Welcome to the summer edition of Pensions Points, your quarterly guide to the key pensions issues you need to be aware of.
The Cost Control Mechanism and the Fire Brigades Union Case Appeal
In March, the Fire Brigades Union (FBU) and the British Medical Association (BMA) launched judicial review applications against HM Treasury’s decision in relation to the cost control mechanism (CCM) as previously discussed in the April 2023 Pension Points article.
In their claim, the FBU and BMA had challenged the Public Service Pensions (Valuation and Employer Costs Cap) (Amendment) Directions 2021. Following actuarial valuation, if costs move too far away from a target cost, then member contributions and/or benefits are adjusted to enable a return to the target level. The government’s approach was to include the McCloud remedy costs into the CCM, which the FBU and BMA sought to challenge. However, Mr Justice Choudhury held that the government’s decision was not unlawful, and dismissed the applications on all the grounds in which the claimants sought to rely on.
Nevertheless, the Court of Appeal has now granted the FBU permission to appeal, although, the date of the hearing is yet to be confirmed. It is likely that we still have a long wait before we receive the Court of Appeal’s assessment of these issues.
HM Treasury have also recently published a statement on the CCM in relation to its application under the Public Service Pensions Act 2013 to public service pension schemes. The policy statement looks at the ‘reformed scheme only’ and how the CCM will operate from 2020 valuations onwards.
With regards to unfunded schemes, which include the NHS, Teachers, Civil Service, Armed Forces, Police and Fire schemes, moving to a reformed scheme only will mean that all accrued service on or before 31 March 2015 will be excluded from the CCM. All service from 1 April 2022 onwards will be included in the CCM (as this will be in the reformed schemes). For the period between 1 April 2015 and 31 March 2022 the retrospective McCloud remedy will operate.
With regards to the LGPS, all pensionable service completed before 1 April 2014 will be excluded from the CCM and all pensionable service from 1 April 2022 will be included. With regards to the McCloud Remedy period, all pensionable service will be included in the CCM. However, the impact of the ‘underpin’ which ensured that members closer to retirement were given transitional protection, will be excluded.
New Equality and Diversity Guidance
Following calls for greater diversity on pension scheme boards, The Pensions Regulator (TPR) published its Equality, Diversity and Inclusion (EDI) guidance for both employers and pension scheme governing bodies. This guidance contains specific codes of practice, which have the underlying aim of encouraging employers and trustee boards to improve EDI in pension schemes.
As part of assisting employers, the guidance emphasises the role of employers in fostering EDI considerations in pension schemes. Importantly, the TPR set out some key considerations for employers:
- The benefits improved EDI will have on decision-making – the TPR findings suggest that a diverse board often leads to improved decision making
- Trustee recruitment and board diversity – the guidance suggests recruiting from a wider group of individuals outside the usual pool of candidates
- Appointing the governing body – considerations surrounding gaps in the diversity of the governing body will help ensure that individuals with a variety of skills and experience are selected
- Appointing the chair – the guidance suggests that the chair of trustees has a vital role in creating and reviewing EDI policy
- Appointing professional pension trustees – address gaps in diversity through introducing professional trustees
Simultaneously, the guidance illustrates ways in which governing bodies can improve EDI. Notably, the guidance recommends governing bodies to review existing diversity compositions, it emphasises the role of the chair in improving EDI, and recommends that a strengthened EDI policy is established which can be consistently maintained over a period of time.
As such, it is imperative that employers and governing bodies assess this newly-published guidance and take steps to improve existing EDI strategies.
Another Judgment Debtor Drawdown… Manolete Partners Plc v White
The issue of whether a director could drawdown his pensions benefits to satisfy an unpaid debt of a figure amounting around £996,000 for a breach of director’s duty, was laid to rest in the case of Manolete Partners Plc v White. In this case, the High Court granted the claimant’s application and forced the director to drawdown his pension in order to pay a judgment debt arising from his breach of director’s duties. Notably, the court emphasised that the claimant should not be allowed to hide assets away in a pension fund which can be withdrawn, particularly if such funds are urgently needed to pay creditors.
Section 91(2) of the UK Pensions Act 1995 provides that a person’s entitlement or right to a future occupational pension scheme “cannot… be assigned, no order can be made by any court the effect of which would be that he would be restrained from receiving that pension.” Relying on this, Mr White had argued that the court cannot make any order which would restrain him from receiving his pension under the scheme. However, the court found no contravention of this Act and held that this did not prevent the claimants from making an order to be enforced against a debtor’s pension fund.
Importantly, this case was distinguished from many other cases because of the fact that the main assets within the small self-administered pension scheme (SSAS) were derived entirely from funds provided by the company (where the breach of fiduciary duty had occurred). In making reference to the seminal case of Blight & ors v Brewster the court found that White had sufficient power to exercise the drawdown rights under the pension scheme rules. Consequently, the court required White to take sufficient steps of designating his pension fund as a ‘drawdown pension.’ Several recent cases suggest that the courts are willing to compel pension members to drawdown their pension to pay creditors in similar situations. Overall, it appears that the courts are of the view that debtors should be unable to hide assets away from creditors in their pension funds where they have the ability to withdraw.
