The IBM appeal – when is a pensions promise not a promise?

Employers can pursue pension plan change with renewed vigour following the publication of the judgment in the IBM appeal. They can now be less concerned about whether promises they have made in the past may bind them into the future, as the weight of an employee’s “reasonable expectations” argument has been significantly downgraded making it more difficult for an employee to successfully challenge pension plan change on the basis that it breaches the employer’s duty of good faith.

Allowing IBM’s appeal, the Court of Appeal overturned the High Court’s ruling that IBM had breached its duty of good faith in introducing the “Project Waltz” pension changes, because of the reasonable expectations it had previously engendered as to defined benefit accrual and early retirement and its contractual duty of trust and confidence by removing the pensionability of future salary increases. In arriving at the decision, the Court of Appeal decided that though the trial judge had identified the correct legal test, he had applied it incorrectly, and he had wrongly elevated reasonable expectations to give them “paramount significance” over other relevant factors. The correct approach was to apply a rationality test, with reasonable expectations forming just one of many factors for consideration in the decision-making process.

The Court of Appeal also found in favour of IBM that making a “threat” that DB members would not receive pay increases other than on a non-pensionable basis, did not breach the contractual duty of trust and confidence. While specific to the pension plan rules, the representative beneficiaries’ cross-appeal that the exclusion power in the rules had been used for a collateral and improper purpose to break the final salary link was refused.

The representative beneficiaries have indicated they will not seek to appeal the decision before the Supreme Court.

Employers should consider member expectations that have arisen from previous communications when making pensions changes and should ensure that consultation is carried out properly. There are still a number of legal pitfalls for the unwary – not to mention problems arising from employees who perceive that promises have been broken.

Do you employ one of the 433,000? Action required if so!

An important deadline is coming up for employers who have used the transitional period for schemes with defined benefits to delay their automatic enrolment duties.  Whilst the transitional period has not been widely used – the Pensions Regulator’s most recent monthly compliance report sets out that, as at July 2017, approximately 433,000 workers have had it applied to them since July 2012 (compared to 8,314,000+ workers who have been auto-enrolled) – employers who have used it will need to take a number of actions both before the transitional period ends on 30 September 2017 and afterwards.

By way of background, employers who sponsor a defined benefit pension plan (DB Plan), including hybrid arrangements offering defined benefits, were able to delay the requirement to automatically enrol one or more of their staff, subject to certain conditions, by using this transitional period.  Broadly, the transitional period was only available in respect of any member of staff in continuous employment, who was eligible for automatic enrolment and entitled to become a member of the DB Plan (providing it satisfied a statutory quality requirement) on the employer’s ‘first enrolment date’ (their staging date in most cases).  The transitional period covers individual workers, rather than the employer as a whole.

Importantly, employers who used the transitional period must now assess any workers covered by it for automatic enrolment and, if eligible, place them into their qualifying DB Plan after the transitional period ends on 30 September 2017.  Note that these requirements will not apply where the transitional period has ended prior to 30 September 2017 because certain conditions referred to above are no longer met (separate requirements apply in those circumstances).  The Pensions Regulator has produced a hefty 43 pages of detailed guidance on this subject.  Helpfully, a much shorter summary of the main actions that relevant employers will need to take by 30 September 2017 and afterwards is available on the Pensions Regulator’s website.

Remember, an employer’s failure to comply with its automatic enrolment obligations can lead to penalties, including potentially significant fines and, for certain breaches, criminal convictions and imprisonment.  Employers who have used this transitional period should ensure they complete the actions described above to avoid any intervention by the Pensions Regulator.

It’s the summer holidays: delays on the roads, delays at the airport, delays on public transport (no change there, then!) and delays on pension transfers

Are pension transfer delays (and complaints about them) here to stay?

In its 2016/17 annual report, the Pensions Ombudsman (PO) noted that there had been an increase in the number of complaints about pension transfers. In fact, complaints about transfers were the second most popular form of complaint, making up 10.5% of all new investigations opened by the PO during the 2016/17 financial year. This figure doesn’t include complaints about transfers relating to pensions liberation either, which received their own 5th place ranking in the PO’s top ten.

