Pensions Insight: 4 December to 11 December 2023

In this insight we provide the latest on the Court of Appeal hearing in the Virgin Media case and cover all other key pensions developments including the introduction of PPF and equal treatment regulations required to ensure that the effect of certain EU-related pensions cases continues beyond 2023, PASA guidance on dashboards connection, and TPR’s position on merger and acquisitions.

Virgin Media, Section 37: Court of Appeal hearing set for 25-26 June 2024

The Court of Appeal hearing in the Virgin Media section 37 case has been set for 25-26 June 2024. During the hearing the employer will appeal the High Court’s decision (or certain elements of the decision) that relevant alterations (covering both past and future pension rights and all changes not just adverse ones) to the rules of a contracted-out defined benefit scheme are void if they were made without section 37, Pension Schemes Act 1993 actuarial confirmation. The case has potentially significant implications for many contracted-out DB schemes. Click here for our case summary.

Regulations made restating effects of PPF and equal treatment cases

On 4 December 2023, two sets of regulations were made which will come into force immediately before the end of 2023. The regulations restate the effects of retained EU law under four pensions cases to ensure the effects continue after the end of 2023 and are not automatically repealed under the EU Law (Revocation and Reform) Act 2023 (see our insight).

The Pensions Act 2004 (Amendment) (Pension Protection Fund Compensation) Regulations 2023 retain the rulings in the Hampshire and Hughes cases so that the Pension Protection Fund (PPF) compensation cap does not apply and the minimum level of PPF compensation continues to be 50% of the value of accrued scheme benefits (see our insight).

The Government has confirmed that the Bauer judgment will not be retained in respect of schemes where the employer becomes insolvent after 31 December 2023. This ECJ December 2019 decision confirmed that receiving less than 50% of the benefits accrued under a scheme from the PPF could be ‘manifestly disproportionate’ if this meant the member would be living under the at-risk-of-poverty threshold.

The Pensions Act 2004 and the Equality Act 2010 (Amendment) (Equal Treatment by Occupational Pension Schemes) Regulations 2023 restate the effects of:

• the Walker v Innospec Ltd [2017] case – that same sex partners are entitled to equal survivor pension benefits without being restricted to post-5 December 2005 service; and
• the Allonby v Accrington and Rossendale College [2004] case relating to sex discrimination, the EU Treaty relating to equal pay and access to a statutory pension scheme – the regulations remove any requirement for an actual opposite sex comparator in respect of GMP equalisation (on the basis that the inequality results from legislative provisions and a notional comparator is therefore sufficient).

PASA Publishes ‘connection ready’ dashboards guidance

On 5 December 2023, the Pensions Administration Standards Association (PASA) published Connection Ready Guidance together with a call to action setting out the top five steps that schemes need to take to become ‘connection ready’.

Schemes in scope (occupational pension schemes with 100 or more non-pensioner members) are legally required to connect to the dashboards ecosystem by 31 October 2026 (see our insight). There will still be different staging dates for schemes depending on type and size, but these dates will be contained in guidance rather than legislation (dates expected to run from late 2024 to October 2026). Although the guidance timescales will not be mandatory, trustees will be statutorily required to have regard to the guidance and, it will be a breach not to do so.

Since the Government announcement on 2 March 2023 that the original dashboards timetable would be ‘reset’, the Pensions Regulator (TPR) and other relevant stakeholders have been urging trustees to continue with their preparations to ensure they will be ready for the ‘switch on’. There is concern that the delay has led to de-prioritisation and that schemes will fall behind on preparation if they are not careful.

PASA call to action

PASA’s call to action sets out five reasons why immediate action is required.

• Reason 1: No scheme is yet ‘dashboard ready’ – the work involved should not be underestimated.
  Action: look at TPR’s dashboards connection checklist.
• Reason 2: Early liaison with the administrator and other relevant suppliers is vital for timetabling the work required and ensuring that they have sufficient capacity.
  Action: speak with the administrator and other suppliers about the project.
• Reason 3: Dashboards will involve many different elements including changes to data, calculations and member communications and perhaps new technology.
  Action: look at the different requirements for those parts not yet considered.
• Reason 4: Action: gaps should be identified early on so that the extent of what is needed to fill the gaps can be assessed.
• Reason 5: Agreeing a connection plan means that the scheme ‘can get ahead of the game’.
  Action: develop a connection plan to make sure that the scheme will be able to connect when required to do so.

