UK Pensions Law Update – May 2022

In a regulatory intervention report issued under section 89 of the Pensions Act 2004, the Pensions Regulator (TPR) has explained why it issued a contribution notice in respect of the Dosco Overseas Engineering Limited (1973) Pension & Assurance Scheme (the Scheme), following a management buyout.

The Scheme had two statutory employers, Dosco Overseas Engineering Ltd and Hollybank Engineering Co Ltd (together, the Dosco Group), which was acquired by SMT Scharf AG (Scharf) in 2010. Clearance from TPR was sought and granted at the time of acquisition.

The purchase turned out not to be a profitable one and an internal Scharf report found that the Dosco Group was unlikely to ever deliver any cash or other value to Scharf – and any value that was generated would be likely be absorbed by the Scheme’s deficit. Scharf therefore decided at a board meeting in September 2012 to prepare to sell the Dosco Group. The minutes of that meeting show that no thought was given to the security of Scheme benefits, but rather how best to extract Scharf from the Dosco Group without triggering the Scheme’s section 75 debt (approximately £38.8m). Following the meeting, Scharf took steps to close the Scheme to future accrual and reduce the financial support that Scharf was providing to the Dosco Group.

Mr Cain, the Dosco Group’s CEO, was incentivised to find a buyer for the Dosco Group under a consultancy agreement which would net him around €250,000 on sale. No third party buyer was found, and Mr Cain and Scharf therefore also entered into discussions around a potential management buyout led by Mr Cain.

Scharf announced its decision to sell the Dosco Group in April 2013 and ultimately decided to proceed with the management buyout. The buyout completed using a shell acquisition vehicle (with no assets or investors) for a purchase price of €2m in May 2013. The purchase price was funded by way of loans from each of the Dosco Group companies on onerous terms. No mitigation was offered to the Scheme nor were the trustees notified or consulted until the day after completion. Mr Cain had received legal advice that the buyout was likely to be materially detrimental and that mitigation should be offered but did not do so. Mr Cain received the agreed €250,000 consultancy fee from Scharf, as well as a 60% holding in the acquisition vehicle.

Eight months later the Dosco Group went into administration and a PPF assessment period was triggered. The trustees managed to secure a buy-in with reduced benefits in December 2015 and TPR issued Warning Notices (indicating that a contribution notice may be issued) to Mr Cain and Scharf. The Warning Notices were issued on the basis that the acts of Mr Cain and Scharf were materially detrimental to the Scheme.

TPR reached a settlement with Mr Cain in December 2020 for around £130,000 but the case against Scharf proceeded.

TPR’s determinations panel concluded that it was reasonable to issue a contribution notice to Scharf as it “paid no regard whatsoever to the Scheme in the course of [the management buy-out], instead viewing the Scheme as something to offload from Scharf on to a purchaser”. It therefore issued a contribution notice against Scharf for around £2m, comprising c. £1.4m in respect of the cash extracted from the Dosco Group by way of loans to the acquisition vehicle and a further c. £670,000 for lost investment return and interest. Daily interest is also to be applied until Scharf makes payment.

Comment

This case is also a particularly clear-cut example of a company failing to (i) properly consider well in advance of a corporate deal how a defined benefit pension scheme will be affected and (ii) engaging with the trustees in good time to agree suitable mitigation.

This case took place before the Pension Schemes Act 2021 came into force. Similar behaviour now could also result in criminal sanctions and further civil penalties.

The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022

On 28 April 2022, the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 (the GMP Conversion Act) received Royal Assent. The GMP Conversion Act amends and clarifies the provisions of the Pension Schemes Act 1993 which allow occupational pension schemes to convert GMP into other scheme benefits. The key amendments, which will come into effect on a date specified in future regulations, include:

• clarifying that survivors’ benefits can be converted under the legislation;
• clarifying that money purchase benefits are generally excluded from the actuarial conversion calculation;
• removing the current requirements for survivors’ benefits post conversion – these will be replaced with new regulations;
• removing the current requirement for employer consent to conversion – new regulations will specify what (if any) consents will be required; and
• removing the requirement to notify HMRC of a conversion.

Comment

The previous legislation governing GMP conversion came in for some criticism in the Lloyds case – including the fact that it was not clear that the legislation could be used to convert survivors’ benefits. The new provisions are intended to strip out some of the current unhelpful technicalities in the current provisions – albeit whether the new legislation will be easier to operate will depend on whether new regulations (as yet to be issued for consultation) do indeed simplify matters.