Transfers are a particular concern following the freedom and choice reforms in April 2015, with HMRC reporting that over £12 billion of benefits have been accessed in this way. It is clear that the PO is prepared to take a hard line with pension providers and administrators when it feels that action could have been taken more promptly, even when the respective parties have acted within legal deadlines. Advances in technology have raised expectations that everything can be done faster – and in some cases this is true. The regulatory framework, however, needs to keep pace with the underlying legislation. Recognising this fact, the Financial Conduct Authority is in the process of consulting on new rules for advising on pension transfers.

So, why do transfers generate so many complaints to the PO’s office?

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The UK Pensions Regulator goes “Back to the Future”

In an episode that has potential for many sequels, the Pensions Regulator has turned its hand to time travel with a report on the conclusion of Phase 1 of its TPR Future project.

TPR Future involves an assessment by the Pensions Regulator (TPR) of the way in which it complies with its statutory duties and how it intends to combat the challenges of encouraging continuing compliance in future. The project is set against the backdrop of recent increased use by TPR of its statutory powers to take enforcement action against trustees and employers (as well as professional advisers in some cases) who fail to comply with their legal duties.

Whilst the report suggests, at least at face value, that TPR Future is primarily concerned with a behavioural shift, it is important that stakeholders – especially trustees – do not interpret this simply as a form of internal TPR business planning. The devil is in the detail: the report contains some important messages for those involved in administering pension plans. In particular, it alerts trustees that TPR will engage with trustees to assess how they are meeting TPR’s standards and use its enforcement powers more widely when it finds failures.

Like Doc Brown examining the inner workings of his DeLorean time machine, those involved with administering pension plans should be inspired by the report to scrutinise their existing governance processes. Failure to do so in this new regulatory environment could result in a less than smooth passage through the space-time continuum!

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Good Work? Must try harder on tax

The report resulting from the Taylor Review of Modern Working Practices (the Taylor Review), ‘Good Work‘, was finally published on 11 July 2017.

The Taylor Review’s primary focus was new ways of working, the ‘gig’ economy, worker rights and responsibilities, and employer freedoms and obligations. Although tax was not (formally at least) within its remit, it was inevitable that in compiling their report the Taylor Review would encounter issues of taxation… indeed, such is the importance and depth of interaction between ‘employment’ issues and taxation, the Report would have been notably incomplete if it had not addressed tax as a critical component in a system where “all work in the UK economy should be fair and decent with realistic scope for development and fulfilment”.

Perhaps understandably (and yet still unfortunately) the Taylor Review does little more than place ‘tax’ on the “too difficult” pile, kicking it down the line for further consideration at a later date. And further consideration is urgently required.

While acknowledging (correctly) that, “the nature of the tax system acts as an incentive for practices such as bogus claiming of self-employed status”, the two main, rather anodyne, conclusions of the Taylor Review, so far as tax issues are concerned, are that:

  • “renewed effort should be made to align the employment status framework with the tax status framework to ensure that differences between the two systems are reduced to an absolute minimum”, and
  • the Government should: Seek to examine ways in which the tax system might address the disparity between the level of tax applied to employed and self-employed labour”

Both statements broadly reflect aspirations that have been long-held by most businesses and advisors and recommendations previously made by various professional bodies, including, for example, the Institute for Fiscal Studies (IFS).

On aligning the ‘employment status framework’ and the ‘tax status framework’, the Taylor Review does go a little further, ruling out imposing the tax system’s binary division between employment and self-employment on employment law, preferring instead to develop a new, ‘dependent contractor’ test. For employment purposes, the new category of ‘dependent contractor’ would refer to people who should be eligible for ‘worker’ rights but who are not employees; i.e., in broad terms, where a firm has a ‘controlling and supervisory function’ over a worker. For tax purposes, the recommendation of the Taylor Review is that: “being employed for tax purposes naturally means an individual is either an employee or a dependent contractor”.

But that conclusion does not ‘naturally’ follow. The implication is that persons falling within this new category should also be subject to National Insurance contributions (NIC) at the rates applicable to employed individuals, and their ‘controlling and supervising’ firm, subject to employee NIC. The recommendation is clearly designed to catch the business structures adopted by the some of the big names associated with the ‘gig’ economy. Taking the recommendation to its logical conclusion, however, means that there is a clear risk that a much broader category of, genuinely, self-employed persons will also be affected. Changes in employment law, made on the back of the Taylor Review, therefore, could have wide and unintended tax consequences.

