Pensions Snapshot - August 2018

This edition of snapshot looks at the latest legal developments in pensions.

This edition of snapshot looks at the latest legal developments in pensions. The topics covered in this edition are:

 

Sting, the Police and the Pensions Ombudsman

In a ground-breaking determination last month, the Pensions Ombudsman (PO) directed the Northumbria Police Authority (the Authority) to reinstate the benefits of "Mr N", a former member of the Police Pension Scheme (PPS).

Mr N was the victim of a pension scam and stood to lose all of the £112,000 that had, on his instruction, been transferred from the PPS. However, his complaint was against the PPS rather than the scammers. Mr N sought the reinstatement of his benefits under the PPS on the basis that he would not have gone ahead with the transfer had the PPS not committed certain failures, including a failure to:

  • conduct adequate checks on the receiving scheme prior to the transfer; and
  • provide him with a sufficient warning about pension scams (in particular, the Pension Regulator's scorpion leaflet).

The Authority contested the complaint and argued that:

  • Mr N would have gone ahead with the transfer even if it had provided him with the scorpion leaflet;
  • it had not engaged with the Mr N during the transfer process because he had instructed and authorised the Authority to deal with his IFA;
  • it did not have a duty to protect members from their own bad decisions;
  • it considered that it had the benefit of a statutory discharge of further liability to Mr N once his entitlements under the PPS had transferred.

The PO disagreed with the Authority. Among the reasons given for the PO's decision, the following are notable:

  • The transfer was requested some nine months after the Pensions Regulator's pension liberation fraud guidance was issued. In the PO's opinion, the February 2013 guidance was a watershed moment, after which the standard of due diligence to be expected of pension scheme trustees, managers and administrators, when processing transfer requests, escalated considerably.
  • Even though a member should be free to make what many may consider to be a bad decision, the PO did not consider that this meant there was no responsibility on the transferring scheme's trustees or managers. In the PO's view there were "red flag" factors that should have prompted suspicion about the receiving scheme and triggered the Authority to make further enquiries of Mr N and the receiving scheme.
  • The Authority could not rely on the statutory discharge because it had failed to comply with the statutory requirement to do "what is needed to carry out what the member requires" in relation to the transfer. The PO determined that:

- "what is needed" included taking into account the law and regulatory guidance; and

-  "what the member requires" could only be established by ensuring that the appropriate due diligence was carried out, any warnings or concerns identified and brought to the attention of the member and that the member then went ahead with the transfer on a fully-informed basis.

The PO concluded that the Authority had applied an inadequate due diligence process and warning system and that this amounted to maladministration. Consequently, it was necessary to put the member in the position he would have been in had the maladministration not occurred – which, in this case, meant reinstating his benefits in the PPS at the Authority's expense. The PO also directed the Authority to pay Mr N £1000 for significant distress and inconvenience.

Comment:  This is the first determination we have seen where the PO has directed a transferring scheme to reinstate a member's benefits as a result of a receiving scheme being a scam arrangement. Various elements of the determination will be somewhat alarming to pension scheme trustees.

In particular, the PO's interpretation of the statutory discharge for transferring trustees suggests that a substantial number of checks are needed before the discharge can apply. This is a very broad interpretation of the statutory discharge wording, which we consider could be open to challenge.

In cases of pension fraud, it may be impossible for a victim to take action against the scammers as they will likely have fled with the assets. For a distressed member seeking redress, the only identifiable target with means is often the transferring scheme. Notwithstanding the understandable distress of Mr N who lost his pension to a scam, the irony of this determination is that it will likely make transferring schemes a softer target for claims arising from the damage caused by pension fraudsters snaring unwitting individuals in their scams.

Trustees and managers of pension schemes should reconsider their transfer processes to ensure all reasonable legal and practical steps are taken to minimise the risk of:

  • transfers being made to a scam arrangement; and
  • former members successfully claiming reinstatement of their benefits at the cost of the transferring scheme.

 

DWP consults on ESG and stewardship changes to pension scheme investment and disclosure regulations

Further to the 2017 Law Commission report on "Pension funds and social investment", the DWP published a consultation on clarifying and strengthening pension scheme trustees’ investment duties. The consultation sought views on proposed changes to existing investment and disclosure of information regulations which are designed to "…help dispel trustee confusion, and give institutional investors renewed confidence, if they so choose, to begin or increase the allocation of capital to investment opportunities such as unlisted firms, green finance and social impact investment…".

