The sense of the meeting is that timing on the review of the IORP Directive (with its potential to increase funding requirements) is slipping back, perhaps to 2014 rather than 2012. We’ll hear more on that this afternoon, including from pensions Minister Steve Webb.

For now, the more clear and present danger for both DB and DC schemes looks like coming from the non-pensions drivers which could combine to fuel a move out of equities and into bonds. EMIR and its worldwide equivalents are likely to impose collateral requirements on transactions which could have the effect of driving bond prices up, with a domino effect of bringing yields down, increasing liabilities, reducing returns, raising employer DB costs and lowering member DC incomes. Add to that scenario the concept of increased funding requirements under a holistic balance sheet, and it seems that even if your lunch money is safe, your pension scheme may not be.

The key thing employers and schemes can do over the next few months is to make your voice heard. The NAPF and its European counterparts are fighting fires on many fronts, and they need back-up. We’ll brief Allen & Overy’s clients as and when consultations take place: let’s do what we can to prove the Daily Express wrong!

Helen Powell is a senior professional support lawyer at Allen & Overy LLP.

We all know that pension schemes which were contracted-out on a protected rights basis (or on a mixed benefits basis) pre-6 April 2012 need to consider amendments to their rules to remove protected rights related provisions.  New regulations give trustees the power to remove such provisions by resolution until 6 April 2018 (and with effect retrospectively to 6 April 2012).  However, it’s worth checking now what your rules say on short service refund lump sums and amending that rule as soon as possible if necessary. 

This is because HMRC have issued a statement confirming that scheme rules which exclude contributions relating to protected rights from short service refund lump sums will result in any such payments after 6 April being unauthorised.  To be authorised, the lump sum payment has to extinguish the member’s entitlement to benefits under the pension scheme except to the extent that it is prohibited from being extinguished by reason of the operation of provision made by or under any enactment.  Pre-6 April 2012, schemes had to keep members’ contributions relating to protected rights in the scheme so a limited refund was allowed.  Since the protected rights legislation fell away, that exemption doesn’t apply and so you have to pay the lot, or not at all.  But scheme rules might stop trustees paying out contributions relating to ex-protected rights.

So the message is, check your scheme rules on short service refund lump sums and, if necessary, make sure the trustees don’t pay out any such lump sums until the rule is amended or until HMRC fix the position.  (HMRC mention in their statement that they will be changing the tax rules in due course but it will be for a transitional period only to allow affected schemes to amend their rules and, importantly, the tax change won’t be retrospective.)  Otherwise trustees may end up paying out unauthorised payments. 

HMRC have also confirmed that, for a member who previously took a short service refund but had to leave his contributions relating to protected rights in the scheme, a second short service lump sum can be paid in respect of this retained amount (subject to it satisfying the requirements for short service refunds at the time it is paid).  Whether or not trustees want to give that option to affected deferreds (and whether they will want to take it) is a story for another time!

Sonya Fraser is an associate at Allen & Overy LLP.

Recent Ombudsman cases support this view.  The technical point is that the trustees have to administer the scheme in accordance with the scheme’s rules, and so need to be sure that the rules are being properly followed. The question is – how far do they have to go?

Two complaints to the Ombudsman illustrate the issue.  Both involved ill-health early retirement pensions where entitlement usually turns on the reason for retirement.  Schemes rules often say that this is decided by the employer.  Both cases show that trustees cannot accept the reason which the employer has notified at face value.

In the first case (Anderson) the qualification condition for the pension was termination of employment “in the interests of efficiency” as decided by the employer.  The employer, Yell,  told the trustees that this didn’t apply (the member’s employment having been terminated for performance reasons) and so the trustees refused the pension.  The case came before the Ombudsman twice.  At the first stage he upheld the complaint on the ground that the trustees had failed to look behind the employer’s decision and give their reasons for accepting it.  Yell’s position that the efficiency ground did not apply in this case was potentially irrational.  So, the trustees should have challenged it.

Following the Ombudsman’s direction, the trustees looked into the case again (in some detail) and concluded that Yell had acted in good faith – not capriciously or irrationally – and that they could accept its decision.  On a further complaint by the employee, the Ombudsman agreed that the trustees had – second time around – met their responsibilities. 

The second case (Green) involved an ill-health pension rule with a condition that the member must not have refused ‘appropriate’ alternative employment.  Before she became ill, the employee had worked for British Airways on ground duties near Liverpool where she lived.  Her contract said that she could be employed at any location worldwide, and BA offered an alternative job at Heathrow, having not been able to find her a job near her home.  The Ombudsman found the trustees guilty of maladministration for having accepted the employer’s decision that the job offered was appropriate.  BA had not properly assessed whether the employee could have done the Heathrow job – it should have taken expert advice on the employee’s ability to cope with the travel involved.  While, under the scheme rules, the decision rested with BA, the trustees had a duty to check BA had reached its decision properly. 

So trustees need to be aware that in some situations they will need to examine critically how employers have reached their decisions under scheme rules.  With case law still emerging, it’s difficult to formulate a hard-and fast rule. So on this one I’ll be cautious and just pose some questions to suggest the general approach for trustees, gleaned from the decided cases.