On eliminating the tax disparity in the treatment of the employed and the self-employed, the Taylor tantalizingly hints there are “various ways in which the system could start to move to a more consistent level of taxation on different forms of labour”. Unfortunately, it doesn’t actually go on to develop what the ‘various ways’ might be. That is deeply frustrating and somewhat skirts around the core question.

Of course, as Chancellor Philip Hammond found out in March when he included a proposal to bring the NIC treatment of the self-employed and the employed into closer alignment in his Budget Statement, and immediately faced a firestorm of criticism and was forced into a personally damaging u-turn, popular tax solutions to these problems are going to be difficult to come by. It is, therefore, perhaps unsurprising that the Taylor Review chose against delving too deeply into the tax implications of its recommendations. But those recommendations only serve to highlight the, increasingly critical, need to address some of the most pressing inconsistencies in the UK’s tax code at the earliest possible opportunity… unfortunately, with the attention of the government currently drawn ‘elsewhere’, it is difficult to see that opportunity presenting itself in the near future.

243 million reasons for a new pan-European personal pension product

It is estimated that only around 28% of the EU’s 243 million citizens aged 25 to 59 years are currently saving into a pension. The European Commission considers that offering an alternative form of pensions vehicle will drive a change in behaviour. To this end, on 29 June, the European Commission proposed Regulations setting out a framework for a bold new pan-European personal pension product (PEPP). This emerges as part of the EU’s 2015 Action Plan on Building a Capital Markets Union (CMU) and is expected to grow the personal pension market to €2.1 trillion by 2030. The Regulations will now be considered by the European Parliament and the European Council with PEPPs expected to start appearing in the market some two years after the Regulations come into effect.

Brexit – In or Out?

The UK’s imminent exit from the EU leaves some uncertainty about the impact that PEPPs will have on the UK pensions market and on capital flows. The Commission has indicated that those UK PEPP providers that have established themselves or a subsidiary in the EU27 prior to Brexit, and gained authorisation as PEPP providers, will be able to offer the product after the UK’s exit from the EU. However, precisely how the regime will work in practice, for example, in relation to porting a PEPP into or out of the UK, is not yet clear and will depend on the detailed outcome of Brexit negotiations.

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Stuck on spin cycle – pensions and the money laundering regulations

In May we took the plunge and blogged about the forthcoming money laundering regulations (which seemed to have gone largely unnoticed until that point).  We highlighted some difficulties with the legislation and that it wasn’t entirely clear how they would apply to occupational pension plans.  Well, the final form regulations have arrived. They came into force on 26 June 2017 and unfortunately some tweaking has further ‘muddied the laundry water’.   Additional clarification is being sought from HM Treasury.  In the meantime, here are our thoughts on the new regulations. Continue Reading

FCA Asset Management Market Study

The UK Financial Conduct Authority (FCA) published its final Report on its asset management market study yesterday. Key findings include:

  • Asset management – the report finds evidence of weak price competition and recommends a number of remedial strategies, including improved transparency and an extension of the senior managers’ regime. However, the FCA has rejected the idea of introducing a statutory fiduciary duty towards investors for asset managers.
  •  Pensions – the report finds that the financial services industry has provided poor value to many investors, particularly smaller pension plans. As a result of its finding that some smaller plans have been unable to secure fair terms from managers, the FCA intends to work with the Department for Work and Pensions to remove barriers to pooling but does not recommend making pooling of assets mandatory.
  • Investment consulting – the FCA is consulting on a recommendation that the Treasury extends its remit to cover strategic investment advice. The FCA is also consulting on whether to conduct a separate market study into investment consultants, having provisionally rejected the undertakings in lieu offered by the three largest consultants.

The report highlights the need for pension plan trustees, as major customers of asset managers, to use their bargaining power effectively.

This is consistent with recent guidance published by the Pensions Regulator, which emphasises the importance of reviewing and negotiating fund documents and contractual arrangements in place with managers and advisers.

