UK Pensions Law Update - July 2024

The Judgment

The High Court considered three key questions:

1. Did the Pension Schemes Act 1993 render any amendments to COSRs made in the absence of the written actuarial confirmation void to any extent?

   The first instance answer given was: yes, the amendments are rendered invalid and void if not supported by the necessary actuarial opinion.

2. Did the requirement for an actuarial opinion relate to amendments concerning both past service rights and future service rights?

   The first instance response was: yes, it applies to both existing and future rights at the date of the amendment(s).

3. Did the requirement apply only to adverse changes to those rights?

   The first instance answer was: no, it applies to any alterations.

Neither points 1 nor 3 were appealed. Issue 2 was appealed, and the Court of Appeal agreed with the first instance decision.

The rights in question are those defined in Regulations as “rights to the payment of pensions and accrued rights to pensions” under a contracted-out scheme. The Court of Appeal held that “accrued rights” should be read as including rights which would accrue in future, and treated the sentence as synonymous with the phrase “rights to pension benefits whether those pension benefits were already in payment or not yet in payment”.

Many may think that this is not what the regulation says – “accrued rights” generally refers only to past service rights, not rights that are to build up in the future. The Court of Appeal was sensitive to the fact this construction was unusual given the words actually used. But the Court favoured determining the legislative purpose of the words before interpreting the words actually used.

Looking at the legislative purpose, the Court noted that the original iteration of the Regulations covered “rights… which are attributable to an earner’s service on or after” the relevant date. The phrase “accrued rights” did not appear in this version. The Court considered that the purpose of the amendments to the Regulations, and the use of the phrase “accrued rights”, was not to cut down the scope of the protection provided in the original version of the Regulations.

The Court also noted that there were more obvious ways of reducing the protection (so that proposed amendments to future service rights did not need actuarial confirmation) if that was indeed what was intended. Furthermore, if that had been the intention, consequential amendments to other parts of the legislative framework might have been expected. So would amendments to the applicable guidance notes given to scheme actuaries.

The Court also did not consider there to be a rational explanation why there would have been a desire to cut the protection in this way. The purpose of the Regulations was to ensure that, when an individual was contracted-out of the State Earnings Related Pension (“SERPS”), he continued to accrue rights that were at least broadly equivalent to the SERPS pension he was no longer building up. If proposed amendments to future service benefits did not need to be considered by the actuary, there was no guarantee that the amended benefits would indeed be sufficient to deliver these minimum benefits. As the legislative purpose of the Regulations was to ensure these minimum benefits were delivered, a broader (and perhaps counter-intuitive) definition of “accrued rights” should be adopted.

By way of recap, the High Court considered the extent to which a proviso in the Scheme’s power of amendment might restrict the BBC’s ability to make amendments to the rights of active BBCPS members (the “Proviso”). The Proviso is as follows:

“…Provided that no such alteration or modification shall… take effect as regards the Active Members whose interests are certified by the Actuary to be affected thereby unless –

(a) the Actuary certifies that the alteration or modification does not substantially prejudice the interests of such Members; or

(b) the Actuary certifies that to the extent to which the interests of such Members are so prejudiced, substantially equivalent benefits are provided or paid for by the BBC or the Trustees or provided under any legislation; or

(c) the alteration or modification is approved by resolution adopted at a meeting of such Members convened by the Trustees....”.

The judgment turned on the extent to which “interests” (i) related simply to rights which active members had already earned by virtue of their past pensionable service immediately before the date of amendment (i.e. their “accrued rights”), or (ii) whether it should be given a broader meaning to include benefits which would (but for the amendment) build up during future pensionable service.

In summary, the High Court held that the Proviso protected: not only (i) past service accrued rights; but also (ii) any final salary linkage; and (iii) the ability to accrue future service benefits on the same terms as provided for under the BBCPS immediately before the amendment.

The BBC appealed the decision of the High Court, arguing that “interests” in the Proviso should be given a more restrictive meaning so as to only protect past service rights. The BBC argued that amendments affecting future accrual should not “activate” the Proviso nor should the Proviso protect the link to final salary.

Summary

The Court of Appeal, approving the High Court’s decision, endorsed a broad interpretation of the word “interests” under the Proviso. In particular, it highlighted the following:

• Context is key: “Interests” does not have a single, natural meaning, and so it cannot be isolated from the context in which it is used. The word has an “inherent pliability” which can have different meanings depending on the context, identity of persons concerned and the nature of the proposed amendment under consideration.
• Power to terminate: The BBC noted that it had the power to terminate its liability to contribute to the BBCPS, so it could prevent any future accrual of pension rights by freezing the Scheme. The BBC argued it follows that it should be able to reduce the rate of accrual through an amendment. The Court of Appeal disagreed. The fact that the BBC had the “nuclear option” to terminate did not necessarily lead to the conclusion that “interests” was restricted to accrued rights. First, such power to terminate is constrained by the Imperial duty of good faith. Secondly, whatever may or may not be envisaged about Scheme cessation had little bearing on the amendment of an ongoing Scheme.

