Pensions Newsletter December 2011
Inside this issue:
PPF Levy – final determination and supporting documentation published
The PPF have now published the final Levy Determination for 2012/13 along with final versions of the Contingent Assets Appendix and Guidance confirming the new approach to certification of Type A contingent assets that we reported on in the November edition of the Newsletter.
The Policy Statement that accompanies the Determination sets out the reasoning behind the approach that has been adopted and highlights the fact that the process of “negative certification” that is being utilised for the coming year was as proposed to them in consultation responses which have also been used to expand the guidance.
The PPF state that the form of certification that requires trustees to confirm that they have “no reason to believe that each certified guarantor, as at the date of the certificate, could not meet its full commitment under the contingent assets as certified” should be something that trustees are able to form an opinion on without going to significant extra lengths and expense.
The Guidance also makes clear that the inclusion of the wording “as at the date of the certificate” means that trustees do not have to take into account the likelihood of future events, including the potential impact of insolvency of the scheme employer, unless the trustees are aware at the time of certifying that such an event may be imminent. For the avoidance of doubt it is also made clear that certification is to be given on the basis of information obtained and should not be given on the basis that trustees have attempted to obtain information, but have been unsuccessful in obtaining this.
Although the PPF are satisfied that the new approach is sufficient to align risk and levy reductions they state that the new approach increases the importance of them carrying out their own checks on the strength of guarantors and reiterate their power to call for further evidence if they are concerned that the guarantor is of limited strength.
As this is the first year that a test of guarantor strength has been required the Board have confirmed that they intend to apply their consideration in a way that “gives the benefit of any doubt to schemes and their guarantors”, but warn trustees not to expect to be able to rely on a lower threshold of guarantor strength as a result.
The new requirements come into force for certification or recertification of type A contingent assets in relation to the levy year 2012/2013 and to be submitted by 5pm on 30 March 2012.
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Flexible apportionment regulations finalised
We reported in our September Newsletter that the proposed DWP amendments to the employer debt regime introducing flexible apportionment arrangements had been delayed until December 2011.
The response to consultation along with final regulations have now been issued and these are due to come into force on 27th January 2012.
There have been a couple of amendments made to the regulations in response to comments received during the consultation, the first being that flexible apportionment arrangements will be a possibility for certain schemes closed to future accrual.
In terms of the draft regulations entering into a flexible apportionment arrangement when a debt was triggered meant that this was reduced to nil, this has been altered in the final regulations to allow part payments of the debt where liabilities being apportioned to the replacement employer a reduced to take account of the part payment.
Action has also been taken to close what was seen as a potential loophole in the draft regulations whereby it might have been possible for a flexible apportionment arrangement to be put in place even though the departing employer continued to employ active members. It has now been made clear that in order for a flexible apportionment arrangement to take effect the departing employer must cease to employ any active member of the scheme.
The new regulations make a number of amendments to other existing regulations, including an amendment which adds entering into a flexible apportionment arrangement to the list of notifiable events.
It is expected that the Pensions Regulator will update its guidance “Multi-employer schemes and employer departures” to include information on flexible apportionment arrangements.
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Changes to Auto-enrolment
It was announced on 28 November that the timetable for auto-enrolment is to be delayed with the intention of giving smaller employers (i.e. those with under 50 employees) more time to comply with the requirements in recognition of the economic conditions that many small businesses are already struggling to cope with.
The new timetable has yet to be confirmed, but it has been made clear that small employers will now not be required to comply until May 2015 at the earliest. This represents at least a one year delay with the first group of small employers previously being brought into the regime from March 2014.
On the plus side for larger employers, whose staging dates are still going ahead as planned, there will be a benefit to them in the fact that this will delay the increase in the level of employer contributions required. The increase in employer contributions from 1% to 2% which was scheduled to come into effect on 1 October 2016 will be delayed until all businesses have started to auto-enrol.
Given that auto-enrolment of small employers will now not commence until May 2015 at the earliest, this increase looks set to be delayed until late 2017, if roll out to small employers still continues to follow the 2 year timetable that was originally proposed.
There is also an impact on those in the middle of the timetable which covers employers with between 50 and 3000 employees as the staging dates will be required to be altered to smooth transition. No revised dates have been set out for this group of employers as yet, but it is expected that these will be moved back somewhat.
A more definite timetable is expected to be available in January 2012.
