Pensions snapshot - February 2020

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

• The Pension Schemes Bill is reintroduced
• Opposite-sex couples given the green light to enter into a civil partnership
• Could PPF levies be on the rise?
• PPF insolvency risk recalibration likely to result in higher PPF levies for schemes with larger employers
• TPR publishes four new guides for trustees on tendering and setting objectives for investment service providers
• Start the clock – when does time start to run for a judge to bring a pensions claim?

The Pension Schemes Bill is reintroduced

The Pension Schemes Bill 2019-20 was published in the House of Lords on 7 January 2020. It replaces the Bill that was published in October 2019 (mentioned in our November 2019 snapshot) and, whilst substantially the same, makes some minor changes.

The main changes that have been made are in relation to contribution notices issued under the new employer resources test. Where a contribution notice is issued by reference to the ‘employer resources test’:

• The defence has been relaxed so it is only necessary to show, among other things, that it was reasonable to conclude that the act or failure to act would not bring about a material reduction in the value of the resources of the employer relative to the estimated section 75 debt. The previous Bill did to refer to materiality.
• In relation to estimating the section 75 debt, the previous version of the Bill allowed the Pensions Regulator (TPR) to determine the “relevant time” where there had been a continuing failure. In the current version, the “relevant time” is now defined as the time immediately before the first of the acts occurred, or the first of the failures to act first occurred, where there has been a series of acts or failures.

Drafting changes have also been made to the Bill’s provisions relating to data protection legislation.

Opposite-sex couples given the green light to enter into a civil partnership

The Civil Partnership (Opposite-sex Couples) Regulations 2019 (the Regulations) have extended civil partnerships to opposite-sex couples in England and Wales. The Regulations came into force on 2 December 2019 and amended the Civil Partnership Act 2004 (CPA 2004) by removing the same-sex requirement in both the definition of a civil partnership and the eligibility criteria for registering as civil partners. The Regulations are unlikely to have a huge impact on occupational pension schemes. However, there are a few points worth flagging.

Occupational defined benefit pension schemes that pay survivors' benefits could face additional costs as they will now have to provide benefits to opposite-sex civil partners. Having said that, the extent of that additional cost may be negligible depending on how much demand there is for opposite-sex civil partnerships.

Scheme rules should be checked to see whether the death benefit provisions need to be amended so that they extend to opposite-sex civil partners. Amendments are unlikely to be required, particularly if the rules define civil partners by reference to the definition of “civil partners” in the CPA 2004. Nevertheless, it is worth checking.

What could prove to be more problematic is where benefits have previously been insured outside a scheme, perhaps as part of a scheme buy-out. Are opposite-sex civil partners covered by the policy terms and, if they are not, what can be done about it? The danger with doing nothing is that the scheme/trustees may be “on the hook” for uninsured and unfunded liabilities in the shape of survivors' benefits payable to opposite-sex civil partners.

Could PPF levies be on the rise?

Members whose schemes enter the Pension Protection Fund (PPF) are provided with benefits at the statutory PPF compensation levels. For members below their normal pension age when the scheme enters the PPF, this is usually 90% of their benefits subject to a compensation cap. This has seen some members receiving less than 50% of their original benefit. The PPF have had to rethink the level of compensation provided following the Hampshire decision, which held that members were entitled to at least half of their accrued pension benefits.

The recent Bauer decision has now suggested that the PPF must, in fact, protect benefits at a level higher than Hampshire had suggested.  This is likely to add an additional administrative and cost burden to the PPF, which could translate into increases to PPF levy charges. 

The Advocate General’s opinion in the Bauer case caused some initial concern to the PPF by providing that “Article 8 [of the EU Insolvency Directive] imposes an obligation on Member States to protect all of the old-age benefits affected by an employer’s insolvency and not just part or a designated percentage of these benefits”. Whilst this case was a reference from the German courts, this would have had a substantial impact on the level of benefits members could be entitled to receive from the PPF and suggested the 50% level in Hampshire did not go far enough.

The CJEU has subsequently issued its opinion on the matter and, in what must be a relief to the PPF, has not followed the opinion of the Advocate General.  The CJEU noted that Member States have considerable latitude in determining the level of protection of employees’ pension entitlements and are not required to guarantee those entitlements in full. However, there is an obligation to provide a minimum degree of protection. Whilst not all losses have to be covered, the losses suffered cannot be “manifestly disproportionate”. The CJEU went on to state that:

“…a reduction in a former employee’s old-age benefits must be regarded as manifestly disproportionate where…a former employee who, as a result of the reduction, is living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned”.