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“Show Time!” for the US Labor Department’s Fiduciary Rule

It may be show time for the U.S. Department of Labor’s (DOL’s) Fiduciary Rule (the “Rule”), but don’t expect an elaborate production.  Think frustrated, reluctant actors on a bare stage with no lights or scenery implementing the previous Administration’s regulatory approach to protecting retirees and retirement savings from conflicted investment advice.

After a long and contentious preview run, the rising curtain reveals that parts of the Rule won’t become effective before January 1, 2018, DOL won’t enforce the rule before that date, and, during this transition period, DOL will continue to consider whether to revise or repeal the rule.  Further, the Securities and Exchange Commission (“SEC”) has shown interest in a major role – or at least an attention-grabbing cameo – that could complicate the production further.

Nonetheless, the show has opened.  Under the Rule, beginning June 9, 2017, those who provide investment advice to retirement savers are fiduciaries and the scope of activity that constitutes investment advice is broader than in the past.   The Best Interest Contract Exemption and the Principal Transactions Exemption will allow financial institutions and advisors to engage in transactions that would otherwise be prohibited under the Employee Retirement Income Security Act and the Internal Revenue Code (the “Code”).  Qualifying for these exemptions, through the end of the year, will require compliance with only “impartial conduct standards” – giving advice in retirement savers’ best interest; charging no more than reasonable compensation; and making no misleading statements about investment transactions, compensation or conflicts of interest. Full compliance, which is set to kick in on January 1, 2018, requires written disclosures, implementation of policies to protect retirees from investment advice that is not in their best interest, new rights and protections for IRA investors, and satisfaction of additional conditions.  Of course, new scenes could be added or the show could close completely before then.

The recent history of this storied rule began with a February 3, 2017 Presidential Memorandum ordering the Secretary of Labor to review the Rule.  In response, DOL requested public comments on the Rule and delayed the April 10 applicability date until June 9 to provide additional time for review.   While on May 22, 2017, DOL Secretary Alexander Acosta announced that the June 9 applicability date would not be further delayed, his agency issued guidance indicating that it would continue its review of the Rule and seek additional public comment on “specific ideas for new exemptions or regulatory changes” and implementation issues.   The guidance also announced a non-enforcement policy stating that DOL will not “pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions” until the January 1, 2018 full compliance date.  The IRS had previously adopted a non-enforcement approach with respect to corresponding provisions in the Code.

Secretary Acosta’s announcement, an opinion piece in the Wall Street Journal, was far from an endorsement of the Rule.  It was, in contrast, a reluctant legal conclusion that the Rule’s implementation must go forward – at least for the time-being. Acosta was clear, however, that the Rule “may not align with the President’s deregulatory goals.”

And there is more.  On June 1, 2017, SEC Chairman Jay Clayton issued a statement recognizing the possible effects that the Fiduciary Rule could have on retail investors and entities regulated by the SEC.  He highlighted the SEC’s mission of (a) protecting investors, (b) maintaining fair, orderly and efficient markets, and (c) facilitating capital formation as part of his request for public comment on the standards of conduct that apply to investment advisers and broker-dealers when they provide investment advice to retail investors.  The Chairman presented 17 areas for public comment to facilitate an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends.  This is familiar ground for the SEC, which has reviewed these matters a number of times over the last decade or so and received a broad range of recommendations for action in response to their efforts.   While changes in the marketplace may justify a need for updated information, it is worth noting that previous efforts have not produced significant regulatory action in this area.  Whether a new SEC effort to address standards for conduct by investment advisors and broker-dealers in the retail space will be more productive and how it will affect the DOL Fiduciary Rule is not predictable at this point but will certainly provide fodder for a sequel to the current show.

Congress, too, has moved into the Fiduciary Rule spotlight. On June 8, the day before the Rule’s applicability date, the US House of Representatives voted to repeal the Rule until the SEC produced its own fiduciary standard.  The Fiduciary Rule repeal was part of a larger bill repealing the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The same day, Republicans introduced another bill to block the Fiduciary Rule.  This one would establish an alternative, disclosure-based, set of rules to govern fiduciaries and prevent conflicts of interests.  Neither the Fiduciary Rule repeal provision in the House-passed bill nor the newly-introduced bill is likely to progress much further.

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