The proposed changes could have far-reaching implications for trustees' investment decisions including:

  • Replacing the existing legislative requirement that a scheme's statement of investment principles (SIP) must take into account social, environmental or ethical considerations in the selection, retention and realisation of scheme investments. Instead, the SIP would need to set out how the trustees take account of "financially material considerations", which will include those arising from "…Environmental, Social and Governance (ESG) considerations, including climate change…".
  • The SIP would need to state the trustees' policy on stewardship of investments in relation to things like monitoring, engagement and voting.
  • Trustees would need to prepare a statement which sets out the extent to which they will take account of views held by members in relation to matters covered by the SIP when preparing or updating the SIP. The views would be ones which, in the trustees' opinion, members hold on both financial and non-financial matters, and that may be relevant to the trustees’ investment and stewardship decisions.
  • Trustees would need to prepare an annual implementation report which sets out how they have acted on the principles set out in the SIP and on the statement of members' views.
  • Subject to a few exceptions, trustees of schemes which provide money purchase benefits and which are required to have a SIP would be required to publish their SIP, statement of members' views and annual implementation report online. These documents would also need to be referred to in members' annual benefit statements.

The consultation closed on 16 July 2018 and the new requirements concerning the contents of the SIP (and the requirement to publish it online) are expected to come into effect on 1st October 2019. The obligation to prepare a statement of members' views (and to publish it online) is intended to apply when the SIP is next updated after 1 October 2019. The requirement to publish an annual implementation report is not expected to come into effect until 1 October 2020.

 

BA judgment creates uncertainty over extent of trustee powers

British Airways' (BA) has successfully challenged a discretionary pension increase granted by the trustees of the Airways Pension Scheme (APS). However, the challenge may have created uncertainty on the scope of seemingly explicit trustee powers and opened the door to further challenges of trustee decision-making by sponsoring employers.

The trustees of the APS had the sole power to amend the scheme. They used that power to give themselves the ability to review and, at their discretion, pay increases to member's pensions. BA challenged the introduction of that power. The Court of Appeal upheld BA's challenge and held that the trustees had, in essence, added the role of 'paymaster' to their existing responsibilities as managers of the scheme. The trustees' use of the amendment power to allow pensions to be increased was an "improper purpose", going beyond the purpose for which the amendment power was intended to be used.

Comment:  The Court of Appeal's decision seems to stem from a view that benefit design is a matter for the employer and not the trustees. However, it could equally be argued that, where trustees exercise a power which results in an increase to pensions, they are not acting as a 'paymaster' or fundamentally changing benefit design. This is because pension increases are not actually a new pension benefit - they are simply protecting existing pension benefits against inflation. If that logic holds then trustees who exercise a discretion to apply increases to pensions (or who incorporate a rule in the scheme they manage allowing them to apply pension increases) are, arguably, not altering the benefit design.

Even if adding a power to allow trustees to choose pension increase levels is acting as a 'paymaster', it may still be considered to be within the scope of a trustee's powers. Although the BA case is unusual in that the APS gave the trustees a unilateral power to amend, many schemes give trustees sole discretion when it comes to exercising other of their powers - including in relation to pension increases or in the selection of the appropriate index to use.

 

Dr G – Pensions Ombudsman directs that reasons must be given for exercise of a discretion

In this case the administrator of a SIPP had been directed to reconsider a decision it had made in relation to the death benefit to be awarded to Dr G, who was the partner of a deceased member. The original decision had found that Dr G was not entitled to a pension from the scheme albeit that she satisfied the test for financial interdependency and was also eligible for a lump sum benefit as an 'eligible recipient' under the scheme rules.

On reconsidering the decision, the scheme administrator again found that all death benefits should be paid to the deceased's estate and not to Dr G. The Pensions Ombudsman held that, while the administrator did not need to prepare a lengthy written document detailing the rationale for its decision, it should set out the factors that had a material impact on its decision and also the factors that were discounted. The SIPP administrator in this case had not done this and there was no evidence of a rational decision-making process which supported the ultimate conclusion reached. As a result, the Pensions Ombudsman directed the scheme administrator to reconsider its decision, properly considering all factors, and prepare a written document to this effect.

Comment:  The case provides useful guidance as to the formal decision-making process that should be carried out when exercising a discretion.