High Court clarifies law where benefits underpaid for many years

The High Court's recent judgment in the case of the Axminster Carpets Group Retirement Benefits Plan (Punter Southall Governance Services Limited v Hazlett) has clarified the law on pension scheme trustees' duties where it turns out that benefits have been underpaid for many years.  Much of the judgment considers the law on forfeiture of unclaimed benefits.  This is currently an important issue for many schemes dealing with GMP equalisation where trustees will need to reach a view on whether any right to back payments of underpaid benefits has been or could be forfeited.  For more detail, click here.

Important Court of Appeal ruling on interpreting pension scheme rules

In an important judgment the Court of Appeal has allowed an appeal by Britvic concerning the meaning of its pension increase rules.  The rules provided for capped RPI-based increases "or any other rate decided by the Principal Employer".  The High Court had previously held that, taking into account various background matters, "any other rate" should be construed as meaning "any higher rate".  However the Court of Appeal held that the words were unambiguous and that there was no reason not to give them their natural meaning which allowed the employer to choose any other rate whether higher or lower.  Addleshaw Goddard LLP and Andrew Short QC of Outer Temple Chambers acted for Britvic.  For more detail, click here.

Court of Appeal upholds judgment that PPF compensation cap age discriminatory

In its judgment in the case of Secretary of State for Work and Pensions v Hughes, the Court of Appeal has upheld a High Court decision that the cap on the maximum PPF compensation that can be paid amounts to unlawful age discrimination.  (For more detail on the original High Court judgment, see "PPF compensation cap found to be age discriminatory" in our September 2020 Update.)  However, the court upheld an appeal by the PPF regarding the lawfulness of the PPF's methodology for calculating compensation. The methodology issue had arisen following the EU court's decision that EU law entitled each individual member to PPF compensation of at least 50% of the value of their accrued entitlement.

Government plans to increase normal minimum pension age to 57

The Government has published the response to its consultation on increasing normal minimum pension age (NMPA) from 55 to 57 with effect from 6 April 2028.  It has also published draft legislation to effect the change.

As proposed in the original consultation, the Government intends to allow members to retain their right to take benefits before age 57 if the scheme rules as at 11 February 2021 (publication date of the consultation) gave them the right to do so.  This will apply regardless of when the benefits accrue.  The Government will make this right available to members who have a right on 5 April 2023 to take benefits before age 57 provided the scheme rules as they stood on 11 February 2021 would have conferred the right to take benefits before age 57 on the member had the member been a member of the scheme on that date.  The draft legislation containing the protection of the right to retire before age 57 refers to the member having "an actual or prospective right under the pension scheme to any benefit from an age of less than 57".  

The consultation makes clear that the protection of a lower NMPA than 57 is intended only to apply to an "unqualified" right to take benefits before age 57.  It says that HMRC will provide further explanation and examples in its guidance regarding what constitutes an "unqualified right".  However, the Government is clear that rules that refer to the NMPA or permit benefits to be taken from the lowest age consistent with the Finance Act 2004 (rather than referring expressly to age 55) do not confer an unqualified right to retire before age 57, but simply confer a right to take benefits from the youngest age prescribed from time to time.  The Government acknowledges that "there may be more nuanced cases where professional judgement is needed about the effect of particular drafting."

Rights following a transfer

The original consultation proposal was that a protected pension age of under 57 would be maintained on a bulk transfer to another scheme, but there was no proposal to preserve a protected pension age on an individual transfer.  However, the Government has now altered its plan and is proposing to allow a protected pension age to be preserved on an individual transfer.  Where a protected pension age is preserved on a transfer in, the Government says that the protected pension age is only intended to apply to the transferred in rights, not any other rights the member may accrue in the scheme.  This is reflected in the draft legislation on individual transfers.  However, if this is the policy intention for bulk transfers, it is not clear how the wording of the draft legislation achieves the policy intention.

It appears that if a member transfers benefits on or before 5 April 2023 to a scheme with rules that, as at 11 February 2021, would have given the member an unqualified right to take benefits from age 55, the law will allow a member to enjoy a protected pension age of 55 in relation to all the member's benefits, not just the transferred in benefits.

Our thoughts

Whether members will retain a NMPA of 55 under the transitional measures will hinge on the exact wording of a scheme's rules, in particular: (a) whether the member has an unqualified right to take benefits from age 55 or whether the right is subject to the consent of another person such as the scheme trustees; and (b) whether the scheme rules make specific reference to taking benefits from age 55 or whether they cross-refer to NMPA under the Finance Act 2004 without specifically mentioning age 55.

