Pensions - Gowling Wlg

Key points Trustees cannot act lawfully when unduly influenced by a conflict of interest; A conflict of interest can impact on the validity of a trustee decision and on the management of the pension scheme; The Pensions Regulator has issued guidance around conflicts of interest; Trustees need to understand, identify and manage conflicts of interest including adviser conflicts; Trustees should adopt a conflicts of interest policy; A conflict can arise in relation to confidential information; and Separate Companies Act 2006 requirements apply to trustee directors.

Key Points TUPE is a very complicated area of employment law. It is particularly difficult when it interacts with pension rights. Specific legal advice is advised if you are dealing with pension rights under TUPE. TUPE does not generally apply to pension benefits. As a result, an employee's entitlement to pension benefits do not generally transfer under TUPE. There are, however, three key exceptions to this rule: Beckmann and Martin rights – rights to certain enhanced redundancy benefits and early retirement benefits may transfer under TUPE; minimum pension rights that apply in certain specific circumstances and, if they apply, provide transferring employees with limited protection by requiring the receiving employer to provide pension benefits in line with prescribed minima; and personal pension schemes – an individual's contractual rights in respect of a personal pension scheme (e.g. a Group Personal Pension (also known as GPPs)) will transfer automatically.

Key Points Calculating pension loss can be complex, especially where the employee was defined benefit pension scheme. The Employment Tribunal service published a 2003 guidance note which suggested two methods for approximating pension loss without the need for actuarial advice, but this guidance has now been withdrawn. During April and May 2016, the President of the Employment Tribunals (England and Wales) consulted on a new approach to calculating pension loss. The response to this consultation is awaited. In higher value cases, the parties may wish to take actuarial advice on pension loss. In the context of a negotiated exit, there are several ways to compensate for pension loss. The cooperation of the pension scheme administrators or trustees may be required to implement some of these.

Key points Under a pensions salary sacrifice arrangement an employee gives up part of their cash salary in return for pension benefits Typically the employee's salary is reduced by the amount that they were previously paying as employee contributions to a pension scheme and the employer pays an equal amount to the pension scheme as an employer contribution Salary sacrifice results in cost savings on National Insurance contributions To introduce a salary sacrifice arrangement an employer needs to vary the terms of the employee's contract of employment As salary sacrifice involves a reduction to the employee's salary, it could have some disadvantages (though most of these can be avoided if the arrangement is set up carefully)

Key Points Whether pension benefits should continue to build up whilst an employee is on family leave depends on whether the employee is on a period of paid or unpaid family leave. Pension benefits should continue (and contributions be paid) in respect of an employee on leave as detailed below for any period of paid leave (whether statutory or contractual). The extent to which there is an obligation on employers to continue to provide pension benefits during periods of unpaid family leave is an area of unsettled law. Many practitioners agree that during periods of unpaid leave, employers are under no legal obligation to pay contributions or provide benefit accrual unless the employee has a specific contractual right to such contributions or accrual.

Discrimination: Sex Key Points This note is primarily focussed on the sex discrimination issues which have arisen in relation to occupational pension schemes (rather than personal pension schemes), because this is where most of the sex discriminatory practices have been identified. The Equality Act 2010 (the "Act") applies to both employers participating in occupational pension schemes and the trustees of such schemes. The Equality Act 2010 also inserts an overriding non-discrimination rule into occupational pension schemes if they do not already contain such a provision. Under the Act, persons (including trustees of pension schemes) are prevented from directly or indirectly discriminating, victimising or harassing someone because of their sex. The key cases of Barber v Guardian Royal Exchange and Coloroll Pension Trustees Limited v Russell established that pension schemes had to equalise pension benefits between men and women, with effect from 17 May 1990 (i.e. the date of Barber decision), and outlined how

Part one - discrimination and part-time employees Key points A part-time worker must not be treated less favourably than a comparable full-time worker doing the same or largely the same job unless the less favourable treatment can be objectively justified. This extends to less favourable treatment in respect of the provision of pension benefits. A part-time worker can bring a claim for less favourable treatment under the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000. The other potential claim a part-time worker can bring in relation to pensions discrimination is a claim for indirect sex discrimination under the Equality Act 2010. Preston v Wolverhampton Healthcare NHS Trust clarified that men or women excluded from their employer's pension scheme on grounds of indirect sex discrimination are entitled to claim access to the pension scheme. ‘Off-sets’ (notional deductions equal to the basic state pension made from a worker’s salary to calculate contributions and pension benefits)