What does this mean?

Time will tell how the PPF will implement this in practice and whether Brexit will have any impact. This is likely to result in a considerable administrative burden for the PPF and increased costs may also mean higher PPF levies in the future.  For more information please see our briefing on the topic.

PPF insolvency risk recalibration likely to result in higher PPF levies for schemes with larger employers

The PPF is consulting on a new methodology for insolvency scores. Insolvency scores are a core constituent of any defined benefit scheme's PPF levy and the PPF intends to start applying the revised methodology to data collected through Dun & Bradstreet (D&B) from April 2020.

Key takeaways from the consultation document are as follows.

• While the insolvency score methodology will be fairly similar to the current methodology, the PPF intends to recalibrate its scorecards to better reflect actual insolvency experience. As a result, the PPF expects that levies for schemes with larger employers will increase and that the levies for schemes with smaller and not-for-profit employers will reduce.
• Trustees and employers should check the scoring data for their scheme on the new levy portal and ensure the information D&B holds is up to date. Any anomalies should be brought to D&B's attention.
• The PPF cannot share data that has been provided voluntarily to the PPF or Experian with D&B. Accordingly employers or schemes requiring D&B to take self-submitted accounts into consideration will need to resubmit such information to D&B.
• The PPF encourages stakeholders to provide D&B with ultimate parent company accounts voluntarily to ensure the most appropriate failure score can be generated.

TPR publishes four new guides for trustees on tendering and setting objectives for investment service providers

As we reported in our July 2019 and September 2019 editions of pensions snapshot, TPR consulted last year on four guides designed to support trustees in understanding and complying with new requirements to run competitive tenders for fiduciary management services and to set strategic objectives for investment consultants. The new requirements were imposed on trustees of occupational pension schemes (with certain limited exceptions) with effect from 10 December 2019 by the Competition and Market Authority’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (CMA Order). A final form of the Occupational Pension Scheme (Governance and Registration) (Amendment) Regulations, which will bring these requirements into pensions law, is expected to be laid before Parliament early this year, to come into force on 6 April 2020.

TPR’s new guides (which may be amended to reflect the new Regulations once in force) are:

• How to choose an investment governance model

  This guide explains investment governance and fiduciary management models and is aimed at helping trustees assess how the different models might be used to further their scheme’s objectives. It encourages trustees to assess their current investment governance capability and knowledge, and to identify and manage conflicts of interest.

• How to tender for fiduciary management services

  This guide includes case studies on competitive tender exercises and sets out key principles to take into account. TPR views running a tender exercise as something that trustees should consider as part of good scheme governance, even where not legally required to do so by the CMA Order.

• How to tender for investment consultancy services

  This is a good practice guide, setting out key considerations for competitive tenders and an example tender exercise.

• How to set objectives for the investment consultant
  This guide includes examples of strategic objectives and methods for monitoring and assessing performance.

Start the clock – when does time start to run for a judge to bring a pensions claim?

The Supreme Court recently handed down judgment in Miller and other v Ministry of Justice.  This case concerned an issue of when time starts to run for a claim by a part-time judge for less favourable treatment under the Part-time workers (Prevention of Less Favourable Treatment) Regulations 2000 (the PTW Regs). 

The judges in question claimed less favourable treatment because they had been excluded from the judicial pension scheme as a result of being part-time judges.  Their claims were, however, lodged within three months from the date of retirement as opposed to three months after the end of their final part-time appointment.  This meant that they were arguably out of time for bringing such claims.

Regulation 8(2) of the PTW Regs states that a complaint must be made within three months of the less favourable treatment or detriment to which the complaint relates or, where there is a series of failures or acts, the last of them. Where the unfavourable treatment arises as a result of a term in an employment contract, each day where that term in a contract is in force, is a detrimental or unfavourable act.

It was held that:

• The meaning of unfavourable treatment and detriment in the PTW Regulations was not restricted to the terms of that contract of employment - instead, any detriment during an employment/appointment could be caught by that term.  In any event, judges did not have an employment contract proper so trying to apply that concept in the current case was not particularly helpful.
• Any other detriment’ (apart from detriment under an employment contract term) would include detriment at the point of retirement to make a pension available.  That would then mean that the detriment to which the complaint related was one which occurred at the point of retirement.Therefore, the three months for bringing a claim under the PTW Regs could be taken as commencing at the date that a judge retired (as opposed to the date he or she left part-time service).

Accordingly, the judges’ complaint was upheld and they were in time for bringing a claim in respect of the unfavourable treatment relating to their pension.