Pensions Law reviewed
Whilst no one can predict what the future will bring, it is possible that we will see a continued fight over the public sector pension reforms. Whilst the unions are considering a renewed offer, the matter is far from resolved and the threat of further strikes looms.
Pensions law has seen significant reform during 2011 with the introduction of the Pensions Act 2011, the proposed changes to public sector reforms and several high profile cases such as Bridge Trustees and Nortel Gmbh.
We reflect on the main pensions talking points of 2011 and consider the areas which are likely to see further change in 2012.
Case review: George and Harding Pension Scheme
Case review: Bridge Trustee - the definition of money purchase schemes
Case review: Nortel Gmbh and Lehman Brothers
Case review: Copple and others v Littlewoods plc - equality of pay and pension schemes
Looking forward 2012 and onwards…
Public sector pension reform made the headlines in 2011 for causing the biggest day of industrial action in a generation. The Hutton Report, issued in March 2011 made several recommendations, the most noteworthy being the recommendation that future benefits should accrue on a career average revalued earnings basis and not on a final salary basis as is currently the case. Other recommendations included the increase of members’ normal pension age to be in line with their state pension age (state pension age is planned to increase to 66 for men and women by 2020 and rising eventually to age 68).
The Hutton report led to a national day of industrial action on 30 November 2011, which saw more than 1 million public sector workers strike over the proposed reforms.
Danny Alexander, Chief Secretary to the Treasury announced on 20 December 2011 that negotiations on the "heads of agreement" had concluded with most unions representing local government, health service, civil service and teachers schemes, taking the offer back to their members to consider. It remains to be seen whether unanimous agreement can be reached.
The Pensions Act 2011 brought about significant changes intended at creating a fair and financially affordable pensions system. Some of the key changes saw the amendment of previous pensions legislation by referring specifically to the Consumer Price Index (CPI) rather than the Retail Price Index (RPI) for measuring the inflation of occupational pension schemes. The CPI is regarded as a much fairer measure of inflation as it is the index used by the Bank of England.
The Act also implements the findings of an independent review on automatic enrolment as part of the changes for the introduction of the National Employment Savings Trust or NEST. The Act changes the earnings threshold for eligibility for automatic enrolment to £7,475 a year, introduces an optional waiting period of three months in which the employer can defer enrolment; simplifies the way an employer confirms that their scheme meets the quality test requirements; and changes the timing of automatic enrolment. Many of these measures are designed to allow greater flexibility for employers and will hopefully reduce the volume of red tape currently in place.
For further information on NEST, please see http://www.andersonstrathern.co.uk/legal-updates/national-employment-savings-trust/
Case review: George and Harding Pension Scheme
The definition of “Statutory employer” and eligibility for entry to the PPF
In January 2011, the Pension Protection Fund (“PPF”) refused entry to the George and Harding Pension Scheme following the insolvency of its sponsoring employer, due to a loop-hole in the 2004 Pensions Act.
The pension scheme concerned closed in 1996. A company known as Zejwa took over George and Harding in 2002 and at that point became the principal employer and continued to pay contributions towards the scheme until the company became insolvent in 2009. The PPF refused entry to the scheme on the basis that it was not “the statutory employer”.
Although Zejwa was classed as the principal employer it was not the statutory employer for the purposes of the PPF legislation and the scheme was refused entry, even though the PPF had accepted levy payments from Zejwa for seven years. The scheme therefore did not qualify for PPF compensation. The PPF offered to return the levy contributions but this was likely to be of little comfort to employees who stood to lose their retirement pensions.
Following this case, schemes completing their annual returns are being asked to identify their “statutory employer”.
Case review: Bridge Trustee - the definition of money purchase schemes
On 27 July 2011, the Supreme Court handed down their judgment in Bridge Trustees Ltd v Houldsworth and another which centres around the definition of “money purchase schemes”.
This case concerned a final salary scheme with a defined contribution element which equalled the level of member contributions. Some contributions were transferred to a Guaranteed Interest Fund which provided a guaranteed return and money purchase benefits were paid by way of internal annuities.
The Supreme Court ruled that as the fund did not separate the benefits from the contributions paid, the benefits were not “money purchase” benefits under the Pension Schemes Act 1993.
The concern with this ruling is that some schemes may be considered money purchase schemes, despite it being possible for a funding deficit to arise. In which case members would not benefit from protection under the PPF.
In the aftermath of this case the Government announced that it intended to introduce retrospective legislation to clarify the position. This led to provisions in the Pensions Act 2011 which define “money purchase benefits” as a benefit whose “rate or amount is calculated solely by reference to assets”.
Case review: Nortel Gmbh and Lehman Brothers
Challenge to the Pensions Regulator’s powers and the effect of a Financial Support Direction (“FSD”)
On 14 October 2011, the Court of Appeal handed down their judgement in the cases of Nortel GMBH and others and Lehman Brothers International (Europe).
After Nortel and Lehman Brothers went into administration the Pensions Regulator issued financial support directions against companies in those groups. The High Court decided in December 2010 that these ranked ahead of other creditors. The administrators appealed this decision, but the Court of Appeal has now confirmed that when a financial support direction is issued to a company after they have become insolvent the expense of complying will be classed as an expense of either the administration or liquidation and will thus rank before other unsecured claims of creditors.
This case has significant implications for companies with final salary schemes in deficit and for the creditors of those companies. It is understood leave has been given to appeal the case to the Supreme Court.
Case review: Copple and others v Littlewoods plc - equality of pay and pension schemes
On 8 November 2011 the Court of Appeal handed down their judgement in Copple and others v Littlewoods plc, where the court dismissed an appeal by female claimants for equality of pay in respect of the right to join their employer's pension scheme.
Prior to a change in the scheme rules, the claimants were denied the right to join the pension scheme of their employer because they worked on a part-time basis. As the Equal Pay Act 1970 established the principle of equal pay the pension scheme was in breach. The company subsequently allowed part-time employees to join the scheme, but refused to grant back-dated membership. The Claimants challenged this, but Lord Justice Elias held that as they had not been able to show that they would have joined the pension scheme if they had been permitted to do so, they would not be entitled to back-dated membership. On the other hand, if the claimants had shown they had wanted to join the scheme, by either joining it at the first opportunity or by a declaration of entitlement then back-dated membership would have been allowed.
Looking forward 2012 and onwards…
Whilst no one can predict what the future will bring, it is possible that we will see a continued fight over the public sector pension reforms. Whilst the unions are considering a renewed offer, the matter is far from resolved and the threat of further strikes looms.
Automatic enrolment and the introduction of NEST from October 2012 for larger employers of 12,000 or more will also be a significant development in UK pension provision.
As may be seen from the case law review, pensions is becoming increasingly litigious and even principles which may have seemed established are subject to continued review.
For further information please contact Steven Dunn, Head of Pensions.
This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.