Key Points The overriding principle under the Equality Act 2010 is that it is unlawful to discriminate against an individual based on their age unless the treatment can be objectively justified. In relation to pension schemes, a number of important exceptions apply to the general principle that it is unlawful to discriminate on the basis of age. These are contained in the Equality Act (Age Exceptions for Pension Schemes) Order 2010 (SI 2010/2133). Where a particular practice does not fall within one of the exceptions, for that practice to be lawful it must be shown to be 'objectively justified' – that is, a proportionate means of achieving a legitimate aim. 'Cost' alone is not sufficient to objectively justify a discriminatory practice, although the case of Woodcock v Cumbria Primary Care Trust [2012] EWCA Civ 330 did call into question how much additional evidence from an employer is needed for the practice to be objectively justified.

Key points The Equality Act 2010 prohibits direct discrimination and indirect discrimination on the grounds of a protected characteristic. The protected characteristics listed in the Equality Act 2010 are sex, age, religion or belief, race, sexual orientation, gender reassignment, pregnancy & maternity, marriage and civil partnership, and disability. With the exception of age, direct discrimination cannot be objectively justified, but indirect discrimination can be. There are particular exemptions in the Equality Act 2010 and associated regulations that apply to pension schemes, notably in relation to age. Trustees of occupational pension schemes are liable to their members or prospective members if they discriminate in terms of the offer of membership or benefits provided under the scheme, for example. All occupational pension schemes are deemed to include a non-discrimination rule, regardless of what the rules say. The Equality Act 2010 also applies (with certain important exceptions) to providers of g

Key points Winding up an occupational pension scheme means that the scheme will come to an end, the trustees will collect in the scheme's assets and distribute them for the benefit of the scheme’s beneficiaries. The trustees will need to carry out data reconciliation of member records. Benefits may be secured by transferring benefits to another scheme and/or by buying annuities with an insurance company. The trustees must notify The Pensions Regulator of the scheme wind up. Where a defined benefit scheme is in deficit upon wind up, an "employer debt" may become payable under s75 of the Pension Act 1995. If wind up is triggered because an employer suffers an insolvency event, it may enter a PPF assessment period and ultimately go into the PPF.

Key points The employer and members of a scheme can contractually agree that the member's entitlement under the scheme will be different to that under the scheme rules The case of South West Trains v Wightman established that such "extrinsic contracts" could be effective Extrinsic contracts cannot affect benefits which it is agreed have been earned by members' employment before the extrinsic contract is concluded, because of section 91 of the Pensions Act 1995 Extrinsic contracts can be useful for employers looking to make changes to future pension benefits but they should always be used with care and only after taking legal advice

Key points The Imperial case (Imperial Group Pension Trust Ltd. v. Imperial Tobacco Ltd. [1991] 1 W.L.R. 589) established that an employer owes a duty to pension scheme members (including employees, former employees and dependants of members) when exercising its powers under the scheme. Summarised, the employer's duty is not, without reasonable or proper cause, to act in a way calculated or likely to destroy or damage the relationship of trust and confidence between employer and scheme member. For the employer to have acted in breach of duty, it needs to be shown that it acted irrationally or perversely, in a way in which no reasonable employer acting in good faith would. Although it is entitled to take into account its own interests in deciding what to do, those interests need to be weighed against any reasonable expectations which employers had created. The IBM case (IBM (UK) Holdings Ltd v Dalgleish [2014] EWHC 980 (Ch)) has recently considered this area.

Key points Employers with more than 50 employees are required to consult with 'affected members' if they propose making certain types of changes to pension schemes. These changes are known as 'listed changes'; The minimum consultation period is 60 days; Affected members include active members and employees who have an entitlement to join the pension scheme (i.e. prospective members); Affected members must be provided with information. The requirements for what needs to be in this information are set out in legislation. In addition, the Pensions Regulator has provided guidance on what it expects to see in consultation information.