The proposals could in some cases result in a member enjoying a "protected pension age" of 55 in relation to transferred in benefits, but a NMPA of 57 in relation to non-transferred in benefits.  This clearly has the potential to complicate the administration of the scheme.

New Pensions Regulator powers to come into force from 1 October 2021

As expected, regulations have been made to bring into force from 1 October 2021 the Pensions Regulator's extended "moral hazard" and new criminal sanction powers under the Pension Schemes Act 2021. Transitional provisions prevent the new powers being used in relation to acts or omissions occurring before that date, though the Regulator has said it may still look back at the period before 1 October 2021 for the purpose of establishing a person's intentions in relation to an act or omission occurring after that date.

The Pension Schemes Act 2021 introduces two new criminal offences: (a) conduct risking accrued scheme benefits; and (b) avoidance of employer debt.  Broadly, the offence of "conduct risking accrued scheme benefits" applies where a person does something which "detrimentally affects in a material way" the likelihood of accrued pension scheme benefits being received and the person knew or ought to have known that this would be the case.  The offence can apply to a failure to act.  The "avoidance of employer debt" offence relates to circumstances where section 75 of the Pensions Act 1995 would impose a statutory debt on an employer of a pension scheme in deficit.  Broadly, it makes it a criminal offence to intentionally prevent a section 75 debt from becoming due, or intentionally to compromise, reduce the amount of, or prevent recovery of such a debt.  The offences do not apply where a person had a reasonable excuse for acting as they did.

The extension to the moral hazard powers will allow the Regulator to require a scheme employer or associated or connected person to provide additional funding for the scheme if an act or omission reduces the amount the scheme would be able to recover from the employer(s) on a hypothetical insolvency, or if it materially reduces the value of the employer's resources relative to the amount of the debt due from the employer if a statutory debt were triggered under pensions legislation.  (See item below for more detail on the "employer resources test").

Regulations on employer resources test

The Pension Schemes Act 2021 will give the Pensions Regulator a new power to issue a contribution notice under its "moral hazard" powers where the "employer resources test" is met.  This is the case where an act or omission materially reduces the value of the employer's resources relative to the amount of the "section 75 debt" which would be due from the employer if such a debt were to be triggered.  This could occur as a result of a corporate transaction or internal restructuring. The power to issue a contribution notice under the new test will come into force from 1 October 2021.

Following consultation, the Government has published the final form of the regulations setting out the detail of the employer resources test.  The regulations provide that the resources of the employer are the "normalised profits" of the employer before tax.  The Regulator is given the power to determine whether an item is to be treated as non-recurring or exceptional for the purposes of the normalised profits calculation, the value of any non-recurring or exceptional items, and the effect of the act or failure to act on the resources of the employer. 

Some respondents to the consultation argued that profits before tax is too narrow a measure and that a more holistic approach would be preferable to take into account that an employer can call on other sources of funding to support scheme contributions.  About half of the respondents to the consultation suggested that the EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) measure would be more suitable as it would provide a better measure of cash available to support the scheme.  However, the Government rejected these suggestions, noting that EBITDA is not a required accounting disclosure and concluding that a holistic measure would create too many uncertainties. However, the regulations have been amended to address the scenario where the employer is a charity or other not for profit organisation.  

Our thoughts

Although the final form regulations are specific in terms of providing that the test is based on normalised profits, the regulations give the Regulator a wide discretion to determine how the normalised profits calculation is carried out.  This means that in practice it may often be difficult to know whether the test is met or not.

Lifetime allowance freeze enacted

The Finance Act 2021 received Royal Assent on 10 June 2021.  The Act freezes the lifetime allowance at its current level of £1,073,100 up to and including tax year 2025/26.

Additional requirement to publish information on website from 1 October 2021

From 1 October 2021, defined benefit schemes must make available free of charge on a website the following information (which also has to be included in the scheme's annual report):

• the trustees' opinion on the extent to which the policy in the statement of investment principles on the exercise of voting rights and undertaking of engagement activities has been followed during the year; and
• a description of the voting behaviour by or on behalf of the trustees during the year (including the most significant votes cast) and details of any use of the services of a proxy voter.

Timescale for TPR's single code of practice put back

On 24 August the Pensions Regulator published an interim response to its consultation on its new consolidated code of practice.  The interim response says that the Regulator does not expect to lay the new code in Parliament before spring 2022 and that it is therefore unlikely to become effective before summer 2022.

