Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
This week we cover the following topics: Updates to the scheme return for DB/hybrid schemes; Validity of amendment to CARE basis for future accrual: Avon Cosmetics; Draft GMP Order 2024.
Updates to the scheme return for DB/hybrid schemes
The Pensions Regulator (TPR) has provided information about updates to this year’s scheme return for DB and hybrid schemes. Returns are due to be sent out in late January or early February and must be submitted to TPR by 31 March 2024. TPR reminds schemes to ensure that their contact details on Exchange are up to date so that the return is sent to the right person.
New for this year, the scheme return will include questions about the scheme’s fiduciary managers, their contact details and when they were appointed (including whether this was via a competitive tender process). TPR will also ask for contact details and appointment dates of the scheme’s investment consultancy providers, whether and when strategic objectives were set for them and when those objectives will be reviewed.
New questions are also to be included on liquidity and leverage and the controls that a scheme has in place. This links back to the guidance TPR issued in April 2023 (read more) following the market turbulence of autumn 2022. Schemes will be asked whether they use leveraged LDI and, if so, a series of questions about each individual LDI mandate. Further questions address: whether the scheme uses a synthetic equity mandate; its exposure to overseas currency; the availability of liquidity and how quickly liquidity can be delivered; and the governance of transactions in response to collateral calls. A final question in this section addresses systemic liquidity impacts.
Schemes will also be asked for details about their AVC providers and how many members each provider looks after; and to provide details of a primary contact in relation to pensions dashboard duties – TPR will use this to send the primary contact updates and information. Finally, TPR has made updates to the help text provided in relation to asset breakdown, to encourage schemes to submit as much of their exposure as possible, and to provide other clarifications.
Read the update from TPR.
Validity of amendment to CARE basis for future accrual: Avon Cosmetics
The High Court has given a ruling on specific questions in relation to an amendment severing the link to final salary in the Avon Cosmetics Pension Plan (the Plan) from 30 September 2006 and providing future service benefits on a CARE (career average revalued earnings) basis. The Plan’s amendment power prevented any amendment which, at the date it was made, affected prejudicially (a) any pension in payment or (b) any rights accrued or secured up to that date.
It had been identified that, as regards accrued benefits prior to the amendment, the switch to a CARE basis for future service could potentially make some members worse off – but the individual outcome could only be assessed when a member’s benefits crystallised on retirement or leaving employment, depending on the impact of salary increases as compared to the rate of inflation. There were two theoretical groups, the ‘Revaluation Winners’ who would be better off under the CARE amendment, and the ‘Final Salary Winners’ who would be worse off. The key question was about the legal impact of the power of amendment having been exercised in a way that breached the restriction on prejudicially affecting accrued rights.
Due to the possibility of negligence claims being made against professionals who had advised the trustees and the employer at the time of the amendments, the court was asked to identify the precise effect of any invalidity of the amendment. The court will be asked to sanction a compromise at a separate hearing in February, and this ruling dealt primarily with the legal issue of identifying the consequences of an ‘excessive exercise’ of the amendment power – would the amendment be ineffective (in relation to the impact on accrued benefits) as regards both groups or only the Final Salary Winners (being effective in respect of Revaluation Winners)? It was not argued by any party that the whole of the wider CARE amendments would be completely void.
In a lengthy decision, His Honour Judge Davis-White KC considered whether (a) it was possible to sever the valid and invalid parts of the exercise of power and, if so, (b) whether the person exercising it would still have done so had they appreciated that only part of it was valid. In this case, he held that the concepts of Final Salary Winners and Revaluation Winners were clearly sufficiently different and identifiable, even if there was a timing issue in terms of identifying which members fall into each category. He also concluded that the partial validity of the amendment was squarely within the overall objective of exercising the power (so the question of whether the trustees would still have exercised it had they known of the invalidity did not arise). He also found that there was no question of the power having been used for an improper purpose. Therefore, on the assumption (which the court was asked to make) that the amendment was invalid in relation to the accrued rights as at 30 September 2006 of the Final Salary Winners, it was still valid as regards the Revaluation Winners.
Read the decision.
Draft GMP Order 2024
The draft Guaranteed Minimum Pensions Increase Order 2024 specifies that the Guaranteed Minimum Pension element of an individual’s occupational pension entitlement (accrued in a formerly contracted-out occupational pension scheme between 1988 and 1997) must be increased, with effect from 6 April 2024, by 3%.
Read the order.