Key points Amendment or modification powers generally are found in scheme rules not in pensions legislation Pensions legislation restricts the way a scheme's modification power can be used Pensions Act 1995: Section 67 onwards protects accrued rights to pension benefits Section 67 also restricts the way changes can be made from defined benefit or final salary benefits to defined contribution or money purchase benefits Section 67 also restricts the way changes can be made which might reduce the rate of a pension Trust law requires trustees to act in members' interests and this applies to decisions to agree to scheme modifications Section 68 Pensions Act 1995 provides a statutory power to make specific modifications regardless of the powers contained in the scheme rules Additional considerations arise where the scheme is contracted out and section 37 of the Pension Schemes Act 1993 imposes additional formalities in such cases

Key Points The Pension Protection Fund (PPF) provides compensation for members of defined benefit (DB) pension schemes whose sponsoring employers have become insolvent. It was established by the Pensions Act 2004. To qualify for entry to the PPF a scheme must be an eligible scheme. The Pension Protection Fund (Entry Rules) Regulations 2005 detail schemes that are not eligible. PPF entry is more complex for multi-employer schemes. The process will depend on the scheme's rules and whether or not the scheme is sectionalised or segregated (for example, on the insolvency of an employer). Detail is provided in the Pension Protection Fund (Multi-Employer Scheme)(Modification) Regulations 2005. The PPF is funded through levies on eligible DB schemes. If a scheme enters the PPF, the PPF will provide compensation to the scheme's members in place of their accrued pension. This compensation is subject to a cap which (usually) increases slightly each year.

Key points Independent trustee of pension scheme may be appointed Other trustees' discretionary powers fall away Employer as sole trustee ceases to act Employer debt: Section 75 Pensions Act 1995 and Occupational Pension Scheme (Employer Debt) Regulations 2005 may apply Scheme may qualify for entry to Pension Protection Fund under Pensions Act 2004 Section 126 onwards Trustees will be unsecured creditors in employer's winding up unless they have previously obtained security (such as a charge over assets)

Key Points Options range from amending benefits to sophisticated investments The employer needs to consider its duty of good faith RPI/CPI

Key points There are circumstances in which a defined benefit pension scheme may have a funding surplus. Refund of surplus to an employer is permitted if certain requirements are met, which differ depending on whether the scheme is ongoing or in wind-up. The requirements include: Ongoing scheme: power in the rules, refund within limit specified by actuary, in members’ interests to exercise power, 3 months’ notice to members.   Scheme in wind-up: power in the rules, scheme liabilities fully discharged, any power to pay surplus to others considered, 3 months’ notice to members. Section 251 of the Pensions Act 2004 provides that, for an ongoing scheme, the refund or surplus power is lost unless the Trustees pass a resolution meeting the requirements of section 251 to retain the power by 5 April 2016. In practice, this means Trustees must have given written notice of their intention to make such a resolution to members and employers by 4 January 2016. Under the Finance Act 2004, a refund of surplus payme

Key Points There are no statutory restrictions on membership of a UK pension scheme by persons who do not live or work in the United Kingdom. Restrictions on benefits accrued or provided under a registered pension scheme may be relaxed where a member does not benefit from UK tax relief because he or she is a "relevant overseas individual" or a transfer has been made into the scheme from a "recognised overseas pension scheme". A registered pension scheme may only make a transfer into an overseas pension scheme that is approved for the purpose by HMRC (a "qualifying recognised overseas pension scheme" - QROPS). Transfers to a QROPS (and onwards from a QROPS to another QROPS) are subject to the Overseas Transfer Charge (OTC) of 25% of the transferred value from 9 March 2017, unless certain exemptions apply. A member who comes to the UK as an existing member of a qualifying overseas pension scheme may benefit from migrant member relief on UK income tax. A scheme may only accept contributions from a "European Emp

Key Points Contingent assets are additional employer or group assets that trustees can access on the happening of a specific event or events Examples of contingent assets are guarantees, charges and letters of credit Contingent assets may be used to give increased flexibility in terms of the approach taken to scheme funding by employers and trustees or to give trustees greater comfort as to the security of the pension scheme Trustees need professional advice before agreeing to accept a contingent asset so they can be satisfied that the contingent asset is validly given and can be enforced by them if the contingent event occurs The PPF has standard form documents for some types of contingent assets