Although the majority of the draft code's content has been drawn from existing codes, there are a number of areas with new content, including a requirement for schemes to carry out a documented "own risk assessment" within one year of the amalgamated code coming into force and then annually.

The draft code also said that, in the absence of exceptional circumstances, no more than one fifth of investments should be held in assets not traded on regulated markets.  The interim response says that the Regulator will not be proceeding with this expectation as drafted, as it recognises that larger schemes may hold unregulated assets above this threshold as part of a well managed investment strategy.

GMP Equalisation Group publishes guidance on GMP conversion

On 9 July 2021 the cross-industry GMP Equalisation Working Group chaired by PASA published its GMP Conversion Guidance.  

GMP conversion legislation enables trustees to convert GMPs into non-GMP benefit subject to satisfying certain conditions.  These include that the post-conversion benefits must be certified by the scheme actuary as at least equal in value to the pre-conversion benefits, pensions in payment must not be reduced, minimum contingent survivor benefits must be provided, and employer consent must be obtained.

The guidance covers three common scenarios in which GMP conversion is being used:

• a bulk one-off exercise for existing pensioners and dependants;
• an at retirement process; and
• a bulk one-off exercise for members with a deferred pension.

The guidance explains the requirements of GMP conversion legislation, the process that must be followed to achieve GMP conversion and the issues which can commonly arise as part of a conversion exercise.  It also explains the tax issues which can arise as a result of GMP conversion.  The guidance contains a number of worked examples illustrating how schemes have approached GMP conversion including the tax issues.

GMP Equalisation Working Group Supplemental Guidance on Transfer Payments

On 11 August the cross-industry GMP Equalisation Working Group published Supplemental Guidance on Transfer Payments.  The guidance summarises the law relating to GMP equalisation and transfer values following the "Lloyds 3" judgment.  It is divided into three sections.  Part A deals with considerations for transferring schemes in relation to individual transfers.  Part B deals with receiving schemes and individual transfers.  Part C deals with bulk transfers.

Transferring schemes

The guidance sets out the steps in the process which trustees dealing with GMP equalisation in respect of transfers out will need to follow.  It suggests that transferring scheme trustees discuss the practical issues with their advisers and agree a policy for dealing with such matters as missing data, calculation issues, deceased or missing former members and how to settle top-up payments.  It notes that there will be some cases where transferring scheme trustees will be unable to discharge any top-up payment which may be due, eg because a former member can't be traced.  It suggests that retention of such ongoing liabilities may not be a significant problem for ongoing schemes, but flags that trustees of schemes that are winding up are likely to seek indemnities from sponsoring employers in relation to such liabilities, which might not be covered by run-off insurance.

The guidance notes that there may not always be a receiving scheme in existence which is willing to accept any top-up payment due.  It notes that schemes may prefer to make a top-up payment direct to the member, but that this may give rise to tax issues.  It suggests that in some cases the sponsoring employer might agree to make a payment direct to the member to avoid tax complications, but suggests that income tax may need to be deducted under PAYE where the employer pays a lump sum to the member.

Receiving schemes

Defined benefit receiving schemes

The guidance flags that the decision of the European Court of Justice in Coloroll and the decision of the judge in the Lloyds 3 case potentially take different approaches to the question of what the law requires of receiving schemes. It suggest that Coloroll indicates that benefits should be adjusted to reflect what would have happened had the transferring scheme paid a transfer value based on GMPs having been equalised.  It suggests that Lloyds 3 requires benefits to be equalised to compensate for the unequal benefits granted due to unequal GMPs.  The guidance says that it is unclear whether any such obligation is instead of or in addition to the equalisation obligation under Coloroll.  It says that in practice defined benefit receiving schemes will need to decide:

• whether to equalise the benefits granted by the receiving scheme in respect of the original transfer value; and
• whether to accept a top-up payment if approached by a transferring scheme.

The guidance considers some of the issues which may arise for receiving schemes.  For example, if a defined benefit receiving scheme receives a "top up" to a transfer value, it does not automatically follow that it is required to increase the benefits of the member to whom the top-up transfer payment relates.

The guidance suggests that in practice DB schemes are expected to apply GMP equalisation measures to the benefits awarded in respect of transfers in as part of their wider GMP equalisation exercise.  Having completed this exercise, they may be reluctant to re-open the position by accepting a subsequent top-up payment if the trustees are advised that this would require further adjustment to members' benefits.

Defined contribution receiving schemes

In relation to defined contribution receiving schemes, the guidance notes that Lloyds 3 does not answer the important question of whether a defined contribution (DC) scheme is under an obligation to correct inequalities resulting from transfer values received.  However, the guidance suggests that DC receiving schemes are not responsible for correcting past inequalities in the original transfer payment received, and it proceeds on this basis.  The guidance notes that DC schemes that have received a transfer value may be approached by transferring schemes seeking to pay top-up payments.  The guidance says that it is "expected" that the receiving scheme will be prepared to accept top-up payments for existing members provided the member consents and, in some cases, an administration fee is deducted from the payment.  It suggests that operators of DC schemes may also decide to set a minimum level of top-up payments that they are willing to accept.

Bulk transfers

The guidance suggests, based on Lloyds 3, that where there has been a bulk transfer on the basis that the receiving scheme undertook to replicate the benefits in the transferring scheme, the receiving scheme should assume an obligation to undertake GMP equalisation in respect of the transferred benefits.  It suggests that specific advice should be taken if transferred in members were granted benefits based on the receiving scheme's benefit structure.  It suggests schemes might want to review any legal agreements entered into in connection with a bulk transfer, as these may contain indemnities which may, subject to any time limits, cover some or all of the cost of implementing GMP equalisation.

Ombudsman rejects complaint where no pension paid to unmarried partner unless nominated

The Pensions Ombudsman has rejected a complaint by the partner of a deceased member regarding the Trustees' refusal to pay her a survivor's pension in the absence of a nomination as required by the scheme rules (Ms R PO-13671).  The scheme rules provided for a survivor's pension to be payable automatically to the surviving spouse of a married member.  They also provided for the payment of a survivor's pension to “…any person nominated to the Trustees by the Member and who was, in the opinion of the Trustees, involved in a long-term permanent relationship which included cohabitation with the Member and was financially dependent or partly dependent on the Member or with whom the Member was financially interdependent at the time of the Member’s death or retirement.”

Following the death of Ms R's partner of 15 years in 2003, the Trustees refused to pay a survivor's pension to Ms R, as they could find no record of Ms R's partner having nominated her to receive a  pension.  In 2017 the Supreme Court gave its ruling in Brewster v Northern Ireland Local Government Officers’ Superannuation Committee in which it held that the rules of the Local Government Pension Scheme Northern Ireland breached the European Convention on Human Rights and Fundamental Freedoms (ECHR) by making the payment of a survivor's pension for an unmarried partner conditional on the member and his partner having completed a written declaration where no such declaration was required in the case of a married member.  Following the Brewster ruling, Ms R asked the Trustees to reconsider the decision not to pay her a survivor's pension.  Having taken legal advice, the Trustees refused to pay the pension on the grounds that the Human Rights Act 1998 (HRA) did not apply the provisions of the ECHR directly to private pension schemes in the way it did for statutory public sector schemes such as the one involved in the Brewster case.

The scheme of which Ms R's partner had been a member was the pension scheme of a privatised water company.  Ms R argued that the employer of the scheme was a "statutory undertaker" carrying out a public function, and was as such bound by the HRA.  She cited previous cases in which a tribunal had found water companies to be public authorities because they had been given special legal powers to enable them to carry out their functions.

The Ombudsman rejected Ms R's claim.  He made no finding as to whether the water company which was the sponsoring employer of the scheme was a public authority for the purposes of the HRA.  However, he held that a key difference between Ms R's case and the Brewster case was that the scheme in Ms R's case was a private sector scheme whereas the scheme in the Brewster case, the Northern Ireland Local Government Pension Scheme, was a pension scheme provided by the state.  He held that even if the sponsoring employer of the scheme in Ms R's case could be regarded as a public authority for the purposes of the HRA, there was no evidence of a "public flavour" to the functions the Trustees carried out in respect of the deceased member's benefits and in responding to Ms R's complaints.  He therefore did not consider that the Trustees could be regarded as a public authority for the purposes of the HRA.  It therefore followed that Ms R could not rely on the HRA in her complaint against the Trustees.

Our thoughts

This determination provides useful clarity as to how Ombudsman will approach the issue of the applicability of human rights legislation to pension scheme trustees, though this is a complex area and a decision of a higher court on the issue would be needed for legal certainty.  On a personal level, it is hard not to feel sympathy for long-term partners of deceased members who miss out a pension for want of a completed nomination form.

Misinformed member not entitled to higher benefits but awarded £1000 for distress and inconvenience

The Pensions Ombudsman has held that a member who was misinformed about the level of his future pension over a number of years was not entitled to a higher amount than provided for by the scheme rules.  However, the Ombudsman awarded the member £1000 for the distress and inconvenience caused by the misinformation (Mr N PO-22137).

Mr N was a member of his employer's pension scheme from 1979 until 1993 when he took voluntary redundancy.  He claimed that he had been offered a redundancy package which included a deferred pension that would increase by a fixed rate of 5% compounding every year.

On ceasing active membership in 1993 Mr N was provided with a "Leaver's Certificate" which said that he would be entitled to a pension of £19,745.40 from age 65.  The certificate said that benefits were paid in accordance with the terms and conditions relating to the scheme, but made no reference to rates of revaluation.  The scheme booklet said that pension in excess of GMP for scheme service after 1 January 1985 would be increased by 5% each year up to Normal Retirement Date (NRD).  In 2014 Mr N was provided with a benefit statement which gave his expected pension at NRD as £19,742.91.  The statement said that it was an estimate and not guaranteed, and that a change in actuarial factors used by the Trustees might result in a reduction to the figures quoted.  In correspondence in 2014, the scheme administrator told the member that his pension calculation was based on fixed rate revaluation, not future inflation rates, in accordance with the applicable terms when the member left the scheme.

Following a move of the scheme's administration to a different office in 2017, Mr N was informed that his benefits were not revalued at a fixed rate, but in line with RPI up to a maximum of 5% pa.  In January 2018 he was provided with a benefit statement showing his projected pension at NRD as £14,481.24 pa.  This was based on his pension in excess of GMP increasing at 1% pa.

The Pensions Ombudsman accepted that the lower pension figure of £14,481.24 pa had been calculated in accordance with the scheme rules which provided for pension in excess of GMP to be revalued in line with RPI capped at 5%.  He found that, based on the Leaver's Certificate and the member booklet, Mr N had reasonably expected to receive a pension of £19,745.40 at NRD.  

The Ombudsman said that the starting point was that Mr N was only entitled to benefits in accordance with the scheme rules.  In the absence of "plausible evidence" of what retirement income Mr N had been working to accrue, the Ombudsman said that he could not conclude that Mr N would have acted differently had he known that his scheme pension might be lower than the figure in the Leaver's Certificate.  The Ombudsman also noted that Mr N had not taken any "appreciable steps" to increase his retirement provision since becoming aware in 2018 that his scheme pension might be less than anticipated.  The Ombudsman found that Mr N had chosen to adjust his financial planning to the pension he could expect from the scheme.  Mr N had not irreversibly relied on misleading information about his benefits.  He had therefore not suffered a financial loss as a result of the misleading information.  However, the Ombudsman the Ombudsman awarded Mr N £1000 for distress and inconvenience.

Our thoughts

This case illustrates that even where a scheme provides incorrect benefit information which significantly overstates the member's benefit entitlement over a prolonged period, the Ombudsman may still find that the member is not entitled to anything greater than his entitlement under the scheme rules.  The case is also a useful indicator of the amount which the Ombudsman might award for disappointment and distress in such cases.  

Ombudsman upholds member's change of position defence following overpayment

The Pensions Ombudsman has held that the Teachers' Pension Scheme is not entitled to recover overpayments of pension in a case where the member was able to demonstrate that her disposable income was relatively low during the overpayment period and that she had incurred expenditure which she would not have incurred had she known the correct position (Mrs E CAS-30002-K6Z8).

In the case in question the member, Mrs E, had had two separate periods of pensionable service in the scheme.  The first was a period of slightly over four years in the period 1975 to 1980.  In 1980 Mrs E received a refund of contributions for this period so ceased to be entitled to any pension in respect of it.  However, a record-keeping error by the scheme meant that its records continued to show Mrs E as having pensionable service for this period.  In 1983 Mrs E rejoined the scheme and continued in active membership until 2008.  When Mrs E retired in 2014, the scheme wrongly calculated the benefits on the basis that Mrs E still had an entitlement in respect of her first period of pensionable service as well as her second.  This was despite an internal review by Teachers Pensions earlier in the year having logged that the pensionable service figure was incorrect and needed updating.

In December 2018 the scheme reduced Mrs E's pension without warning.  It subsequently explained that Mrs E had been overpaid by approximately £13,500, of which she had received approximately £5600 as a lump sum and the remainder as pension.  The scheme sought to recover the overpayment, though it did offer Mrs E £500 for the distress and inconvenience caused.

The Ombudsman upheld Mrs E's complaint.  He acknowledged that to a pension professional it might have been identifiable from the information sent to Mrs E that there was an error which might lead to an overpayment.  However, he said that the test of good faith in a "change of position" defence was a subjective one.  The Ombudsman noted that statements made by Mrs E indicated that her understanding of pensions was "very basic at best".  He accepted Mrs E's account that on receiving her pensions information she glanced at her forecasted benefits and did not read the remaining detail, as she trusted that Teachers Pensions would calculate her benefits correctly.

Mrs E had been able to produce detailed information about her income and expenditure during the overpayment period.  This indicated that she had a total monthly income of approximately £1643 and total regular essential outgoings of approximately £1217, leaving a disposable income of approximately £426 per month during the period of the overpayment.  That was without accounting for essential, but irregular, outgoings such as clothes.  Her business earnings fluctuated meaning that her income was often even lower.  During the overpayment period, the evidence showed that Mrs E had spent money on travelling and expensive gifts.  The evidence indicated that she used her credit card to fund her travels and that this was ultimately paid off using money from her current accounts.  There was no evidence that Mrs E had regularly saved during the overpayment period.  

The Ombudsman found that it was unlikely that Mrs E would have spent the money she did on gifts and travel had it not been for the income overpayment.  He therefore upheld Mrs E's complaint in part, finding that she had a "change of position" defence against the income overpayment.  He held that Teachers Pensions should reduce the amount it was seeking to recover to the lump sum only, and that it should contact Mrs E to discuss an affordable repayment plan for that.  He also awarded Mrs E £1000 for the serious distress and inconvenience suffered, unless she agreed to offset that amount against the overpayment owed.

Our thoughts

The starting point in an overpayments case is that the scheme is entitled to recover an overpayment even where a member has received it in good faith.  However, members may have a "change of position" defence to a repayment claim if they have incurred significant expenditure in reliance on payments being correct, thus changing their financial position in such a way that it would be inequitable to require them to make repayment.  It is relatively rare for a change of position defence to succeed, as it is often difficult for a member to show that they would not have incurred the expenditure anyway regardless of the overpayment.  This case is therefore a useful example of the type of circumstances in which an overpayment defence may succeed.  It also illustrates that the test for determining whether a member received overpayments in good faith is a subjective one.  A change of position defence may succeed where the member has little understanding of pensions notwithstanding that someone with a better understanding might reasonably have been expected to spot that an error had been made.

No award for disappointment and distress where scheme rules provided late

The Pensions Ombudsman has found that a delay in complying with a member's request for a copy of the scheme's trust deed and rules did not warrant the minimum Ombudsman award of £500 for disappointment and distress despite being a breach of the disclosure regulations (Mrs S CAS-37810-V2L4).  

The main issue raised in the member's complaint was the question of what normal retirement date (NRD) applied to the member.  The member claimed that her NRD was 60 whereas the Trustee took the view that it was 62.  The Ombudsman found in favour of the Trustee, holding that a provision that potentially provided for members to have a NRD of 60 only applied where the member and Principal Employer had agreed that this would be the case.  The Ombudsman found no evidence of such an agreement in the case of the member concerned.  The Trustee had acknowledged that it had not provided the member with a copy of the scheme's trust deed and rules within two months of her request, as required by the disclosure regulations.  The member had requested the "full terms and conditions of the scheme" in November 2017 and had repeated her request on subsequent occasions.  A copy of the scheme rules was not sent to the member until November 2018 after she made an express request for a copy of the rules.

Our thoughts

The Ombudsman has a policy of not making any award of compensation for disappointment and distress unless he considers that an award of at least £500 is warranted.  In this case, although there had been a delay in providing the trust deed and rules, the Trustee had engaged with the member's queries and the Trustee's interpretation of the rules was ultimately found to have been correct.  In this case the member originally requested the "full terms and conditions of the scheme" rather than expressly referring to the trust deed and rules.  Where a member is clearly requesting a copy of the scheme's governing documentation, it is prudent to treat such a request as a request for a copy of the scheme's trust deed and rules even if the member uses different terminology.