In the case of the BBCPS, the Court of Appeal held that “interests” was a “deliberately simple, broad and open-textured word”, was not tied to “accrued rights”, and was neither limited by reference to a particular cut-off date nor to past contributions. The result was that the “interests” of active members extended to: (i) past service rights; (ii) final salary linkage; and (iii) future service benefit accrual.

Mr E accepted that his pension should be reduced to the correct level going forwards, but argued that it was inequitable to seek to recover the c. £90,000 overpayments from future pension payments. Both the Court and the Pensions Ombudsman accepted that equitable recoupment could apply in principle, and allow past overpayments to be recovered from future instalments of pension. What was in contention, however, was whether it was equitable for the BIC Scheme Trustee to do so in Mr E’s case.

Key to this particular case was a February 2013 Trustee announcement. That announcement informed members that there was a dispute around the pre 1997 increases and that future increases to pensions in payment on this tranche of benefit would be suspended until the matter was resolved. Importantly, however, the announcement was not clear that past overpayments arising from previous pension increases might need to be recouped, depending on the outcome of the litigation.

TPO partially upheld Mr E’s complaint, on the basis that equitable recoupment is an equitable” remedy that was only available to trustees to the extent it is fair in all the circumstances for it to be applied. TPO held that each case must be considered on its facts, and it was overly restrictive to simply say that it would be always be equitable for recoupments to be applied over the same period as the overpayment had arisen. In appropriate circumstances, equitable recoupment might not be available at all to trustees or could be significantly curtailed.

On the facts, and particularly given Mr E had honestly believed he had been entitled to the overpayments until around 1 August 2019, the BIC Scheme Trustee could only recoup overpayments of a little over £6,500 made since that date. The Trustees would also need to obtain a County Court order permitting this recoupment. Further, the Trustees were ordered to pay Mr E £1,000 for distress and inconvenience.

Labour’s Manifesto

Turning to the Manifesto first, whilst it is thin on detail, it sets out the broad elements of Labour’s approach to reviewing and reforming the pensions sector.

Labour’s pledges include the following:

1. Productive finance: Similar to the previous Government’s “Mansion House Agenda”, Labour has pledged to increase investment from pension funds in UK markets aiming to provide better returns for UK savers and to encourage more productive investment for UK business.

2. Climate change: As part of Labour’s aim to make the UK the green finance capital of the world, it plans to mandate UK-regulated financial institutions, including pension funds, to develop and implement transition plans in line with the goal of the Paris Agreement (i.e. to ensure the rise in global surface temperature stays below 1.5°C).

3. Triple lock: Labour has also promised to retain the triple-lock mechanism for increases to the State pension (i.e. ensuring that the State pension is increased annually by the higher of CPI, average wage growth, and 2.5%), despite concerns that the mechanism is increasing the State pension at an unsustainable rate.

   As an aside, higher inflation has led to substantial increases in the State pension in recent years, which is now approaching the limit of the tax-free Personal Allowance. The full State pension currently amounts to around £11,500 per year, which falls just short of the tax-free Personal Allowance of £12,570. Given that Labour criticised the previous Government’s proposed “Triple-Lock Plus” mechanism (which would have increased the tax-free Personal Allowance by the same triple-lock mechanism as the State pension), it is unlikely that we will see any change to the Personal Allowance to account for the additional tax should the State pension exceed £12,500 per annum. In time, this may result in tax deductions for individuals for whom the State pension is the only or most significant source of retirement income.

4. Mineworkers‘ Pension Scheme: Labour has also pledged to end the “injustice" of the Mineworkers’ Pension Scheme by reviewing the surplus arrangements and transferring the investment reserve fund back to members.

There were, however, some key pensions issues that were notably absent from the Manifesto. These include:

1. Lifetime Allowance: Labour had earlier suggested that it would reinstate the Lifetime Allowance (“LTA”), but this proposal was not included in its Manifesto. Given the legislative holes in the current regime (see our later commentary on “Abolition of the LTA”), it will be interesting to see whether (and how quickly) these issues are addressed.

2. Extension of automatic enrolment rules: In September 2023, legislation was passed to permit the Secretary of State to lower the qualifying age for automatic enrolment from 22 to 18, and to widen the band of pensionable qualifying earnings by abolishing the lower earnings limit. This legislation has not been implemented, and it remains to be seen whether this is also a priority for the new Government.

3. Repayment of surplus: In February 2024, the previous Government consulted on (amongst other things) methods of extracting surplus from overfunded DB schemes and returning that surplus to employers and/or members. It is unclear whether the new Government will revisit the findings of the consultation, but given the Government’s clear intention to increase productive investment from UK pension funds into the economy, it would not be surprising to see this consultation reconsidered in future.

