Pensions Newsletter September 2011
Inside this issue
Flexible Apportionment
Following the recently closed DWP consultation on new possibilities for apportioning employer debt under section 75 of the Pensions Act 1995, flexible apportionment arrangements were forecast to become an option as soon as 1st October. However the DWP has just announced that this is to be delayed and is now due to come into being in December 2011.
The flexible apportionment arrangement, which will be introduced as an amendment to the current employer debt regulations, will afford an alternative to an employer debt being triggered in a relevant multi-employer defined benefit scheme on certain types of corporate restructuring.
The new arrangement will apportion liabilities rather than a fixed sum of debt, as is the case under existing arrangements, and works by apportioning the departing employer's liabilities to one or more remaining employers who, in effect, step into their shoes as regards these. A debt under section 75 would only be triggered if triggered in a relevant multi-employer defined benefit scheme on the employer to whom the liabilities had been transferred, at which point such employer would be liable for a debt calculated on the basis of his own liabilities plus those it had agreed to accept responsibility for under the flexible apportionment arrangement.
The arrangement must be in writing and agreed by the trustees and all employers involved and all liabilities of the departing employer must be apportioned to employers remaining within the scheme.
A funding test must also be met which aims to ensure that the remaining employers are able to adequately fund the scheme and that the arrangement will not adversely affect members' benefits.
The draft regulations also include provision to extend the period of grace under which temporarily ceasing to employ an active member will not trigger a debt from 1 year to 3 years.
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Pensions Ombudsman
The most common complaint received by the Pensions Ombudsman concerns ill health early retirement with the Ombudsman recently commenting that complaints tend to occur where schemes are administered without close enough reference being made to what the rules actually say.
Last month in Green (78914/2) a complaint was upheld against an employer for failing to apply the rules correctly and against the scheme trustee for failing to ensure that the employer had applied the scheme rules correctly in reaching a decision to refuse award of an ill health early retirement pension.
In this case the test for awarding the pension included a requirement that the individual must be incapable of carrying out any appropriate alternative employment offered by the employer.
The Ombudsman considered that the circumstances and scheme guidance meant that location was a factor that should have been considered in deciding if the alternative employment offered was in fact appropriate and the employer had not taken this into account in applying the rule.
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Getting closure
Closing a defined benefit pension scheme to future accrual can be complex and not without difficulties.
In the current economic climate, increasingly employers who sponsor defined benefit schemes are seeking ways to control the costs of supporting them. In the past many employers have undertaken less extreme liability management exercises such as closing schemes to new members, offering enhanced transfer values, or reducing future pension accrual (rather than ceasing future accrual altogether). The spiralling cost of pensions has now resulted in the closure of schemes to future benefit accrual being the preferred option, and employers with open defined benefit schemes look likely to become a relic of the past.
Click here to read the rest of this article by Colin Crocker in the Journal of the Law Society of Scotland.
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City of Edinburgh Council v Scottish Council for Research in Education, the University Court of the University of Glasgow - 11 August 2011
City of Edinburgh Council are the administering authority of Lothian Pension Fund. The first defenders, Scottish Council for Research in Education (SCRE) were a scheme employer of the fund under an admission agreement. In 2002 SCRE were taken over by The University Court of the University of Glasgow (UCUG) and SCRE ceased to make any contributions to any fund. The employees of SCRE transferred to UCUG and their pension entitlements were transferred to the Strathclyde Pension Fund. The former employees of SCRE were left behind in the Lothian Pension Fund and the Fund is now in deficit in respect of these former employees.
SCRE claimed that the Local Government Pension Scheme (Scotland) Regulations 1998 did not impose a liability on them in respect of the former employees at the time they ceased contributing to the Fund and that this cannot be imposed retrospectively. The pursuers claimed that there is a drafting error in the regulations and if these were properly construed they would make SCRE liable for the deficit.
Summary of Case
The regulations contain a power for an administering authority to establish an admission agreement fund and any admission bodies eligible to participate in this fund are then referred to as transferred bodies. This was not done for SCRE and they therefore never became a transferred body.
The regulations impose a duty on the administering authority to obtain a valuation of the fund and there is a mechanism for this to be reviewed on the occurrence of certain events, one of these being where an admission agreement ceases to have effect and the admission body is ceasing to be a transferred body.
The pursuers argued that the use of the words “ceasing to be a transferred body” is a drafting mistake and should refer instead to “ceasing to be an admission body”. The wording covered too limited a number of cases and not the majority of situations where admission agreements simply come to an end.
It was held that the regulation allowing for valuation is confined to a situation where an admission agreement fund has been established and does not apply otherwise. This may mean that the cost of maintaining the solvency of the fund falls on other participating employers, but the judge felt unable to conclude that this consequence was contrary to the intended purpose of the regulations.
The duty to make payments under the regulations was confirmed to be imposed only on an employing authority which means a body employing an employee who is eligible to be a member. As a result neither defender had an obligation to make a payment to the fund.
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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
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