Local Government Pension Deregulatory Review

Transcription

1 Pensions update Newsletter July 2007 HEADLINES Appeal against first financial support direction Court of Appeal ruling on winding up priorities Pensions deregulatory review Local Government pensions broad comparability a statutory requirement New transfer regulations consultation published APPEAL AGAINST FIRST FINANCIAL SUPPORT DIRECTION On 27 June the Pensions Regulator published its first determination imposing Financial Support Directions (FSD) on Sea Containers Limited (SCL) in relation to two defined benefit pension schemes. The two FSDs require SCL to put in place financial support for those schemes totalling over 90m. The principal employer of the two schemes is Sea Containers Services Limited, a wholly owned subsidiary of Bermuda-based SCL. If SCL does not comply with the FSD then the Regulator may go on to issue a Contribution Notice, requiring immediate payment to the schemes up to the full buy-out deficit. We understand that SCL has lodged an appeal with the Pensions Regulator Tribunal. The Tribunal will effectively re-decide the matter and may take into account any new evidence not raised before the Regulator. The Tribunal will then remit the matter back to the Regulator with directions as to how it must proceed. Those directions might confirm, vary or revoke the original FSD. There is a right of appeal (subject to permission from the Tribunal or court) on a point of law to the Court of Appeal against any determination of the Tribunal. While the reference to the Tribunal is pending the Regulator will not be able to take any further steps in relation to the FSD.

2 COURT OF APPEAL RULING ON WINDING UP PRIORITIES On 26 July the Court of Appeal handed down judgment in the case of Cripps -v- Trustee Solutions. The case concerns the division of assets among different groups of members on winding-up. It will be of interest to trustees of defined benefit schemes which commenced winding-up before 6 April Nabarro represented the scheme trustee. The question on appeal concerned which members fall into the priority pensioner category on winding-up and for what portion of their benefits. The difficulty arose because male members of the scheme, who had been members since before May 1990, had accrued part of their benefits based on a retirement age of 65 and part on 60. The High Court had held that any member aged 60 or over as at the date winding-up commenced was in the pensioner priority category on winding-up for all his benefit (not just the tranche of benefit accrued with a retirement age of 60). Mrs Cripps (a deferred member of the scheme who would receive a reduction in her benefit as a result of that decision) appealed. The Court of Appeal overturned the High Court judgment and ruled that those members aged between 60 and 64 on the date winding-up commenced will be in the pensioner priority category only for that portion of their benefits accrued with a retirement age of 60. However, they are to be treated as being in the deferred category with a lower priority in relation to benefits accrued with a retirement age of 65. In the light of this decision, trustees of defined benefit schemes which are in the process of winding up (where winding-up commenced before 6 April 2005) may need to review the manner in which benefits are being secured. PENSIONS DEREGULATORY REVIEW PUBLISHED The Sweeney/Lewin report on pensions deregulation was published on 25 July. The main theme of the report is that if open-ended risk and regulatory burden could be alleviated sufficiently then employers would be more likely to be willing to offer/continue offering DB schemes. Specific areas dealt with in the report include: Principles based regulation The report is concerned that in some areas there are too many layers of regulation - regulations, codes, guidance etc which can sometimes be unclear or inconsistent. Consideration should be given to whether the number of regulations can be cut down and there should never be a code and regulations in the same area. The DWP should, whenever legislation falls to be introduced or revised, consider whether unnecessary prescription can be removed. The current regime should gradually be rationalised and simplified rather than being replaced wholesale. There should be a built in period of grace of a number of years for any new legislation to allow schemes whose practices comply with the former regime to continue with it. Both regulations and guidance should be more accessible and intelligible. Benefit design and section 67 The report suggests that schemes might be able to be more flexible (and share risk between members and employers) for example by promising lower accrual but with an expectation that if things go well benefits will be augmented, or by introducing a higher retirement age (e.g. 70)

