A round-up of recent pensions law developments: February/March 2010

This e-bulletin summarises some recent developments. Please contact us if you would like more information.

Stop press

1. DWP publishes final-form section 75 debt regulations: some helpful changes relating to new easements but certain useful technical amendments have been removed

Round-up

Cases

2. Court of Appeal considers the meaning of "money purchase benefits" in Bridge Trustees v Yates

Regulatory

3. Pensions Regulator consults on revised winding-up guidance
4. IGG consults on new DC investment governance framework

PPF

5. PPF publishes its first newsletter: topical issues for schemes in PPF assessment periods

PPF Ombudsman

6. Another attempt to challenge a PPF levy invoice fails

Look ahead to a key issue for April

7. Normal minimum pension age set to increase: implications for schemes.

Team news

8. New pensions partner

Stop press

DWP publishes final-form section 75 debt regulations: some helpful changes relating to new easements but certain useful technical amendments have been removed

On 15 March the Department for Work and Pensions (DWP) published its response to its consultation on amendments to the so-called "section 75 debt" regime, alongside the final-form amending regulations themselves. The regulations will come into force on 6 April 2010, and will be relevant where employers cease to have active members in a defined benefit pension scheme from that date.

The primary focus of these regulations continues to be the easements applicable to internal restructurings. However, the draft regulations also contained many technical amendments designed to make the existing regime easier to operate in practice. Unfortunately, many of these technical amendments (including certain much-anticipated clarifications) are absent from the final regulations.

Broadly, a section 75 debt becomes due from an employer to the trustees of a defined benefit pension scheme where that employer ceases to employ any employees in active membership of that scheme. This can happen in a range of circumstances including on a sale of a subsidiary or on an internal reorganisation where the employer transfers all of its employees to another group company; it can also happen unintentionally when an employer's last employee who happens to be an active member of the scheme leaves, retires or dies. The amount of the debt owed is the cessation employer's share of the scheme's deficit calculated on the full buy-out basis.

However, it is possible for employers to avoid paying the section 75 debt immediately in full (for example, through scheme apportionment arrangements or withdrawal arrangements). In September 2009 the DWP consulted on the potential introduction of two further easements, the effect of which would be to prevent a section 75 debt from being triggered on certain corporate restructurings involving one-to-one employer transfers:

• A "general easement". The DWP proposed an eight step procedure broadly contingent on there being no weakening of the employer covenant ( the "restructuring test").



• A "de minimis easement". The DWP proposed a six step procedure which would exempt certain very small restructurings from triggering a section 75 debt.

The draft regulations also contained some technical amendments designed to clarify certain issues arising out of the 2008 amendments to the section 75 regime.

The draft regulations were reviewed in our bulletin here.

For more detail on the application of the section 75 debt regime generally, please see our microsite page here.

The new regulations: key points

Overall, the regulations contain many helpful amendments in relation to the operation of the new general and de minimis easements.

In relation to both easements:

• The requirement, applicable to both easements, for the receiving employer to have its head office in the UK has been dropped.



• However, the DWP has confirmed that the easements will only apply to one-to-one transactions; though they also point out in their response to consultation that there is no limit on the number of one-to-one transactions which can be undertaken by employers for the general easement. The DWP has removed the requirement for the assets/liabilities/employees/members to transfer on the same day in order "to provide additional flexibility for employers".



• The 12 week longstop deadline for the transfer to take place (i.e. 12 weeks from the date that the trustees have confirmed to the exiting employer that the restructuring or de minimis tests have been met) has been extended to 18 weeks (with the possibility of a further 18 week extension, subject to trustee agreement).



• There will be a cut-off date (six years from the date of the completion of the restructuring), after which no debt can arise due to the restructuring. This will provide helpful certainty on subsequent corporate disposals.



• However, a section 75 debt will be triggered if it becomes apparent that not all assets, employees, scheme members or liabilities have been transferred within six years of the restructuring or if the employers have failed to confirm that the transfer of assets, etc, has been completed within that timeframe.



• The requirement for the employers to confirm that an insolvency event has not occurred/is unlikely to occur in relation to them within 12 months (if a restructuring takes place) has been dropped. This was a "step" in relation to each easement; consequently, the general easement under the final regulations comprises seven steps and the de minimis easement now comprises five steps.



• Orphan liabilities must be included in the calculation of liabilities. This may mean that both employers will have to calculate their notional employer debts, thus adding costs to the process of using the easements.