PASA connection guidance

This new guidance sets out the practical steps under five main pillars that must be completed before schemes and providers will be ready to connect. In particular, it notes that it could take 18 months or longer to get to this stage and that there may be industry resource constraints which add even more pressure to timescales.

Being ready to connect means being in a position to start the short process of connecting to the dashboards ecosystem – effectively requiring 95% of the work to be finished.

The five pillars used in the guidance are: (1) governance (having a project plan); (2) matching readiness (being ready for find requests based on material usage of the system); (3) value data (being ready to provide view data at scale); (4) technology (scheme is tested and operating on relevant technology); and (5) administration (scheme is ready to deal with administration such as queries, changes and effect on usual business).

Under each pillar are the principal activities split out into those attributable to the scheme and the provider. In each area the guidance covers the relevant areas that need to be assessed, implementation and what evidence might be needed to demonstrate compliance (e.g. an audit trail is required to show that the staging date guidance has been adequately considered – see our insight). It also includes links and references to other useful material including TPR’s checklist.

The guidance ends with a sample plan for a scheme that has not yet begun the work.

Action: Schemes in scope should continue with their dashboards preparations and put in place a project plan with the administrator (or other supplier) as soon as possible.

TPR speech on M&A transactions

TPR’s 7 December 2023 speech at the UK Finance Corporate Finance Committee dinner focused on its position as regards merger and acquisition (M&A) activity. The key messages were that:

• TPR’s role is not to stop or unnecessarily slow down M&A transactions but it does have to ensure members’ interests are protected, for example, in making sure that the scheme receives equitable treatment, and that suitable mitigation is provided for risks or detriment such as increased debt, loss of covenant or security matters;
• corporate management needs to “support trustees to implement a robust funding plan” – the M&A business plan should demonstrate consideration of the scheme and its protection and agreements should not be diluted after the transaction completes;
• not providing suitable mitigation is seen by TPR as ‘avoidance’ which could potentially trigger TPR’s anti-avoidance powers;
• TPR will only implement its Pension Schemes Act 2021 criminal powers (see our insight) in the ‘most’ serious cases;
• companies need to liaise early on with TPR and the trustees must make sure they can engage with the bidder as early as possible – they should be kept informed as the deal progresses; and
• the regulations which will introduce an expanded notifiable events regime covering M&A activity will be introduced in ‘due course’.

PPF blog on sustainability

On 4 December 2023, the Pension Protection Fund (PPF) published a blog on how its sustainability strategy is aligned with the United Nation’s 17 interlinked Sustainable Development Goals and what action the PPF is taking in six of these areas; (1) quality training and development, (2) increasing diversity and inclusion, (3) apprenticeship opportunities, (4) support of infrastructure and innovation, (5) using procurement to reduce environmental impact, and (6) responsible investing and minimising operational emissions.

TPO decision on section 75 debt and the plumbers pension scheme (CAS-39170-Y5Q0)

Summary of decision

The Deputy Pensions Ombudsman (DPO) has made a determination regarding a centralised multi-employer non-segregated DB scheme governed by Scots law.

DPO partly upheld a complaint by a former participating employer (Mr S), ruling that he remained liable for a section 75 debt notwithstanding delays in respect of notification and certification. However, it was determined that Mr S had been on the receiving end of a negligent misstatement and maladministration on part of the scheme’s administrative manager, and this was reflected in the Directions handed down by the DPO.

Section 75 – background

Under section 75 of the Pensions Act 1995, when an employer withdraws from an ongoing multi-employer defined benefit (DB) scheme, it becomes responsible for funding its share of any deficit in the scheme by way of paying the scheme’s trustees the outstanding amount. Since 2005 this sum has been calculated by reference to the scheme’s estimated buyout deficit.