The Pensions Regulator: Cyber Security Statement
Capita, who are largely involved in administrating pension funds for several large employers reported a cyber-attack earlier this year. This resulted in around 90 organisations reporting breaches of personal information held by Capita who were concerned of the risks posed to millions of policyholders’ information contained within Capita’s systems. Consequently, the Pensions Ombudsman (PO) took services down after the cyberattack for precautionary reasons.
Following this, The Pensions Regulator (TPR) contacted numerous pension funds (who had outsourced to Capita) and asked trustees to explain the approach they have taken to ensure that member’s data is adequately protected. According to the TPR, IT security and cyber-attacks is a top priority for the pensions watchdog moving forward and they demanded that trustees who believed that their scheme had suffered a data breach, should notify this to the TPR or the Information Commissioner Office (ICO) immediately.
As well as this, the ICO has encouraged those who use Capita’s services, to conduct due diligence on their data and determine whether personal data is open to risk. Additionally, the ICO has requested that organisations notify them within 72 hours of the potential personal data breach. Those who do not report a breach, must provide reasonable explanation for why they had decided not to report. Thus, this indicates the tougher-screening process imposed by the TPR and ICO on trustees to ensure that personal data of members is protected and not vulnerable to cyberattacks.
Death Grant Decision Making – Pensions Ombudsman Decision
The Pensions Ombudsman’s (PO) recent determination in Swansea City & County Pension Fund (CAS-45793-J6Y3) upheld a complaint from a surviving spouse (Mrs S) regarding a death grant grant following her husband’s passing (Mr S). Mr S died in 2016 and was survived by his wife and three adult sons, two of whom were from a previous marriage (aged 39 and 42), whilst the youngest son was 21, none of whom were dependants. Mr S had created a will but had not completed a nomination form for the death grant.
The decision-making panel reviewed Mr S’s will and decided to split the death grant between Mrs S and Mr S’s three sons. Mrs S believed that she should be the sole beneficiary of the death grant following Mr S’s wishes. Indeed, the PO found that the Council had incorrectly identified Mrs S and the Mr S’s sons as beneficiaries of the will; which the PO subsequently identified as maladministration. The will only made reference to Mrs S as a beneficiary and instead stated that on Mrs S’s death, the property held on trust for Mr S’s three children would be shared between Mr S’s sons.
Additionally, the Council stated that where there are no nominations made for the death grant, the Council looks to make reasonable enquiries to gather the relevant information in order to make their decision. The Council did not do this, and did not contact Mr S’s sons until after it had made the decision. Consequently, the PO identified that the panel had failed to request the necessary additional information from Mrs S and Mr S’s three sons despite Mrs S raising concerns, which in itself should have prompted enquiries.
Consequently, the PO required the Council to make further enquiries with Mr S’s three sons and pay Mrs S £1,000 for the distress and inconvenience caused. Following this, the Council will also reconsider its decision concerning the distribution of the death grant.
This decision highlights the importance of encouraging employees to make and subsequently keep up-to-date their nominees for their death grant. Secondly, it highlights how the PO will respond to incorrect interpretations of an individual’s will, and how a will, whilst a useful tool when making these decisions, in absence of a nomination, should be treated with caution and interpreted correctly. Indeed, whilst benefits will be paid at the discretion of the scheme, all potential beneficiates must be properly considered and the correct processes followed.
The Pensions Regulator: Scam Fighting Strategy
In an attempt to limit pension scammers, the The Pensions Regulator TPR have introduced its scam-strategy plan to combat scamming and protect pension pots from scammers looking to target vulnerable savers. Importantly, the TPR has stressed that savers have become more susceptible to scamming particularly following the aftermath of COVID-19 and during the ongoing cost of living crisis.
The TPR had previously introduced ‘Project Bloom’ in 2012 (now renamed Pension Scams Action Group), which had been developed for the purposes of tackling pension scams. Similarly, under the Pension Schemes Act (2021), trustees were given the flexibility to refuse transfers where a risk of scam was prevalent (the system relied on red and amber flags to notify trustees of potential risks). Nevertheless, the TPR emphasised that additional measures would need to be put in place to provide more robust protections for savers. The TPR warned organisations of the possibility of leaving more savers vulnerable because of the current economic climate. According to the TPR, more households will be lured by offers to access their pension savings early to cover household bills with the risk of many being attracted by fake investments offering high returns which do not come into fruition.
In response to these concerns, the TPR has rolled out its three-part plan which aims to:
- Educate savers about the threat that scams present
- Encourage higher standards that prevent practices which lead to saver harms
- Fight fraud through the prevention, disruption, and punishment of criminals
Previously in 2020, the TPR launched its pledge to combat pension scams. Following its launch, more than 600 organisations have participated in this pledge to combat pension scams. The TPR estimates that this commitment has now resulted in 16 million pension pots being better protected. The TPR is now working alongside the Financial Conduct Authority and the Money and Pensions Service to take active steps to ensure that pension pots continue to be safeguarded appropriately.
If you would like to discuss any of these topics in more detail, please contact our Pensions team.