• Minor infractions will not unravel the easement. Again, this is helpful as the process is prescriptive; this new provision means that a trivial breach will not trigger a section 75 debt.



• The trustees may require the exiting and receiving employers to meet the costs arising from the easements.

Specifically in relation to the general easement:

• Employers will be required to provide information to the trustees for the purposes of the restructuring test.



• Where incorrect or incomplete information is provided by the employers (and this information would have been material to the trustees' decision), an employment cessation event occurs.



• The formal requirement for trustees to seek professional advice has been dropped from the final version of the regulations.



• The requirement for the Regulator to be notified of the decision has been dropped. The DWP also confirms that formal applications for clearance are inappropriate.



• The restructuring test is amended to require the trustees to consider the effect of the restructuring on the employer covenant.

Specifically in relation to the de minimis easement:

• The scheme members in respect of whom defined benefits have accrued as a result of service with the exiting employer must now either be (i) no more than two members; or (ii) no more than 3% of scheme membership, whichever is the greater.



• The total annual amount of accrued pensions of the members covered by the transaction must not exceed £20,000 (to be increased by £500 each year).



• In a rolling period of three years, de minimis transactions in a scheme must involve no more than five members (or 7.5% of scheme members – whichever is the larger); and the total amount of accrued pensions in respect of these members must not exceed £50,000.

Technical amendments (not relating to either easement):

As noted above, the September 2009 draft regulations also contained some technical amendments designed to ease the operation of the section 75 debt regime in practice. However, the DWP has removed many of these amendments due to "a divergence of views amongst practitioners" and the fact that "additional work will be needed" to address all of the issues raised. This complex area "deserves closer consideration to ensure any regulations introduced are robustly tested and member protection is not adversely affected".

Comment

Whilst the absence of certain technical amendments will not necessarily change how the regime is interpreted and operated in practice, the formal clarification of certain points (for example, that a scheme apportionment arrangement can provide for a sum to be apportioned on a fixed or floating basis) would have been welcome.

Notwithstanding the many helpful amendments in relation to the operation of the two new easements, many employers will still prefer to use more flexible ways of dealing with section 75 debts (for example, scheme apportionment arrangements). However, it is worth noting that the new easements require the trustees to apply (mainly) objective tests (the restructuring and de minimis tests), whereas scheme apportionment arrangements require trustees' consent. This subtle distinction may mean that these new easements are used in practice, despite their prescriptive nature.

Round-up

Cases

Court of Appeal considers the meaning of "money purchase benefits" in Bridge Trustees v Yates

In Houldsworth v Bridge Trustees and the Department for Work and Pensions (the appeal stage of Bridge Trustees v Yates), the Court of Appeal had to consider whether certain unusual benefits should be classified as money purchase benefits on a winding-up.

The significance of this judgement extends beyond the context of schemes in winding-up and involved (amongst other things) consideration of the effect of an underlying guarantee or internal annuitisation on benefits which might otherwise be characterised as "money purchase benefits". In both cases, the Court held that these features did not prevent the benefits from being classed as money purchase.

We will issue a more detailed bulletin on this case in due course.

Regulatory

Pensions Regulator consults on revised winding-up guidance

On 5 February 2010, the Pensions Regulator published a consultation paper containing revised guidance on avoiding delays when winding-up schemes. It is substantially the same as the original 2008 guidance (reviewed in our bulletin here). In particular, the suggested 2 year longstop deadline for the completion of key activities in connection with a winding-up remains. Amongst the additions to the original guidance are a list of key activities when winding-up defined contribution schemes and a new item to the list of "unavoidable delays" (namely, when it is impractical to secure benefits with an insurance company).

However, it is worth noting that the draft guidance no longer contains any reference to the equalisation of Guaranteed Minimum Pensions (GMPs). Whilst not particularly instructive, the 2008 guidance did contain a bland statement to the effect that trustees were responsible for taking the most appropriate action for their scheme. Following the ministerial statement confirming the government's view that GMPs should be equalised regardless of whether there is a comparator (see our last bulletin here), the absence of any reference suggests that the Government and regulatory authorities have not yet settled on a preferred approach.

The consultation paper can be accessed on the Regulator's website here. Consultation closes on 5 May 2010.

IGG consults on new DC investment governance framework

The Investment Governance Group (IGG) (a Government-sponsored body chaired by the Pensions Regulator established, essentially, to promote the revised Myners principles) has published a consultation paper: Investment governance of defined contribution pension schemes. This "best practice guidance" is aimed at employers, trustees, providers and advisers in relation to work-based defined contribution arrangements (both occupational and personal).

