Avid readers of Professional Pensions may have seen an ariticle in the 6th September edition regarding the case of Waddy v Foster Wheeler (yes, THAT Foster Wheeler – just can’t seem to keep out of the pension press can it??). I was asked to comment on the case just as I was rising from a Magistrates’ court sitting so I’m not sure my thoughts were fully cogent at the time!!

The significance of this case is that it concerns the rights of gay couples in a Civil Partnership to the same pension rights as heterosexual spouses. Now you may have thought that all this was sorted some time ago with the passing of legislation back in 2005 and it’s reenactment under the Equality Act 2010. But the more techically minded amongst you will also remember that there was an option available to schemes to only “equalise” benefits which accrued post December 2005. And that’s what many schemes did of course – largely to control costs for which funding had not been provided prior to then.

It seems (although in fact aspects of this case have settled outside of court so there is no formal trancript of events) that Foster Wheeler did not provide full benefits for Civil Partners. Mr Waddy and his partner Mr Skipp had been together for 40 years and entered a CP in 2006. The scheme having taken advantage of the exception has now agreed to provide full benefits in this case but maintain that the scheme rules were entirely lawful.

Liberty who took the case on Mr Waddy’s behalf continue to maintain that the Equality Act exception is unlawful both in respect of EU law and under the European Convention of Human Rights. The point will be argued further in an Employment Tribunal in January 2012 and we await the outcome with interest.

I have to admit that even when the legislation was first passed, I did just wonder whether the temporal limitation would ever be challenged. Now it seems that it is, I suspect that if Liberty lose at the ET, that won’t be the end of the matter. It is amazing that in the second decade of the 21st Century we should still be in doubt as to the intent and validity of equal rights. But that’s pensions for you. Why make things simple when it’s so much fun to make it complicated…

An article in the Times today (20 Jun 2011) has raised the issue of the development of a two tier occupational pension being provided by companies. Those of us well versed in the machinations of the UK pension industry would probably say ’so what else is new’ but maybe for some readers of this blog, it needs a bit more explanation. So here goes:

As we all hopefully know, starting from 2012, employers will be required to auto enrol qualifying employees into some sort of pension arrangement and pay contributions into it. For many particularly smaller employers, this will be something of a shock if they have never had to contribute to a pension scheme in the past. For the very smallest companies, there will be a default option called the National Employment Savings Trust or NEST. For others, they may wish to simply use their existing arrangements (if they have one) as long as it qualifies by providing a certain minimum standard of provision especially contribution rates. But many of the medium to larger companies particularly in those industries that have a high turnover of staff may suddenly be facing a vastly increased bill as more employees who may not have been ‘eligible’ to join schemes in the past (or indeed may not have wanted to) suddenly do.

So, what’s the answer? For some, it would seem to be to establish a type of ‘feeder’ arrangement whereby a scheme is established providing only the bare minimum that it needs to in order to qualify. Only if an employee stays for a given period of time will they then be able to join the main scheme that provides a far greater level of benefit and contribution. Or they may be offered NEST for perhaps the first couple of years – again providing a fairly meagre level of pension savings but better than nothing at all.

For those with a work history of low paying peripatetic employment, the reality of retirement will still be pretty poor. But it will still be better than reliance on the State. And for the employer, perhaps a more manageable cost. There are a few other ideas being bandied about too including setting up industry wide schemes akin to the Dutch model.

But more worrying of all is the lack of engagement and communication at the moment together with a certain amount of ostrich like behaviour!! 2012 is getting closer all the time and while for some, the staging date process will mean a formal start date of 2015, it can take well over a year and maybe closer to two to get things up and running. The time to start planning is now.

In an earlier life I was the Legal Director of the Occupational Pensions Regulatory Authority, the predecessor body to the current Pension Regulator. One of the issues which took up a considerable amount of management and investigatory time concerned a scam called ‘Pension Liberation’. It worked like this.

Gullible people desperate for cash would be encouraged to transfer out of their safe often well funded DB scheme into a ‘fake’ pension scheme, set up by the scammers. At it’s most sophisticated, they would even be given false contracts of employment so that the Inland Revenue (as it then was) would think that there was a genuine occupational scheme. For a significant fee, the ‘employee’ would then be given a cash sum out of the scheme – all totally illegal of course. The scammers had up to 50% of the transfer value, sometimes more as the admin fee, the ‘member’ got his hands on some cash but at a significant cost. And when the Revenue finally caught up with them, as they inevitably did, a massive tax penalty to boot. So most of pension savings could be lost leaving the victim ‘member’ to a very poor old age.