In Phoenix Venture Holdings Ltd v Independent Trustee Services Ltd [2005] High Court case determined that a debt must be calculated by the actuary under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (Employer Debt Regulations) before it can be claimed or enforced. This judgement was relevant in this particular case, meaning Mr S was possibly still liable not only for his share of the deficit but also for a proportionate share of what are referred to as orphan debts, i.e. liabilities that cannot be assigned to any specific remaining employer.

The scheme’s trustee had historically lobbied the DWP for a change to the Employer Debt Regulations, with the aim of reducing the potential impact on any participating employers, as many of them were individuals who were vulnerable to being made bankrupt by the debt. However, this had been unsuccessful.

Limitation and prescription period – background

In England Section 9 of the Limitation Act 1980 (LA 1980) provides for a six-year limitation period in relation to sums recoverable under statute. However, the position in Scotland differs, with section 6 of the Prescription and Limitation (Scotland) Act 1973 stating that obligations within scope of that provision are extinguished after a five-year prescription period. Section 7 of the 1973 Act sets a 20-year limitation period where the applicable debt has had no relevant claims made in relation to the obligation nor any relevant acknowledgement.

Triggering the section 75 debt – background

Mr S was the owner of an unincorporated plumbing business and a participating employer of the scheme. As his business was unincorporated, Mr S had personal liability in respect of observing the governing provisions and statutory requirements applying to the scheme.

In 2010, Mr S’s wife had a telephone call with the scheme’s administrator to discuss the potential impact of altering the business’ legal status to a limited company and what effect this would have on participating in the scheme. The administrator explained that “nothing would change” save the name on the paperwork. This conversation was shortly after followed by a letter from the administrator, which explained that a new deed of adherence and contracting-out certificate would be required.

On 1 July 2010, Mr S officially changed his plumbing business to a private limited company, unaware of the fact that this action had triggered a section 75 employer debt. It was noted that the trustee and scheme administrator continued to fulfil their duties to the scheme in the same way as prior to the business’ change in legal status.

In October 2015 and May 2016, Mrs S and Mr S resigned respectively as directors of the company.

Calculating and recovering the section 75 debt – background

• November 2017: The trustee informed Mr S that the company owed a section 75 debt (this having been triggered on 30 June 2010 when the business changed status).
• Early 2018: The trustee consulted with employers about the way in which the actuary proposed to calculate section 75 debts under the scheme. Issues had arisen including in relation to the methodology to apply due to problems with collecting membership data.
• During 2018: Further updates on the advice the trustee had received on section 75 calculation were provided to participating employers.
• November 2018: Mr S instigated a dispute under the scheme’s internal dispute resolution procedure following notification from the trustee that it had to seek recovery of the debt, but it was dismissed under the two-stages by both the Administration Manager and the Chairman of the trustee.
• June 2019: Mr S was sent an estimate of the section 75 debt and informed that the Employer Debt Regulations did permit trustees not to pursue the debt on the grounds of it being disproportionately expensive to do so. However, to consider this exemption the trustee would have to analyse the realisable value of the business against the cost of the debt being calculated, certified and collected. The trustee explained that there were only two options available to Mr S: a flexible apportionment arrangement (FAA) or a deferred debt arrangement.

Mr S – complaint to TPO

Mr S complained to TPO on several grounds including:

• Public policy, i.e. that the trustee should not be able to hold a debt over him for an unlimited amount of time and consequently bypass any legal obligations without any repercussions.
• Because the trustee had not told him about the debt until 10 November 2017, a little over seven years after the debt was triggered (2010 being when the trustee knew or could reasonably have been said to have been aware of the debt having arisen) the trustee was time-barred from pursuing the debt based on five and six-year prescription and limitation periods in Scots and English legislation.
• Distinguishing the Phoenix case because the trustee failing to calculate the debt was maladministration.
• The trustee’s inability to calculate the debt did not mean that it should not have told Mr S about it in 2010 when it was triggered.
• The trustee had misrepresented the position to Mr S’ wife in 2010. Mr S had relied on this and would have acted differently as regards participating in the scheme had it not been for the misinformation.