GMP equalisation: PASA publishes FAQs on equalisation process

In March 2022, the Pensions Administration Standards Association (PASA) published the first instalment of its frequently asked questions relevant to GMP equalisation (the FAQs). The FAQs, to be updated from time to time, are intended to provide pragmatic solutions to help scheme administrators implement GMP equalisation. The FAQs currently provide guidance on:

• whether the “look-back” approach (i.e. for assessment of crossover points between member and comparator pensions in periods between pension increase dates) is an appropriate solution for most scheme structures and members;
• in bulk communications to members on any payment of arrears and interest due, whether trustees can consider providing the total amount of arrears due and identity interest separately, rather than providing a detailed breakdown;
• what issues arise in relation to death benefits subject to GMP equalisation;
• a pragmatic approach that could be taken in checking the lifetime allowance position of a member within the scope of GMP equalisation; and
• certain factors for the administrators and trustees to take into account in determining whether a more generous or restrictive approach is to be taken in commutation.

Comment

The FAQs deliver a central message that a pragmatic solution should be taken as schemes implement GMP equalisation. Further instalments of the FAQs are to be expected, which will hopefully provide more guidance on recommended industry practice.

GMP equalisation: new HMRC guidance addresses transfer value top-ups and GMP conversion

In April 2022, HMRC published a newsletter on GMP equalisation to provide guidance on (i) transfer top-up payments in relation to past transfers and (ii) the GMP conversion method (the Newsletter). This supplements two other newsletters published by HMRC in 2020 which discussed lifetime allowance, annual allowance and lump sum payments in the context of GMP equalisation.

On transfer top-up payments, the Lloyds judgment held that scheme administrators may need to correct past transfer payments if their calculation did not take into account the adjustments required to address inequalities arising from GMPs. The Newsletter provides helpful confirmations that HMRC considers that top-up payments to another scheme will generally be tax authorised if the receiving scheme is a registered pension scheme or a qualifying recognised overseas pension scheme (even if it is a different scheme from that to which the original transfer was made).

HMRC also confirms that protected pension ages or protected higher lump sums will not generally be lost as a result of a transfer top-up. Care should be taken, however, that fixed or enhanced protection is not lost. HMRC also confirms that top-up payments may be “cashed out” as lump sums if the relevant Finance Act conditions are met.

On GMP conversion, the Newsletter confirms the expected pensions tax position for pensioners (including those who have retired before GMP conversion, or those retiring in the tax year when GMP conversion is undertaken). However, the Newsletter recognises that GMP conversion could have unhelpful consequences for deferred members – including annual allowance inputs and the loss of fixed protection. HMRC therefore notes that it is considering whether it is possible and appropriate to make legislative change in this area.

Comment

HMRC’s guidance on transfer top-ups is welcome, and should provide comfort that such transfers (and cash commutations in lieu of transfers) will generally be able to be made on a tax authorised basis. HMRC acknowledges, however, that the tax implications of GMP conversion require further detailed consideration, and potential legislative change, to avoid unwanted adverse impacts on members.

On 30 March 2022, the DWP published its further consultation on facilitating investment in illiquid assets by DC schemes. This consultation follows the FCA’s finalisation of the rules for the Long Term Asset Fund (LTAF), which are designed to encourage efficient investments in long-term illiquid assets. The DWP's overall goal of encouraging increased investment in illiquid assets by DC schemes remains unchanged, and it now proposes (i) that it would give principles-based advice on performance fees (rather than legislate as to what performance fee structures are, and are not, permissible) and (ii) to compel DC schemes to disclose and explain their approach to illiquid investment. Furthermore, for larger authorised master trusts, the DWP is consulting on proposals to relax employer-related investment restrictions. The consultation closed on 11 May 2022.

Comment

We welcome the DWP’s move away from its previous proposals to codify what performance fees are, and are not, permissible – as it seems more appropriate to let pension scheme trustees decide what is acceptable in the context of their membership. Simmons & Simmons continues to be actively represented on HMT/DWP working group on the LTAF and we shall provide further updates.

From 1 June 2022, trustees will not be able to proceed with a member request for flexible benefits or to transfer out unless the member has taken pensions guidance or opted out. These amendments to the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 also require trustees to offer to book a Pension Wise appointment for the member. In anticipation of the new rules coming into force, the Pensions Regulator (TPR) has updated its relevant guidance.

TPR notes that it considers (i) it is good practice to book a Pension Wise appointment for the member as soon as possible and (ii) schemes should update their standard transfer-out communications and processes to include this new requirement to offer to book an appointment.

Comment

TPR has confirmed that the new requirements will not apply to member applications for flexible benefits or transfers out that are already being processed on 1 June 2022; however, trustees and managers who have yet to update their procedures, processes and member communications should do so as soon as possible.