Prosecutions supported by OPRA at the end of the 1990’s largely put a stop to these scams, but sadly it appears that there is a new kid on the block albeit in another guise. They are called ‘Pension Reciprocation Plans’ and work by allowing people under the age of 55 to borrow up to half the value of their fund after it’s been transferred into a ‘Master Trust’ Pension Plan which – it is claimed – fall outside the legislation which would otherwise prevent members taking loans from their own scheme. Half of the funds – it’s only sold to those with a transfer value of £20,000 or more – no point going after the paupers now is it – are held in a highly risky unregulated property investment vehicle in a lax tax friendly jurisdiction such as the British Virgin Islands, the other half in a non tradeable fixed interest security. Initial fees are also high at 5% with an annual management charge of 1% and and interest rate on the loan of 5% over Bank of England Base.

As such it is not for the feint hearted and the financially unsophisticated, and while it appears to be ‘legit’ the FSA are being urged to look into these plans. If they came to me with this as a possible ‘investment’ opportunity I would not touch it with a 50 foot bargepole…and dear readers, while I am of course not authorised to give financial advice, I suggest you should think very very carefully if someone approaches you with this ‘too good to be true’ wheeze…it probably is.

After a bit of a break to recharge my pension batteries (lounging on a beach works wonders!!) normal service is resumed with a report of recent happenings in the pensionsphere.

I have just got back from a fantastic conference organised by Mallowstreet which was frankly unlike any pension conference I’ve ever been to. I loved the motivational speakers and the drumming session (yes really!!) was amazing once one got over the slightly cultish feel to the rhythmic beat.

But there was serious stuff there too. Worthy of particular mention was James Cameron on Climate Change Capital. His premise essentially was that pension schemes would do well not to underestimate the effect of growing scarce resources such as water, food and energy on the investment potential of asset allocation. Indeed, CCC should be considered a separate and valuable asset class of its own. People will kill over lack of water supply and being aware of the need to support new ways of doing things is vital if we are to avoid social and economic meltdown in the future. Now I am no ‘green goddess’ far from it – I am frankly a cynic when it comes to the causes of climate change – but much of what was said made sense to me, if not from a green perspective then certainly as another investment opportunity for growth.

Then of course there was the Pension Minister Steve Webb. A very good speaker it has to be said, and on the day when Age UK organised a march on Parliament to demonstrate against the rapid rise in womens’ State Pension Age, he again mentioned that the Government would ‘reflect’ on what for many women will mean an extra 2 year wait for their pension – a wait they can ill afford and for which they have had insufficient time to plan. Sadly I suspect the Treasury computer will say ‘No’ to any real change in the current proposal but we can but hope as the Pension Bill is delayed on its passage giving a potential opportunity for revision if the pressure for change is accepted. I’m not holding my breath though…

He also had words to say on Auto Enrolment and NEST – nothing we don’t franly already know but it was nice to actually hear an acknowledgment from a Minister that what we have at the moment is too complex, provided inadequate pension provision, and was a turn off to most people to save for their retirement. We know the problem Minister, now let’s find the solution.

Which brings me to the Debate section – will Defined Contribution ever be as good or better than Defined Benefit? Accepting as most of us do that DB is flapping about like a dying swan, DC remains the ’standard’ alternative. At the outset, the audience were pretty firmly in the No camp, but after some great discussion, at the end and with significant support for a collective DC solution, a small majority win for the Yes camp ensued. It was a ‘first past the post’ vote. We decided that adopting AV was just too difficult…!!

I also had the pleasure of doing another radio interview with Danny Pike at BBC Radio Surrey/Sussex yesterday. Here it is http://www.silverman-sherliker.co.uk/mp3/jkradio4.html and most of my other interviews with Danny can be heard from our main Silverman Sherliker website

Your favourite pension lawyer spent most of last week snowed in so has been a little remiss in posting but with the thaw comes the need to write so here goes.

This weeks bon mots concern the Government proposals to allow schemes to adopt the Consumer Price Index (CPI) in place of the Retail Price Index (RPI) when calculating the amount by which pensions should increase each year. Now I can already hear the yawns but bear with me because this actually is pretty important. First, some background.

The Government announced earlier in the year that Public sector pension schemes were going to adopt the CPI measure and it was only a matter of time before private sector schemes would come under financial pressure to do the same. What does this mean? Well, each year, pensions in payment and those benefits of members who have left a scheme leaving their pensions behind until they come to retirement age, are uprated. Many schemes will have a rule that says something along the lines of ‘pensions will be increased by RPI’ or ‘by the Index’ or maybe ”by the lesser of x% or RPI’. Now RPI is currently running at about 4.5% while CPI is at 3.2%. A significant difference and one that will grow significantly over time. Clever actuarial types have already crunched the numbers and estimate that this could be as much as a 25% difference over the life of a pension.

Needless to say, the Consultation document which is due to be published today will try to cover these issues and I’ll probably post an update later when we know a bit more. The main thrust of the push seems to be that most pensioners will have paid off their mortgages by the time they come to retire and therefore the index does not need to account for housing costs. RPI is ‘volatile’ according to pensions minister Steve Webb and RPI includes those costs, CPI does not. But to me that is a spurious argument. For one thing, fewer people are and will actually be able to afford a mortgage, they are renting. Renting costs will not diminish and for pensioners, indexation as it is known is a vital part of pension provision.

For sponsoring employers, the temptation to save money in already underfunded schemes will be high, but things are not really that simple and the law may actively prevent reducing RPI if the scheme rules are drafted in a certain way. It will be contraversial and highly unpopular with the workforce.Trustees will need a great deal of advice on whether to agree to an employer’s request to amend the scheme and what the consequencies might be if they do.

Apparently the Government ‘didn’t realise how complicated the change actually was’. Why am I not the least surprised.

Update: The Government has announced that they won’t implement a statutory override permitting schemes to adopt CPI even if their rules would not allow it. So, chaos will rule, no one will win, not the Schemes, nor the members and Steve Webb can sit back and consider it a job well done. It isn’t…not by a long way

TPR has issued its latest guidance on the very tricky subject of Employer Related Investments. Readers may know that for many years now there have been fairly strict limits on the amounts that a pension scheme can invest in the business of its sponsoring employers. In very simple terms, no more than 5% of the fund can be invested and there are complete bans on things like providing bank guarantees to the company.

There is a very good reason for these limitations – essentially to prevent ‘putting all your eggs in one basket’ as it were. Way back in the mists of time, the pensions of whole swathes of workers were wiped out when the trustees unwisely made excessive loans to keep the sponsoring employer afloat, (for the seemingly logical reason that it’s better to have a job which provides a pension scheme than no job at all) only to see the whole thing come crashing down when the employer inevitably went belly up meaning not only was there no job, but there was no money in the pension scheme left either. Today of course we have the PPF but that’s another blog entirely.

But that was then and this is now and we have seen an explosion in rather more complex and imaginative investment vehicles coming on stream  including pooled type investments such as unit trusts and other collective investment schemes. In addition, the industry is having to come up with some exotic ways of meeting funding shortfalls as the regulator uses its muscles to require stricter funding mechanisms which again has led to complex debt for equity swap deals (where the trustees effectively take over the business and give up any further claims on the company in return) such as in the Uniq case.

This has led tPR to think a bit more deeply about ERI and remind schemes and employers that they might need detailed legal and other advice when considering such investments and expects ‘an alternative funding structure’ to be provided as a fallback position.  Even cash of equivalent value would do…presumably it didn’t occur to TPR that if cash was that readily available it might have been offered already but we’ll let that pass for now. While acknowledging that it may be ‘difficult’ for trustees to track investments underlying pooled investment vehicles such as collective investment schemes, nevertheless it expects trustees to monitor these indirect investments ‘in a reasonable and proportionate way’ So that’s all right then.

If ever there was a proof that no one at TPR has ever actually run a pension scheme, this is it.

So, at long last we have Lord Hutton’s interim report on the future of Public Sector Pension Schemes (PSS). We are already hearing the entirely predictable howls from the Unions that they will fight any attempt to take away their cherished (and expensive) Final Salary benefits but maybe, just maybe, we need to have a little reality check here.

What is the Report actually saying. Well, for a start, it recognises that about one in five people in this country are covered in some way or another by a PSS. That’s an awfully large part of the population. Billions of pounds are paid out each year and that figure is likely to double or treble over the next 20 or so years. We are talking here of maybe £60 to 90 BILLION a year. Get real people – WE SIMPLY CANNOT AFFORD THIS IF NOTHING CHANGES.

Next, we are all living longer. When these schemes were established, retiring at age 60 meant we probaly had at best 5 to 10 years of retirement on average in receipt of a pension. Today, we can expect to live into our late 70’s or early 80’s and every year as improvement in health, medical breakthroughs and lifestyle continues, we can expect maybe 20 or 25 years on a pension. Just where to you think that money is going to come from? It doesn’t grow on trees. We have to SAVE for it, and yes, PAY for it while we are able to – in other words during our working lives.

Much has been made in the past of the fact that workers in the public sector have been prepared to sacrifice higher salaries available in the private sector for the fact that they will have a great pension at age 60. Another unpleasant fact for the Unions here – this is simply no longer the case. Many public sector workers are now earning higher salaries than their equivalents in the private sector yet private sector workers have been suffering the reality of closure of Final Salary schemes for many years now and the position shows no sign of changing. So another shibboleth bites the dust. Of course there are hundreds of low paid civil servants out there whose options for jobs outside the civil service may be limited but – and its a big but – ironically these are the very people who benefit least in fact from Final Salary schemes once the sums are done and various means tested benefits are factored into the mix. To quote from the Report

In assessing fairness the Commission also found that the reliance on final salary in the majority of public service pension schemes tends to favour those who receive rapid promotion and those who stay in public service for their whole career. The promotion effect alone could mean that high flyers can receive almost twice as much in pension payments per pound of employee contributions than do low flyers.

What Hutton is saying is essentially this:  Wake up and smell the roses. We are all going to have to make sacrifices and there is really no good rationale why the public sector shouldn’t share the pain. The default retirement age for everyone is gradually going up as we’re living longer. Why shouldn’t PSS normal retirement ages also increase? Contributions will also have to go up. It wasn’t that long ago that some PSS required NO contribution from its members bar a small percentage to cover spouses pension. Granted that has changed in recent times but there is a big black hole to fill. Moving to a ‘career average’ rather than a Final Salary basis and other more innovative risk sharing arrangements is more of a long term aspiration, but it works elsewhere in Europe, why not here? What make us so special? Our pension system – unlike those in Europe and elsewhere where the strategy has always been based on a more holistic approach to pension planning – has instead been incoherent and piecemeal. We have meddled and tinkered around the edges for years, resulting in the most complex, expensive and inefficient system imaginable.

While Hutton is not the complete response to what is an enormous problem, it is a start. If only Steve Webb has the guts to do what he always spoke about in opposition and begin the take that holistic approach, sweeping away years and years of bad law, bad strategy and bad implementation  and give us that New Deal in pensions,  we will be condemned to suffer a poorer old age. The PSS are part of the problem, maybe now they may become part of the answer.

This weeks’ items – another massive bailout (potentially) and a oopsie by a pension industry ‘good guy’

First, the Coalition Government has announced it’s intention to sell off part of the Royal Mail. So far so predictable. The kicker in this particular tale is that the Royal Mail is currently sitting on an £8BILLION (yes you read that correctly, £8 BILLION!!!) deficit and that’s just what’s been revealed in the company accounts. The Actuarial Valuation results due soon are expected to show an even bigger deficit. This will not ordinarily make it a particularly attractive proposition for any potential buyer.

But wait…everything is fine…the British taxpayer is going to pick up the tab…again. While the Government has said that it will seek the injection of private capital the chances are that this will fail as it did last year when an attempt was made to sell part of it off.  St Vince of Cable has indicated that the Government (that’s actually you and me to be honest) will take on the pension liabilites to make it more of a viable proposition for a buyer. We already have a gaping big hole in our national finances. What’s another £8 billion between friends? I would just love to see the PPF cope with this scheme!!

The second story this week concerns a claim by a former senior employee of the Pensions Advisory Service (TPAS) that the organisation discriminated against him on the grounds of age by sacking him before a restructuring exercise comes into effect, in an effort to avoid making him redundant just before he retired thus avoiding paying him compensation under a Civil Service compensation scheme. I don’t want to go into the rights and wrongs here. It’s not my place. But you would think wouldn’t you that an organisation like TPAS would have taken advice not from a lawyer (their decision may well have been LEGALLY watertight) but from a PR Guru who would almost certainly have told them that
bad press on something like age discrimination was bound to lead to adverse comment from bloggers and the industry alike!! Common Sense guys. Trumps economics every time!!

Been a bit quiet on the pension front this week – must be something to do with some vote thingy going on in the country. Pensions seem pretty low on the politicians agenda (it’s that ‘too difficult’ basket again) so I thought this week I’d actually blog about a bit of law (shock horror!!)

The Outer House Court of Session (it’s a Scottish court for all you Sassenachs) has put the boot into the English once again over of all things, the equalisation of pension rights in schemes.

For those of my readers who may not be pension experts, a little reminder. Since 17 May 1990 and the Barber decision in the European Court of Justice, men and women have had equal pension benefits applied to them. The decision (and various subsequent and refining judgements) have said that the disadvantaged sex must be given the same rights as the advantaged sex unless and until schemes were amended to ‘level down’ all the benefits equally. Typically this meant that men who had a Normal Retirement Age of 65 would be able to take any benefits that accrued to them after 17 May 1990 at age 60 – the NRD for women – without any actuarial reduction for early payment. However schemes could be amended to make NRD 65 for both sexes. The period between 17 May 1990 and the amendment date is called the Barber Window.

Still with me – jolly good! Now, many schemes got very worried by the Barber window and sought to close it as soon as possible. Unfortunately this was often acheived without too much attention being paid to the strict amendment powers of the scheme rules. The English courts have considered this and have said, most notably in the Trustee Solutions v Dubery case, that unless the amendment requirements were strictly adhered to (for example if it required amendment by Deed, a scrappy piece of paper calling itself an Announcement just wouldn’t do) then the amendment was not valid and the Barber window remained open. Much wailing and gnashing of teeth as schemes already in deficit suddenly faced a liability for which they hadn’t properly funded!

Now our friends North of the Border have put something of a coach and horses through that principle in a case called Low and Bonnar v Mercer Limited. Lord Drummond Young (for it was he) has declared that the Scottish language is somewhat different to that of English and the word ‘Deed’ did not mean quite the same thing and had no techincal meaning in Scottish law. Consequently if a scheme required an amendment to be by Deed in Scotland, that could in fact merely imply some form of formal writing such as a Board Minute. Well, lots of rejoicing in Edinburgh and Glasgow then but not much comfort for us in the South where equalisation remains one of the thorniest problems we pension lawyers are having to deal with.

It’s enough to drive one to drink…Mine’s a good single Malt…

I have decided that this blog will be an election free zone – at least for the time being. I suspect that none of the three main parties actually have much of a clue about pensions other than how they can get the over 55’s to vote for them with a bribe or two so let’s not go there and instead talk about a couple of other pensiony issues

First, a cautionary tale for Trustees, with tPR having reported two trustees from the firm GP Noble to the Serious Fraud Office. Charges have been laid and the matter is next due before Southwark Crown Court on 16 April.

Criminal sanctions against trustees have been available since the good old days of OPRA and the Pensions Act 1995 but have (rightly I think) been used sparingly and only in the most serious of cases. We await the outcome of this one with interest but it behooves no one,  not even MPs – and certainly not pension trustees – to think they are above the law

Next, an interesting development in the Cadbury take over saga by Kraft. It seems that the original drafters of the Scheme inserted provisions which will make it all but impossible for Kraft to close the final salary arrangement. As a result, the members are being told that they must either opt out of the Scheme (thereby encouraging a ‘death by a thousand cuts approach’) or face a three year pay freeze. Not a great choice either way and doesn’t say a lot for the due diligence process when the deal was put together does it? Oops!

Finally to public sector pensions and the recent report by the CBI that suggests that the final salary model is unsustainable and needs reform. While not wishing to accuse the CBI of stating the bloomin’ obvious, it nevertheless highlights the issues and proposes some solutions which may be a challenge to the next Government. An estimate that public sector pensions could cost each working person over £330pa in taxes to pay for these pensions is not likely to be much of a vote winner for any party that ignores the subject. Rats – I said I wasn’t going to mention the election – as I’m clearly not able to keep my promises, perhaps I should offer myself to the electorate!!.