The trustee’s position

The trustee argued that:

• it was statutorily required to pursue recovery of a section 75 debt and this obligation was not circumvented through public policy factors;
• applying the Phoenix ruling and Scots law, the prescription period did not start to run until the date the section 75 certificate was issued;
• it was not intentional that the legislation as regards not being able to calculate the debt was not adhered to;
• neither it nor its representatives (the administrator) had a duty to advise Mr S about the legal implications of participating and leaving the scheme;
• it was not the administrator’s role to provide Mrs S with advice on statutory requirements;
• the section 75 debt could not have been avoided by using an FAA in 2010 as these were not introduced until January 2012.

DPO determination

Partly upheld:

Limitation and prescription period – not upheld

Noting the applicability of Scots law rather than English law, the DPO decided that the 20-year prescription period rather than the five-year one was applicable. Based on the Phoenix judgment, the DPO agreed that the requirement to pay a section 75 debt is only enforceable when the debt has been certified by the actuary. This did not take place until November 2018 which meant that the 20-year period had not yet run out. Therefore, the trustee was not prevented by ‘prescription’ from recovering the debt.

Information provided by the administrator – held to be negligent misstatement

Although the trustee and the administrator were not directly obliged to tell an employer beforehand of a section 75 debt potentially being triggered, the administrator’s relationship with Mr S was of sufficient proximity and it had expertise in respect of the scheme and statutory requirements for a duty of care in negligence to have been assumed as regards the incorrect information provided about ceasing participation.

The case of Outram v Academy Plastics [2000] IRLR 499 relied on by the trustee to show that there was no duty of care did not mean that the trustee or administration company could not assume a duty of care in relevant cases where they had gone further than providing legally required information.

Case law demonstrated that an administrator providing advice could be said to have assumed a duty of care to provide competent advice (Wirral Borough Council v Evans [2001] OPLR 073) and to take reasonable care to provide accurate and correct information where information is provided (Musawi v Bevis Trustees Ltd [2009] EWHC 1915 (Ch)). It was acknowledged that these cases did not relate to information provided by a trustee to an employer but were akin to one another as to be applied.

Although there was no direct evidence of the administrator having said that ‘nothing would change’ upon Mr S changing the status of his business, the DPO found that it was more likely than not that this was said and that this would cover section 75. The DPO also found that, without this information, Mr S would not have changed his business to a limited company in 2010 but would probably have taken advice and not made the change until he knew if the scheme would be exempt from the statutory provisions. As regards the availability of a FAA, the DPO noted that it was reasonably foreseeable that a way of mitigating the debt (such as an FAA which permits apportionment) would be set up in the future.

Taking this and the approach that the trustee had in fact taken in relation to approving FAAs into account, the DPO was satisfied that if Mr S had put off triggering the debt until 2016 an FAA would have been approved.

This meant that Mr S had suffered financial loss.

Delay in certifying the debt

The trustee was aware by 2012 that its lobbying attempts were unlikely to be taken forward and knew by 2013 that the issues as regards calculating the debts could be resolved. However, the trustee was not guilty of maladministration in respect of the 2010 to 2013 period which delayed recovery of the section 75 debt because it did not have a duty of care in negligence to actively tell Mr S about triggering the debt or advise him about it.

Nevertheless, the trustee was found to have delayed certifying the debt between September 2014 and 10 November 2017 and this was maladministration. This prevented Mr S from being able to arrange his financial matters in relation to the possibility of a section 75 debt arising.

Indemnity and exoneration provisions in the rules

Because the Scottish Court of Session had decided that the trustee was not fraudulent or grossly negligent in how it operated the scheme and failed to recover section 75 debts, the trustee could rely on the indemnity provisions in the scheme rules. However, the Court had not considered the exoneration provision which the DPO found to be far narrower in application – as it related to breaches of trust and not negligent misstatement. This meant that the trustee and the administration company could not rely on this.

Directions

It was directed by the DPO that the trustee and administration company must:

• request that the scheme actuary certify the final value of the section 75 debt (the Final Value)
• apply an amount equal to the Final Value minus £35,638 (the amount Mr S received from the sale of his business) to partially discharge the debt; and
• apply a further amount of £2,500 in respect of the severe non-financial injustice suffered by Mr S to further partially discharge the debt.