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Judicial Review of the change from RPI to CPI fails – this time!
The case of R. (on the application of The Staff Side of the Police Negotiating Board and Others) v Secretary of State for Work and Pensions and Others has now been heard by the High Court who decided that the change to using CPI as a measure for determining public sector pension increases is lawful.
This action challenged the making of the Social Security Benefits Up-Rating Order 2011 and the Pensions Increase (Review) Order 2011 which set out that the level of increases granted to certain benefits would be calculated on the basis of the Consumer Prices Index (CPI) as opposed to the Retail Prices Index (RPI) that had been used previously.
There were four grounds on which the orders were challenged which can be summarised as follows:
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CPI is not an appropriate index/measure
Section 150 of the Social Security Administration Act 1992 sets out the mechanism for increasing certain benefits where it is determined that there has been an increase in the general level of prices. It was argued that as CPI uses a geometric mean and takes into account the fact that consumers may opt for a cheaper product if one particular product increases in price significantly (know as a “substitution principle”), that this was not an index which compared the difference between prices alone and was therefore not suitable.
This argument failed on the basis that it was considered implausible that section 150 would have intended to exclude a recognised index on the basis that it uses a geometric mean and the fact that the exercise of comparing was carried out to determine whether pensions had “retained their value in relation to the general level of prices obtaining in Great Britain”, the use of CPI, which includes a substitution principle, was entirely consistent with the objective of the exercise and therefore appropriate.
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Irrelevant consideration and improper purpose
It was argued that the decision to change from RPI to CPI was made with cost savings in mind and was therefore a decision taken having regard to irrelevant considerations and for an improper purpose having no regard to the obligations under section 150 to determine the best method available.
This argument failed on the basis that there was no right or wrong answer as to which index was appropriate and in a “tie break” situation where a decision had to be made between two measures that were appropriate it was possible to favour one over the other for any “rational reason” including its impact on the public purse.
It was apparently felt by two of the judges that regardless of this the Government had been of the view that CPI better reflected the effect of inflation on spending power without any thought to the impact of this on costs. There was considered to be no good reason to doubt the good faith of the Government in making this decision and on the evidence, even if it was wrong to take into account economic considerations, the same decision to switch would have been taken anyway had they not been considered.
McCombe J came to a different conclusion on this point. He refused to agree with the reasoning of the other judges and gave a separate judgment setting out that the decision was made improperly as cost saving had been the main driver for this and should not have been considered if the procedure for review in section 150 was followed properly.
He stated that there was only one question that was relevant and that was “How can we determine appropriately, for the purposes of the review under section 150(1), whether benefits/pensions have retained their value in relation to the general level of prices obtaining in Great Britain?”. He considered there to be no evidence that this question had been asked. He based his reasoning on witness statements and communications that showed that the potential cost savings had always been the prime consideration. There was likewise no evidence that the same decision would have been made without taking costs into account or would still be taken if the orders under challenge were quashed.
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Representations and legitimate expectations
It was outlined that representations had been made through scheme documentation and communications with unions, as well as having become established practice that RPI would continue to be used. This, it was contended, had built up reasonable expectations on the part of the members and the Secretary of State did not consider the fact that these were being overridden. These expectations should have, at least, it was argued created an obligation to consult with the members on the changes before making them.
This argument failed as there was considered no promise or assurance given on which a member could found a reasonable expectation. The view taken was that the literature simply referred to RPI as this was the relevant rate at the time it was published and the trade union representatives should have been aware that the legislation was such that the rate used in calculations could be altered.
Even if there had been a legitimate expectation it was contended that the Government was always capable of overriding this in the public interest and the fact that the proposals to make the change were announced around 10 months before the Orders were made gave the unions a period, similar to a consultation period, in which to present their arguments to the Government.
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Sex Discrimination Act 1975 (SDA)
The final point argued was that the Secretary of State did not comply with the equality duty that was imposed on public authorities at the time of the switch under the SDA as they failed to have regard to the fact that the impact of the change would be greater in relation to women.
This argument failed on the basis that even if the duty did arise (which in this case Elias LJ, McCombe J and Sales J believed that it did), it was satisfied in relation to this particular case as the Treasury had complied with the duty, it was not required that the Secretary of State separately comply with this duty too in relation to the same Order.
Permission to appeal was granted and this is currently timetabled to be heard on a date between 2 May and 31 July 2012.
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The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter