Court of Appeal says members cannot be forced draw benefits to pay debts

In the case of Manolete Partners PLC v White, the Court of Appeal has overturned a High Court judgment which would have required a member to draw down his entire pension fund from his small self-administered pension scheme (SSAS) in order to enable the member's creditor to enforce a judgment debt.  The Court of Appeal held that the High Court order breached section 91 of the Pensions Act 1995 which provides that no order can be made by a court if the effect would be that a member would be restrained from receiving a pension under an occupational pension scheme.   

As a result, it is now clear that a member cannot be required to put their benefits into payment or to opt for the maximum amount of benefit to be paid as cash for the purposes of making funds available to a member's creditors.  For more detail, click here.

Court approves rule amendment to allow merger of staff scheme in surplus with executive scheme in deficit

In the case of Arcadia Group Pension Trust Ltd v Smith, the High Court made an order to confirm that the scheme trustee of the Arcadia Group Pension Scheme (the "Staff Scheme") would be acting within the scope of the scheme's amendment power in amending the Staff Scheme's rules to allow it to merge with the Executive Scheme.  The court also gave approval to the Staff Scheme trustee exercising its new power to effect the merger notwithstanding that the Staff Scheme was in surplus, and the Executive Scheme was in deficit.  For more detail, click here.

Updated employer covenant guidance

In December the Pensions Regulator published its new employer covenant guidance.  The guidance includes sections on:

• identifying employers with legal obligations to fund the scheme;
• assessing employers' cash flow;
• assessing employers' prospects;
• determining the "reliability period" (i.e. the period over which trustees can be reasonably certain of the employer's cash flow to fund the scheme) and covenant longevity (i.e. the period for which trustees can be reasonably certain that the employer will be able to continue to support the scheme); 
• contingent assets, i.e. how to approach ascribing an appropriate value to them;
• how to assess the employer's "reasonable affordability" for recovery plan purposes;
• determining whether the level of risk being run in the scheme's funding and investment strategy is supportable by the covenant; and
• monitoring the employer covenant.

Parts of the guidance reiterate the content of the DB funding code, but there is also some important new content, in particular regarding the circumstances in which a guarantee from another company in the employer's group will meet the criteria for a "look through guarantee", i.e. a guarantee under which the guarantor effectively assumes the same liability as a statutory employer, meaning that the trustees should assess the guarantor's ability to support the scheme as if it were a statutory employer. 

Action required

The guidance is not legally binding, but does set out the Pensions Regulator's expectations, so trustees should consider how their current practice compares to the guidance.  Questions which trustees should consider include:

• How often do we review the employer covenant?
• Do we have an information sharing protocol in place with the employer?
• Does our scheme benefit from any contingent assets?  If so, how do we value them?

Regulator adds new questions to DB and hybrid scheme returns 

The Pensions Regulator has added new questions to the scheme return for defined benefit and hybrid schemes.  For the next round of scheme returns, schemes will be asked:

• whether they have measured their scheme's common or scheme specific data in the last year.  (Previously schemes were asked whether they had measured this data in the past three years);
• whether, and if so when, the trustees have set strategic objectives for the scheme's investment consultant;
• when the investment consultant's performance was last reviewed against its objectives (or, if applicable, why there has been no such performance review).

It is a legal requirement for trustees to set objectives for the scheme's investment consultants and review the investment consultants' performance against those objectives at least every 12 months.

PPF announces reduced levy estimate

In January the PPF announced that its levy estimate will be reduced to £45 million for 2025/26.  The PPF says that this will be its lowest ever levy and that 99.7% of schemes are expected to see a reduction in levy next year.

The PPF has also included a new provision in its levy rules that enables it to set a zero levy if sufficient progress is made on legislative changes that would give the PPF greater flexibility in setting the levy.

Employer's assurance regarding mirror benefits following transfer was contractually binding

In the case of Mr H (CAS-50353-Y4X5), the Pensions Ombudsman has found that an employer had given a legally binding assurance to provide a member with mirror benefits if he transferred his benefits to a new scheme following a restructuring.  A noteworthy aspect of the case is the Ombudsman's conclusion that the scheme rule providing for discretionary pension increases did not allow a zero increase.

Background

The employer issued an announcement in 1997 which invited Mr H to join the new scheme in place of the previous scheme and told him, "…your membership terms will mirror those under the [previous scheme]".  Mr H also received an announcement informing him, "The pension earned up to 31 December 1997 [the day before joining the new scheme] will receive annual increases in the same way as under the existing pension scheme.”  A letter from the employer's benefit consultants shortly before the transfer confirmed to Mr H that on transferring his membership to the new scheme, "… your accrued and future Pensionable Service benefits would mirror those that would have been available under [the previous scheme].”  

Mr H joined the new scheme for future service on 1 January 1998 and also transferred his benefits in respect of past service into the new scheme. He resigned from the employer's service in June 1998. When Mr H first started to receive his pension in 2014, his benefits were calculated on the basis that the excess over GMP increased at the rate of RPI, subject to a 5% cap.  

The benefits which transferring members were to receive under the new scheme were never formally documented in the scheme's trust deed and rules.  The scheme rules applicable to Mr H contained no provisions for increases in payment for pension in excess of GMP.  In 2015 the trustees (with collaboration from the employer) sought Counsel's advice on benefit entitlements under the scheme (though not in respect of Mr H specifically).  Counsel advised that the scheme should be administered on the basis of its trust deed and rules, and that the 1997 announcements had not been incorporated into the provisions of the scheme.  Following the Counsel's opinion, the scheme trustee informed Mr H in 2017 that he would receive no further pension increases in respect of pension in excess of GMP that had accrued before 6 April 1997.  Mr H complained.

The employer's contractual obligation

The Ombudsman found that Mr H had a contractual entitlement to pension increases that mirrored those under the previous scheme.  He found all the elements required for a contract, ie offer, acceptance, intention to create a contractual relationship, and consideration.   The 1997 announcement inviting Mr H to join the scheme had been an offer, and Mr H's election to join the new scheme was an acceptance.  There had been an intention to create contractual relations, and Mr H had provided consideration by virtue of continuing to work, paying contributions and transferring his past service benefits to the new scheme when he could have chosen to leave them in the previous scheme.  The Ombudsman noted that the amendment power under the new scheme allowed the employer to amend the scheme unilaterally, so there was nothing legally preventing the employer from giving effect to its promise under the scheme.

The Ombudsman rejected the employer's arguments that Mr H was time barred from bringing a claim.  He said that the contractual agreement to provide mirror benefits was a continuing obligation which was not actually breached until the 2017 announcement informing Mr H that he would not be entitled to increases on the part of his pre-6 April 1997 pension that exceeded his GMP.  In any event, the remedy sought by Mr H was equivalent to specific performance of the contract.  The Limitation Act 1980 on which the employer sought to rely only provided for limitation periods to apply where a claimant sought damages, not specific performance of the contract.

What was the effect of the pension increase rule in the previous scheme?

The pension increase rule in the previous scheme provided, “On each 1 April that part of the Member’s pension under rule 3 which exceeds the Member’s Guaranteed Minimum Pension shall increase at such percentage rate per annum compound as may be fixed from time to time by the Trustees at the direction of the Principal Employer and advised in writing to Members. …”

The Ombudsman concluded that the wording of the previous scheme's pension increase rule meant that there was a requirement to provide some level of increase, ie a zero increase was not permitted.  The Principal Employer was required to genuinely consider exercising the power at regular intervals, even if it decided not to change the rate of increase on a particular 1 April.  He found that at the time Mr H transferred, there had been a direction in force under the previous scheme requiring increases at least equal to the rate of increase in RPI, subject to a 5% cap.  This meant that Mr H should have been granted increases at this rate in the new scheme until such time as the Principal Employer gave a new direction varying the increase rate.