Consultation on "Stronger nudge" to pensions guidance

The DWP and FCA are carrying out separate but parallel consultations on rule changes to ensure that members receive or specifically opt out of Pension Wise guidance before receiving their benefits.  The draft regulations in the DWP consultation will apply to trustees of occupational pension schemes providing money purchase benefits, and the FCA rules will apply to providers of personal pension schemes.

DWP consultation

The draft regulations will generally apply where a member aged over 50 (or the member's survivor) applies to receive or transfer benefits.  Before actioning the request, the trustees must offer to book a Pension Wise appointment for the individual.  If he/she turns down that offer, the trustees must provide details of how to book a Pension Wise appointment directly.  To opt out of receiving Pension Wise guidance, the individual must give an "opt out notification".  In most cases, the opt-out notification must be given as a separate communication, not as part of the original request or during the interaction with the trustees resulting from that application.

The consultation document itself does not specify when the changes will come into force, but the 6 April 2022 appears in square brackets in the draft regulations as the coming into force date.

The consultation runs until 3 September 2021.

Government response to draft regulations and guidance on delivering better value for money

The Government has published a response to its consultation on draft regulations and guidance dealing with the requirement for defined contribution (DC) schemes to carry out a "value for members" (VFM) assessment.  As reported in our December 2020 Update the new regulations will require DC schemes that have less than £100 million in total assets (and have been operating for three or more years) to compare their scheme with at least three large schemes.  Where the smaller scheme cannot demonstrate value for members, the government will generally expect the trustees to wind it up and transfer the assets and liabilities to a larger scheme.  Schemes will be required to complete the VFM assessment annually and report on it as part of the chair's statement and in the annual return.  

Some changes have been made to the regulations following the consultation.  In particular:

• the implementation date has been pushed back.  The first VFM assessment will apply for schemes for their first year ending after 31 December 2021;
• the government has clarified the position on hybrid schemes to make clear that it is schemes with total assets (DB and DC together) below £100 million that are within scope, though it is only the DC element of the scheme that is subject to the assessment;
• in relation to the requirement to compare the scheme to at least three larger schemes, the Government has removed the requirement that there must be "reasonable grounds" to believe that at least one of the larger schemes would accept a transfer of members from the smaller scheme.  Instead the larger scheme must "have had discussions" with the smaller scheme over a potential transfer; and
• schemes that have informed the Pensions Regulator that they are in the process of winding up will be exempt from the requirement to carry out a VFM assessment.

The Government says it is committed to increasing the pace of consolidation in the DC pensions market to create greater scale, and that it will review the £100 million threshold at regular intervals.  More immediately, it welcomes input to its call for evidence on the case for greater consolidation of DC schemes.  (See item below.)

Call for evidence on future of the DC pension market and the case for greater consolidation

The Government has carried out a call for evidence on the "Future of the defined contribution pension market: the case for greater consolidation".  The call for evidence says that if the current trend for the number of DC schemes to fall by between 8-10% each year continues, the Government expects there to be around 1000 DC schemes (excluding "micro schemes", ie those with less than 12 members) in five years' time.  The Government believes that this is too many and wants to accelerate the pace of scheme consolidation over this period.  Questions asked in the call for evidence include whether respondents agree that the Government is right to aim for fewer, larger schemes going forward, what impact the new value for members assessment will have on consolidation of schemes under £100 million, and how the Government can incentivise schemes with assets of between £100 million to £5 billion to consolidate. 

Consultation response on incorporating performance fees within the charge cap

Alongside its consultation response on delivering better value for money (see above) the Government also published the response to its consultation on adding to the existing methods by which trustees can assess whether their scheme complies with the charge cap.  Broadly, where a scheme providing money purchase benefits is used to satisfy an employer's obligations under auto-enrolment legislation, trustees must ensure that no members' funds in a default arrangement are subject to charges in excess of 0.75% of funds under management.  The planned changes to assessing compliance are designed to give trustees more flexibility to invest in illiquid assets by allowing them to smooth charges over a longer period than one year.  The consultation response confirms that the Government will proceed with its proposed amendments, subject to some drafting changes for clarity, and that the relevant regulations will take effect on 1 October 2021.

Requirements for website statement expanded

Since 1 October 2020, trustees of schemes providing money purchase benefits have had to publish on a website certain information (also covered in the annual report) regarding the scheme's statement of investment principles (SIP), including the trustees' opinion on the extent to which the SIP has been followed during the year.  From 1 October 2021 the list of information which must be published on the website is expanded and includes voting behaviour by or on behalf of the trustees.

