Update: pensions

Recent months have seen some interesting activity in a number of areas affecting pensions, with offerings from the courts, HMRC, the pensions regulator, the Department for Work and Pensions, the pensions ombudsman and the information commissioner.

The long-awaited change to the minimum age at which benefits can be drawn from registered pension schemes came into force on 6 April 2010. With limited exceptions (principally, if the member meets the conditions required for payment of an ill-health pension or if the member has a protected pension age) from 6 April members are required to meet the new normal minimum pension age (NMPA) requirement of age 55. That is an increase from the previous NMPA of 50. Strictly speaking, benefits can be paid earlier than the new NMPA, but the critical point is that is likely to mean that the payment becomes an unauthorised member payment under the Finance Act 2004 (rather than an authorised member payment) with the corresponding unauthorised member payment charge applying, making any such payment very unattractive. It might be worthwhile to check how the pension scheme's rules deal with this.

The rules of most schemes will have been amended following A-Day (6 April 2006 '“ when the applicable provisions of the Finance Act 2004 came into force) to reflect the required change to NMPA. Failing that, the transitional provisions (which run until April 2011) should be considered to deal with the position where a member (despite the adverse tax consequences) seeks to insist on payment form earlier than the new NMPA of age 55.

The pensions regulator and Reader's Digest

The pensions regulator has recently been in the news regarding his stance on the Reader's Digest matter. Reader's Digest operated a defined benefit pension scheme. The company, the trustees and the pension protection fund (PPF) had in effect agreed an arrangement which involved a lump sum payment and an equity stake in the UK arm for the scheme trustees. The result might have meant that the insolvency of the UK arm could have been avoided and the position of the PPF improved. But the deal needed to be accepted by the pensions regulator. He did not accept it, and Reader's Digest UK was placed into administration in February. What is difficult to fathom is how that decision sits with one of the pension regulator's key aims of reducing the risk of payments having to be made from the PPF. What is clear from the decision is that it cannot be taken as read that the pensions regulator will automatically agree to arrangements between scheme sponsors, trustees and the PPF, even if, as a result, a scheme may fall into the PPF with fewer assets to cover its liabilities than if the deal had been accepted. It remains to be seen whether the pensions regulator will seek to use his anti-avoidance powers.

Data protection

Data protection has always, rightly, been a matter which trustees of all pension schemes have (or should have) taken seriously. From 6 April 2010, there is an even more compelling reason to do so, because the information commissioner will now be able to impose penalties of up to £500,000 for serious breaches of the Data Protection Act. While there is no specific treatment for pension scheme trustees as against any other body subject to the data protection requirements, the nature of some of the information held by trustees (ill-health, for example) may be a factor that the information commissioner will take into account when assessing the seriousness of any breach and any penalty for that breach. Aside from the key Data Protection Act requirements, there is a dovetail with the pensions regulator's good governance requirements for trustees. It is now more important than ever for the trustees to check that those to whom they have delegated data processing tasks are performing that properly.

Consulting scheme members

Since 6 April 2006, there have been requirements in place that scheme members must be consulted over certain changes to their pension scheme. The list has included matters such as changing member contribution rates or changing or ceasing further benefits. A notable absent feature was the requirement to consult regarding any change in pensionable earnings. With effect from 6 April 2010, that has changed. From that date, employers operating defined benefit schemes will be required to consult members if they propose to change the amount of pensionable earnings used by the scheme to calculate a member's pension benefits under the scheme. The pensions regulator has the power to impose penalties of up to £50,000 for non-compliance with the consultation requirements.

National employment savings trust

Readers will previously have noted the planned introduction of what were then called personal accounts. Well, now the branding people have been at work and the result is that we will have a new acronym to deal with '“ NEST, standing for national employment savings trust.

From 2012, an obligation will be phased in under which employers will need to automatically enrol eligible workers into a pension scheme which meets certain standards. The scheme can be an employers own scheme but NEST will be available for employers to use, aimed at low to moderate earners.

There will also be an obligation (again being phased in) for employers and employees to contribute, ending up with a minimum eight per cent total contribution comprising three per cent employer contribution, together with employee contributions and an element of tax relief.

The aim, of course, is to overcome inertia, and to ensure that employees are automatically enrolled, with the option for them if they wish to opt out rather than having to make a conscious decision to opt in or join an employer's scheme. Very recently, we have seen the detail of the automatic enrolment requirements. And, for detail and complexity, they do not disappoint. We also now have some detail of the proposed charging structure for NEST. These, and other aspects of the NEST arrangements, will be the subject of a separate article later.

Hybrid schemes

The Court of Appeal provided us with an interesting decision in Houldsworth v Bridge Trustees [2010] EWCA Civ 179 (otherwise know as the Imperial Home Décor case).

This is of particular relevance to those schemes with both defined benefit and defined contribution sections '“ often referred to as hybrid schemes.

Under these schemes, the understanding has been that each of the members of the defined contribution section will have an identifiable 'pot' attributable to them. This would be particularly significant in the event of the scheme winding up. But this has become something of a problem, with the risk that those 'pots' might actually not be dealt with separately but instead be counted as part of the overall assets of the scheme. In that case, the way in which assets must be dealt with in priority under section 73 of the Pensions Act 1995 could count against the defined contribution members.

The case was, by common consent, complex, and was such that the Department for Work and Pensions felt it necessary to become involved over a concern about how it had implemented EU directives. The Court of Appeal decided that providing guaranteed returns and internal annuitisation did not mean that benefits could not be money purchase and neither did providing a salary related underpin (such as a guaranteed minimum pension). And benefits paid by an employer to match those voluntary contributions paid by the employee are derived from the payment of voluntary contributions by the member, and that they should be both first in the priority order under section 73 and that they should not be used for the benefit of those who had not made contributions.

It should be noted that this case turned very much on its facts, and the decisions about what constituted money purchase benefits was very much linked to section 73. It also related to the winding up priority order that applied pre 2005, although certain aspects of the decision may still be of significance in relation to ongoing schemes.

Overpayment of benefits

As always, the pensions ombudsman provided us with useful clarification concerning the often contentious issue of recovery of overpayments of benefits to members. Where they have received an overpayment of benefits from the scheme, members may argue that recovery of overpayments should not be allowed because the member has changed his or her position. What will be looked for is whether the member has changed his position in such a way or to such an extent that it would be inequitable to enforce the recovery.

In the matter of Kenny (which involved the teachers' pension scheme) the member received (which turned out to be correct) a quotation for the level of benefit he would receive. But the actual payments that subsequently started to be paid were at a significantly higher level. The member claimed that it would not be appropriate to recover the overpayments since they had already been spent.

The pensions ombudsman decided that the amount of the pension payments actually received was such that it should have alerted the member that there was an error. In that case, the defence to a recovery was not appropriate since, in effect, the change of position had not been in good faith.