4. Other key points: Other areas of recent focus in the pensions sector that were not discussed in Labour’s Manifesto include the following:

   • Use of the Pension Protection Fund (“PPF”) as a public sector consolidator for pension schemes (also see our At a Glance update below on the PPF’s revised proposition on the design of a public sector consolidator);
   • The development of pensions dashboards, and other updates from the Pension Schemes Act 2021 such as proposed changes in relation to the Notifiable Events Regime consulted on in 2021; and
   • The move towards a “Lifetime Provider” model under which employees pay into only one pension pot over their working lifetime.

King’s Speech 2024 – Pension Schemes Bill

The King’s Speech announced a new Pension Schemes Bill (the “Bill”), which is largely based on proposals already considered by the previous Government. One of the main aims of the Bill is to help savers in private-sector DC pension schemes to increase the value of their individual pension pots by over £11,000 for an average earner over their lifetime. The Bill also aims to encourage pension schemes to widen their scope of investment. The Bill is expected to include the following measures:

1. Consolidation of individual deferred small defined contribution pension pots: Consolidation of small pension pots in defined contribution (“DC”) schemes to maximise retirement income and boost pension schemes’ investment power.

2. Value for money framework: Drawing on the consultation undertaken by the Department for Work and Pensions (“DWP”), The Pensions Regulator (“TPR”) and the Financial Conduct Authority (“FCA”) in 2023, the value for money (“VFM”) framework will require trust-based DC pension schemes to demonstrate that they deliver value by meeting a standardised test in a nod to further consolidation across the pensions sector.

3. Retirement products: Trustees of occupational pension schemes will have duties to offer retirement income solutions, and other solutions like default investment options to members.

4. Consolidation of the DB market: This is to be achieved through commercial Superfunds, which aim to offer greater protection for members in closed DB schemes.

5. Jurisdiction of TPO: TPO will be reaffirmed as a competent court to avoid the need for pension schemes to apply to the County Courts to enforce decisions in relation to the recovery of overpayments.

6. Pension Protection Fund and Financial Assistance Scheme: Rule amendments will be made to allow eligible members to receive lump sum payments earlier than currently.

Chancellor’s “landmark” pensions review

Shortly after the King’s Speech, the Chancellor announced a “landmark” pensions review with the objectives of boosting pension pots and stimulating economic growth in the UK.

The first stage of the review will consider strategies to enhance productive investment and retirement outcomes through scheme consolidation and broader investment strategies. HM Treasury notes that:

• By the end of the decade, DC schemes will be managing around £800 billion in assets, so even 1% of these assets could mean £8 billion of productive investment to support the economy and infrastructure;
• The Local Government Pension Scheme manages £360 billion worth of assets, which could be pooled to encourage investment in a wider range of UK assets.

The second stage of the review will then consider the wider pensions landscape in more depth – concentrating on improving pension outcomes and fostering increased investment in UK markets.

The Inquiry Letter highlighted several regulatory shortcomings that allowed the fraud that led to Norton Pensions Schemes’ collapse, including inadequate scheme registration processes and pension transfer rules. It was noted that the registration processes by HMRC and TPR could inadvertently be seen to be “endorsing” schemes, contributing to the ease with which fraudulent schemes could attract investment. Whilst changes were made in 2014 to tighten these processes and make it harder to register a scheme, the Norton Pension Schemes had already been established and registered. Additionally, the pension transfer rules at the time did not require due diligence checks for transfers, facilitating the scam.

TPR’s delayed intervention was criticised. Despite receiving whistleblowing reports and information about the fraudulent activities linked to the Norton Pension Schemes, TPR took a “risk-based decision” not to undertake further investigation during the critical period. It wasn’t until 2019 that TPR appointed Dalriada as an independent trustee, which was seen as a delayed response that hindered potential asset recovery.

The Inquiry Letter also pointed out the potential need for regulatory reforms, including extending TPR’s remit to cover pension scheme administrators (particularly given one of the pension scheme administrators “admitted she knew nothing about the regulation of pensions") and enhancing its rule-making powers (rather than having to wait for the DWP and Parliament to alter its powers to respond to new regulatory challenges). These changes aim to prevent similar frauds in the future by enabling quicker and more effective regulatory responses.

Finally, the Inquiry Letter discussed the role of the Fraud Compensation Fund (“FCF”) in providing compensation to the victims. Dalriada, the independent trustee appointed by TPR, received the first compensation payment of £9.4 million from the FCF in March 2024. However, the process for claiming compensation was described as challenging and the Inquiry Letter provides suggestions for simplifying the process to aid victims more efficiently. These include removing the requirement for a Scheme Failure Notice before bringing a claim, and allowing the FCF to agree that a scheme is at a “last resort” and to make payments earlier than usual.