Final form regulations published for climate risk governance and reporting

In our March Update we reported that the Government had published a consultation on draft regulations imposing new climate risk reporting and governance requirements on master trusts and the largest occupational pension schemes.  The final form regulations have now been published, along with the Government's response to its consultation.  There have been some amendments to the regulations on points of detail, but the key elements of the regulations are unchanged from those originally published for consultation.  Broadly, the new requirements will apply to occupational pension schemes with assets of over £1 billion and to authorised master trusts (regardless of size.)  The government intends to conduct a review in 2023 to consider whether to extend the measures to smaller schemes.

In a separate but related development, the Pensions Regulator is consulting on draft guidance for schemes subject to the requirements, and on a draft appendix to its monetary penalties policy dealing with its approach to imposing penalties for breaching the requirements.

FCA consults on introducing climate-related disclosure requirements for fund managers

The FCA is consulting on introducing new climate-related disclosure rules for fund managers (as well as for life insurers and FCA-regulated pension providers).  The FCA is proposing that fund managers will be required to publish an annual report on how they take climate-related risks and opportunities into account in managing investments on behalf of their clients.  The proposals will apply to fund managers who have at least £5 billion in assets under management on a 3-year rolling average.  The FCA is proposing to introduce the new requirements on two phases.  Which phase a firm falls into will broadly be determined by the value of assets under management.  For firms in the first phase, the FCA proposes that the rules will come into force from 1 January 2022 with a publication deadline of 30 June 2023 for the first disclosures.  For firms in the second phase, the relevant dates will be 1 January 2023 and 30 June 2024 respectively.

Where a fund manager's clients such as pension scheme trustees need information to satisfy their own financial disclosure obligations, the FCA is proposing that disclosures be made to the client on request once a year. The first disclosures under this rule would be made no earlier than 1 July 2023. The FCA is also proposing that firms should be required to provide data on the underlying holdings of their products to clients who request it to satisfy their own climate-related financial reporting obligations.  Fund managers would be obliged to respond to a single request within the financial reporting period, beginning no earlier than 1 July 2023 (or 1 July 2024 for fund managers in the second phase of implementation).

The consultation closes on 10 September 2021.

European Commission adopts data protection adequacy decision for UK

The European Commission has adopted an "adequacy decision" which will allow the free flow of personal data between the UK and EU member states to continue while the decision remains in force.  The decision will expire on 27 June 2025, but may be renewed.  It may be suspended or amended before then if UK data protection law changes in such a way that the Commission considers that the conditions for an adequacy decision are no longer met.

ICO consults on draft international data transfer agreement

The Information Commissioner (ICO) is consulting on a draft international data transfer agreement and guidance to replace the Standard Contractual clauses for transferring personal data outside the UK.  The consultation comprises:

• proposals for updates to guidance on international transfers;
• a draft international transfer risk assessment tool; and
• an international data transfer agreement.

The consultation closes on 7 October 2021.  For more detail, click here.

PASA Counter Fraud Guidance

On 1 July 2021 PASA publisCasehed Counter Fraud Guidance for pension scheme trustees and providers.  The guidance is focused on encouraging organisations to ask a range of investigative questions focused on three main areas:

• The legal and regulatory landscape: Does the organisation understand the different types of fraud? Is it aware of any emerging threats and ready to react? Has it sought the relevant legal, regulatory and cyber advice?
• Understanding an organisation’s vulnerability to fraud: Do the organisation and its suppliers understand the vulnerabilities of systems and beneficiaries in respect of fraud, and the extent of risk and potential cost?
• Ensuring an organisation is resilient to fraud: What potential for fraud exists, and how can the risk this poses be reduced to an acceptable level?

Trust Registration Service open for registration of non-taxpaying trusts from September

We have previously reported that Employer-funded retirement benefit schemes (EFRBS), ie unregistered pension schemes, will in future be required to register with HMRC's Trust Registration Service (TRS) regardless of what taxes they pay.  (Previously, whether an EFRBS was required to register depended on what taxes it had paid.)  The legislation currently provides that schemes will be required to register by 10 March 2022, but HMRC has announced that the TRS is now expected to be open for non-taxpaying trust registrations in September 2021 rather than Spring 2021 as previously anticipated.  HMRC has previously said it plans to extend the registration deadline to provide trustees approximately 12 months from the date the service becomes available in which to register, so it appears likely that the registration deadline for schemes registering for the first time will be in September 2022.