3 with an expectation that if funding allows, members could retire earlier on an unreduced pension. The authors of the report believe that section 67 (which restricts modification of subsisting rights) does allow benefits to be offered in this way - although would welcome clear guidance from DWP and Pensions Regulator that this is the case. LPI pension increases Defined benefit schemes must provide increases to pensions in payment (currently LPI to a maximum of 2.5 per cent) The two authors disagreed on this issue. Ed Sweeney said LPI was a valuable benefit and should remain compulsory in DB schemes. Chris Lewin felt that retaining it could impede the development of new risk based schemes. As they could not agree they made no recommendations. Surplus The report recommends that the legislation should be simplified and amended to allow return of surplus to employers once a scheme has reached its statutory scheme specific funding level and the trustees agree at that time that such a payment should be made. Employer debt - multi-employer schemes Where an employer participating in a scheme ceases to employ active members there should be a period of grace of up to one year before a debt is triggered (during which time it might employ new members thus preventing the debt arising). Where a scheme has a strong employer covenant and has met its target funding level then no debt should be triggered on a corporate restructuring. Chris Lewin suggested that even where the employer covenant was weak, no debt should be triggered, as long as it remains the same. Trustee knowledge and understanding The report suggests that this should be tested across the trustee body as a whole and not require each trustee to have knowledge and understanding in each area. Also, reasonable personal legal expenses arising from trustee duties should be reimbursed by the scheme. The Secretary of State has announced that the government will publish a response to the review in the Autumn. LOCAL GOVERNMENT PENSIONS BROAD COMPARABILITY A STATUTORY REQUIREMENT From 1 October 2007 it will become a statutory requirement for local authority employees who are members of the Local Government Pension Scheme (LGPS) and whose employment transfers under a Tupe outsourcing contract to be offered broadly comparable pension rights by their new employer. Currently this is not a requirement, merely best practice under Department of Communities and Local Government (DCLG) guidance. Anyone involved in an outsourcing which is likely to complete after September should ensure that the contract complies with the new requirements. The legislation effecting this change is the Best Value Authorities Staff Transfers (Pensions) Direction 2007, a direction made by the Secretary of State for the DCLG under section 101 of the Local Government Act 2003.

4 The direction provides that the contract between the authority and the contractor must require the contractor to secure, for each transferring employee, pension protection which is enforceable by the transferring employee. Pension protection is secured if, after the transfer, the transferring employee has rights to acquire pension rights that are the same as, broadly comparable to, or better than, those he had under the public service scheme. NEW TRANSFER REGULATIONS CONSULTATION PUBLISHED The DWP has issued a consultation document on the new transfer value regulations intended to come into force on 6 April The consultation closes on 17 August The key points are: Current actuarial guidance (GN11) will be withdrawn and the requirements for the calculation of transfer values set out in the regulations. The trustees, not the actuary, will be responsible for calculating transfer values and determining the assumptions to be used, after obtaining actuarial advice. Transfer values may be reduced to take account of scheme underfunding where the trustees have obtained an insufficiency report. The amount of the cash equivalent transfer value (CETV) will be a minimum amount; trustees may pay higher amounts if they consider it appropriate. The circumstances in which the period for the calculation of the CETV can be extended from three to six months are widened. The Early Leavers Regulations will be amended to allow DC scheme trustees to adjust cash transfer sums to allow for investment gains or losses between the date of leaving and the date of transfer.

5 CONTACT Kate Richards, Partner T +44 (0) k.richards@nabarro.com Susan Jones, Knowledge Lawyer T +44 (0) s.jones@nabarro.com About the Pensions team We have one of the largest and most established Pensions teams in the UK. Everyone in our team is a pensions specialist and together we can provide expert advice on every aspect of pensions. We focus our diverse experience and in-depth knowledge and understanding of key pension issues on delivering effective, tailored solutions. We handle a very wide range of pensions issues, from drafting complex pensions documentation, dealing with complex pensions reorganisations to successfully defending Pensions Ombudsman complaints. London Lacon House, 84 Theobald's Road, London WC1X 8RW T +44 (0) F +44 (0) Sheffield 1 South Quay, Victoria Quays, Sheffield S2 5SY T +44 (0) F +44 (0) Brussels 209A Avenue Louise, 1050 Brussels, Belgium T F Disclaimer Detailed specialist advice should be obtained before taking or refraining from any action as a result of the comments made in this publication, which are only intended as a brief introduction to the particular subject. This information is correct at the date shown below. We cannot be responsible for links to external websites that may become broken in the future. Copyright Nabarro, July 2007