Was the scheme trustee under an obligation to provide mirror benefits to Mr H?

As the trustees had not been a party to the contract between Mr H and his employer, the Ombudsman also had to consider whether the trustees were under a legal obligation to provide mirror benefits to Mr H.  The scheme's transfer in rule provided, “the Member shall be entitled to receive out of the Scheme such further benefit as the Trustee … shall consider to be justified by the said transferred sum”.  The Ombudsman concluded that the broad wording of this rule allowed the trustees to provide that transferred in benefits would mirror those of the previous scheme, and that accordingly the trustee should have provided mirror benefits.

Our thoughts

It is perhaps not surprising that the Pensions Ombudsman found that the member was entitled to the benefits that were promised at the time of the transfer.  It was unusual to focus on the contractual obligation of the employer as a basis for the claim.  There was no limitation defence available to the employer because there was a continuing breach and because there is no limitation on specific performance.

The Pensions Ombudsman's conclusion that the wording of the discretionary pension increase rule did not allow for zero increases is also noteworthy. It contrasts with the Court of Appeal's decision in Britvic Plc v Britvic Pensions Limited (in which Addleshaw Goddard acted for the employer).  In that case the court held that a rule providing "each pension…increases in each year after it starts to be paid" could give rise to zero increases in some years.  The key difference was that the rule in the Britvic case specified that the rate of increase was the percentage increase in RPI for the previous year (subject to a cap) "or any other rate decided by the Principal Employer".  In that case the court attached weight to the fact that providing increases in line with RPI changes could give rise to zero increases if the change in RPI was negative for the relevant year. 

Employers and trustees who have a discretionary power to grant pension increases need to take care that the power is exercised in accordance with its terms.  If proposing not to grant any pension increase, they need to be sure that the power permits that.

Final report of first phase of Pensions Investment Review to be published in the Spring

In our last Update we reported on the first phase of the Government's Pensions Investment Review in which the Government has proposed the introduction of a minimum size and maximum number of default funds.  In a speech at the end of January the Chancellor announced that the final report on these proposals will be published in the Spring.  

ICAEW audit statement following the Virgin Media judgment

The Institute of Chartered Accountants in England and Wales (ICAEW) has published its thoughts on the implications of the Virgin Media judgment for pension scheme sponsoring employers and their auditors.  Although not primarily aimed at trustees, the document sets out the ICAEW's view of what actions it is reasonable for trustees to be taking in response to the Virgin Media judgment.  For more detail, see our briefing.

Changes to pension surplus rules

In a press release published in January, the Government announced that it will set out changes to the pension scheme surplus rules in the Spring in a response to the Options for Defined Benefit schemes consultation which was published by the previous government.  That consultation said that the government was considering a statutory override so that all schemes could "choose to share surplus subject to the appropriate funding levels".  It sought views on whether the scheme funding threshold at which a payment of surplus to the employer is permissible should be set at something below buy-out.  It also sought views on giving employers the option to pay a higher "super levy" to the PPF in exchange for the PPF offering a 100% level of compensation in the event of the sponsoring employer's insolvency.

Second phase of Government's pensions review on hold

In December 2024 the FT reported that the Chancellor has put the second phase of the Government's pensions review on hold.  The Government had said that the second phase of its pensions review would look at the adequacy of retirement savings. According to the FT, "people briefed on the issue" at the DWP have said that the Chancellor has blocked the second stage of the pensions review due to concerns about placing new burdens on business.

Pension fund clearing exemption to be retained on longer term basis

The Government has confirmed that it will make permanent the exemption that pension schemes currently have from the obligation to clear certain derivative contracts at a central counterparty.  The Government says it will take forward legislation to ensure that the exemption does not expire on 18 June 2025 as currently scheduled.