The consultation paper consists of six high-level principles, each accompanied by best practice guidance. It also includes a "table of accountabilities" identifying the key decision-maker (either the employer or trustees) in relation to the main stages involved in the establishment and operation of defined contribution schemes.

The IGG sets out six principles intended to be "the accepted code of best practice for those responsible for investment decision-making and governance" in defined contribution schemes:

• Clear roles and responsibilities for investment decision-making and governance.



• Effective decision-making, through the adoption of a proactive approach (by, for example, building in regular assessment and reviews of the people and processes within the decision-making structure).



• Appropriate investment options. Broadly, decision-makers should offer an adequate range of investment options in light of the expected risk tolerances, investment time horizons and member requirements; and ensure that they have clear investment objectives and relevant benchmarks.



• Decision-makers should offer an appropriate default strategy.



• Decision-makers should monitor the performance of investment options and take appropriate action where necessary (for example, consider removing an option which is not performing well).



• Clear and relevant communication to members so that they can make an informed choice as to investment funds and understand their personal responsibility for their pension plan, the choices they have available and how these affect the value of their fund and retirement income.

The consultation runs until 5 May 2010.

PPF

PPF publishes its first newsletter: topical issues for schemes in PPF assessment periods

In February, the Pension Protection Fund (PPF) published its first edition of Technical News, intended to provide practical guidance on topical issues to schemes in PPF assessment periods. This accessible, practical newsletter covers:

• The implications of ITS v Hope (a High Court case reviewed in our bulletin here and which, essentially, used public policy to strike down an attempt by pension scheme trustees to buy-out benefits in a way which would secure the best deal for members but which would have increased PPF liabilities). Not surprisingly, the PPF points out that trustees need to be wary of attempts to "game" the PPF; however, it also notes that the Court accepted that there would be occasions where the existence of the PPF would be a legitimate consideration for trustees (for example, when considering whether to trigger an insolvency event).



• The equalisation of GMPs. The PPF acknowledges the ministerial statement reported in our bulletin here, which confirmed the need to equalise GMPs regardless of whether comparators can be identified. The PPF will make an announcement on this "in the near future".



• It confirms that where scheme rules provide for a terminal illness lump sum to be paid to qualifying members, these members will be entitled to the lower of the terminal illness lump sum that would be provided under the PPF compensation provisions and the benefits provided under the scheme rules.



• The PPF confirms that, in light of the increase in the minimum pension age from age 50 to age 55, all early retirement applications in relation to schemes in an assessment period should be processed before the scheme transfers to the PPF; failure to do so will extinguish the unprocessed early retirement requests.

PPF Ombudsman

Another attempt to challenge a PPF levy invoice fails

In Young, on behalf of the T-Mobile (UK) Pension Scheme, the PPF Ombudsman rejected a complaint from scheme trustees that the PPF failed to consider "relevant factors" in deciding not to review the scheme's levy invoice.

In particular, the trustees argued that the PPF failed to consider the effect of the increase in the levy scaling factor (broadly, the factor used to allocate the total levy required by the PPF in any given year across all eligible schemes) from its "indicative" level (that is, the estimate published by the PPF to give an indication of the likely amount) when compared to its final level. This, coupled with the "late" publication of the actual levy scaling factor, "potentially made it impossible for [the trustees] to predict the levy in advance and to consider what proportionate steps ought to be taken …to mitigate the amount of the estimated levy."

The PPF Board ought to have recognised that the trustees would, to some extent, have relied on the indicative scaling factor when undertaking financial planning and was, therefore, under a duty to take reasonable care to ensure that the indicative scaling factor was as accurate as possible.

In further representations, the trustees also argued that the concept of "equitable liability" meant that, if the levy invoice could not be changed, the PPF Board could, on the grounds of fairness, decide not to pursue the full amount. They also noted that if trustees could not reasonably rely on the indicative scaling factor when engaged in financial planning, then it served no useful purpose.

Whilst expressing "some sympathy" with the argument that there is no purpose in producing an indicative figure that bears little resemblance to the final figure, the PPF Ombudsman was of the view that it was "unsound" of the trustees to have relied completely on the indicative scaling factor, especially as it was published with a clear indication that the actual factor could be different.

On the issue of "equitable liability", the PPF Ombudsman drew parallels with its use in HMRC matters and noted that the concession was originally introduced to protect other creditors' claims when HMRC's claims took precedence in insolvency. This was not a relevant consideration in this case.

