of contention among pensions experts.

“It’s not a joined-up policy,” says Anna Rogers, a pensions partner at Mayer Brown and chair of the APL. “Pensions liberation is when people transfer benefits into a vehicle that’s not approved to cash in. In some cases it can involve fraud – for example, an intermediary may take a big chunk of commission and leave you with a tax bill. 

“On the one hand the Department for Work and Pensions is trying to stop this sort of thing happening, but at the same time the Treasury is saying that you can cash in when you’re 55. It’s a kind of government-sponsored pensions lib.” 

The cloudy nature of the legislation has driven many schemes and employers to turn to legal counsel for clarification on how to proceed. 

The potential introduction of defined ambition pension plans (DAPP) is another hot topic. This product, proposed by the Government in 2013, would give employees some certainty about how much they will retire on, but be cheaper for employers to run than traditional DBPP schemes. 

In essence it’s a middle ground between putting onus of risk on employee and employer. 

Rogers concludes: “There’s a lot of uncertainty at the moment. If the legislation is changed there will be lots of lawyers involved in setting up new schemes.”

The ICI Pension Fund: a really big deal

The ICI Pension Fund is the largest-ever bulk annuity insurance policy arranged by a UK pension scheme 

Pensions buy-ins and buy-outs occur when a regulated insurer takes over financial responsibility for meeting the cost of the pension promise made by that fund to its members. This reduces risk within the fund and improves security for members. 

It is thought these transactions will become more popular in the coming years, particularly following the announcement of the Chancellor’s pensions plans in the Budget. Analysts assert that any decline in individual annuity sales is likely to boost capital for the bulk annuities market. 

The deals are also becoming higher in value. In fact, in March, Legal & General and Prudential agreed the UK’s largest-ever corporate pensions insurance buy-in deal. The pair will insure £3.6bn worth of DBPP liabilities of defunct UK chemicals group ICI, now part of AkzoNobel. 

The deal is more than twice the size of the previous record for a bulk annuity transaction. 

Allen & Overy advised the trustee of ICI Pension Fund on the deal, while Slaughter and May took the lead role for ICI and AkzoNobel. Hogan Lovells was instructed by Prudential on that part of the transaction, while Clifford Chance was fielded by Legal & General.

In-house opportunities: few and far between

PPF general counsel David Taylor
PPF general counsel David Taylor

For pensions lawyers, there are relatively few opportunities for in-house work. However, for those seeking work outside private practice it is not a lost cause. 

While large insurers such as Aviva, Legal & General and Standard Life outsource much of their legal advice, they also employ in-house lawyers from a range of backgrounds, including a number of dedicated pensions experts. 

A handful of the largest FTSE 100 companies keep their pensions advisers in-house, while some of the biggest pensions schemes also employ in the area relatively heavily. 

The PPF, which provides compensation to members of eligible DBPPs in the case of insolvency, is a particularly hefty employer. 

The fund is home to 15 lawyers, primarily hailing from specialised pensions backgrounds.