The outcome follows a long line of levy appeals which have been rejected by the PPF Ombudsman and once again demonstrates the difficulty of challenging or overturning a levy invoice once it has been set. It is worth noting, however, that the PPF has changed its policy for the future and published the final levy scaling factor for the levy year 2009/10 well in advance.

Look ahead to a key issue for April

Normal minimum pension age set to increase: implications for schemes

With effect from 6 April 2010, the earliest age at which any individual will be able to take their pension from a registered pension scheme (except in cases of ill-health) will be increased from age 50 to age 55. Where a pension/lump sum is paid out to a member who is below the minimum pension age, it will be an unauthorised payment and will be liable to a tax charge of 40% and potentially a scheme sanction charge of a further 15%.

However, transitional provisions apply to protect certain categories of members (broadly, members who had a right (including a prospective right) to take pension at ages 50 to 54 on 5 April 2006 – although this is subject to certain caveats which are explained more fully below).

The basic position

As noted above, the current minimum pension age of 50 will increase to age 55 with effect from 6 April this year. This will not affect the payment of ill-health pensions or where benefits are commuted on the grounds of serious ill-health; and those who have started to take an early retirement pension before that date, but who are aged between 50 and 54, will be able to continue to draw that pension in the normal way.

The other category of member unaffected by the change consists of individuals who have a "protected pension age".

Who has a protected pension age?

Broadly, those who had an unqualified right to take a pension and/or a lump sum at age 50 to 54 on 5 April 2006 will have a protected pension age if all of the following conditions are met:

• Their right to their pension/lump sum was unqualified (that is, not subject to employer or trustee consent).



• According to the HMRC Manual, it is irrelevant if, for example, trustees have always exercised their discretion so as to grant a pension – the right is not unqualified and the member would not have a protected pension age.



• "Unqualified" does not mean the same as "unconditional". HMRC confirm that, where a member has to meet certain conditions in order to receive the early pension at ages 50 to 54, that early pension will be an authorised payment if the member meets those conditions (for example, redundancy).



• It is possible for certain categories of member to have an unqualified right, but for others to have a qualified right (with the latter, therefore, not having a protected pension age).



• The right must have been set out in the scheme's governing documentation on 10 December 2003 (the date on which the proposal to increase the minimum pension age was announced).



• The member must have had the right under the scheme on 10 December 2003 or acquired the right under the scheme's provisions as they were on 10 December 2003 on joining the scheme after that date.



• All benefits must crystallise at the same time.

This transitional protection will survive a block transfer (broadly, where two or more members of one pension scheme transfer their benefits to the same receiving scheme at the same time and neither member was a member of the receiving scheme for more than 12 months before the transfer). The member will lose his or her right to a protected pension age on an individual transfer of benefits.

In very broad terms, where a member's entitlement to a protected pension age arises from membership of a scheme before 6 April 2006, protection will be lost where the member has a protected pension age of between age 50 and 54 and takes his or her benefits, but continues to be employed by one of the scheme's sponsoring employers (or by an employer connected to them). This employment restriction only applies where the entitlement arises after 5 April 2010; it does not apply where the entitlement to benefits was already in existence on that date.

A couple of practical issues:

• What if a member aged 50 to 54 already in receipt of an early retirement pension wishes to crystallise further benefits? The member must have reached the new minimum pension age of 55 for any further benefits to be authorised payments.



• Impact of the Easter holidays. HMRC notes that members who turn 50 on any of the days from 2 to 5 April may be unable to trigger a benefit crystallisation event because of business restrictions over the Easter bank holiday period. HMRC will treat the benefit crystallisation event in relation to these members as occurring on their 50th birthday.

What does this mean in practice for employers and trustees?

Many employers and trustees will have informed members of the change already, but they may also wish to consider undertaking a communications exercise (even if it is only a reminder) with members who are at present aged between 50 and 55 and who stand to lose their right to take an immediate early retirement pension on 6 April.

Employers and trustees may also wish to turn their attention now to the identification of protected members, so that future pensions administration runs smoothly.

Pension scheme rules and booklets may have to be amended to reflect the new minimum pension age.

Team news

New pensions partner

Daniel Schaffer, formerly a partner at Freshfields Bruckhaus Deringer and one of the City's leading pension lawyers, has joined the Herbert Smith pensions team with effect from 8 March. See our website here for more details.