First, are there plausible grounds for believing that the employer’s decision has been arrived at after following a proper procedure – assessing all the evidence and taking expert advice where appropriate?  Second, does the decision appear to be rational and consistent in its reasoning?  Third, does it stack up with the scheme’s rules?  And, last but not least, does it seem to be in good faith (sometimes called the ’smell test’).  If so, the trustees should be able to leave it there: but if in doubt – it’s best to investigate.

Jonathan Goodwin is a consultant at Allen & Overy LLP

To recap, the understanding to date has been that employers can’t justify discriminatory treatment on the grounds of cost alone – they need a non-cost factor as well, in order to show that the treatment is a proportionate means of achieving a legitimate aim, so as to justify the discrimination. The Employment Appeal Tribunal in this case had thrown some doubt on the ‘cost plus’ principle, suggesting that it made sense for ordinary principles of proportionality to apply – and that the ‘cost-plus’ approach resulted in artificial game-playing – “find the other factor”.

The Court of Appeal has refused to go that far. It agreed there is ’some degree of artificiality’ about the ‘cost plus’ approach – almost every decision taken by an employer is going to have regard to costs – but it made clear that it accepts ECJ guidance that saving or avoiding costs cannot, without more, amount to a legitimate aim.

It seems that the hurdle for finding an additional reason isn’t particularly high – here, the employer wanted to dismiss an employee on the grounds of redundancy, and had been planning to do so for some time. That was enough to establish a legitimate aim, and the court then went on to say that the employer could – and, in fact, should – give effect to the dismissal in the most cost-effective way it could. In this case, the consultation period Mr Woodcock had been deprived of would have changed nothing – it was simply the cutting of a procedural corner. Balanced against the substantial windfall he would otherwise have had, the discriminatory treatment was a proportionate means of reaching the employer’s legitimate aim. 

Stephen Richards is an associate at Allen & Overy LLP.

The Pension Protection Fund contingent asset regime’s been with us for a few years now.  Underfunded pension schemes get lower PPF levies if they’ve got a funding guarantee from a guarantor that has a lower insolvency risk than the scheme’s own sponsoring employers.  But it’s come to the PPF’s attention that some guarantors mightn’t be quite what they seem – the ghost guarantors!

Insolvency risks are based on Dun & Bradstreet company failure ratings.  The vagaries of the D&B system mean that companies with little or no trading history can have very favourable D&B scores.  So, even a shell or service company could have a great D&B score and net a PPF levy reduction.  But, when it comes to the crunch and the guarantee needs to be called upon, you might as well ask Greece for a tenner.

So the PPF’s taking action.  Its Chief Policy Adviser, Chris Collins, and its legal team ran a “Contingent Assets Surgery” for the Association of Pension Lawyers earlier this week and their message on the point was clear: the PPF’s going to be performing its own analysis of guarantor strength, comparing it with the deemed value of the contingent asset for levy purposes.  Primarily, it’s going to consider publicly available financial information.

Slimer - surprisingly liquid assets for a ghost

It’s also going to look to the trustees:  trustees certifying new guarantees or re-certifying existing ones by 31 March 2012 are going to have to be able to say that their guarantor’s good for the money.

The PPF’s said that if it’s so “clear cut”, trustees shouldn’t have to take “specific active steps” to investigate the guarantor’s ability to pay.  However, what counts as clear cut isn’t in itself that clear.  Checking accounts for the guarantor’s net asset position is the first suggestion from the PPF but, as they note, you might have to look further – e.g. into liquidity – as a great net asset position isn’t much good if you can’t realise the asset at the time you need to pay the pension liability.  Advice: amongst other things it’s probably worth getting get some written comfort from the guarantor’s finance director – a paper trail is nearly always a good idea. 

If trustees determine that the guarantor’s only good for part of the money then this year, for the first time, they have the ability to certify only up to that amount.

But if a guarantee isn’t re-certified this year for a particular guarantor because the guarantor turned out to be too ghostly to count, would the PPF look into the reasons?  Would they hound down the schemes with ghost guarantors and seek to recoup past levy reductions?

Hopefully not – for this year at least the PPF is more likely to accept the adjustment as evidence of a change of creditworthiness, rather than as an admission that the guarantor was never good for the money in the first place.  But if you’ve got any concerns – “Who’re ya gonna call?” Ghostbusters?  Maybe not.  I’d suggest A&O.

Stephen Beattie is an associate at Allen & Overy LLP.

 For companies wishing to put in place or certify a new letter of credit for PPF purposes and additionally for those who are preparing to re-certify current letters of credit, it is worthwhile remembering the requirement for the letter of credit to be issued by an “acceptable” financial institution. The PPF have defined this to mean a financial institution that:

(a)                has a current Moody’s credit rating of Aa3 or better, or a current Standard & Poor’s credit rating of AA- or better, or a current Fitch credit rating of AA- or better;

(b)                has been regulated and approved for business by the Financial Services Authority or its applicable successor, either directly or on the basis of rights in European Union law; and

(c)                is domiciled in a “nominated jurisdiction” (broadly any state which is a member of the European Union or the Organisation for Economic Co-operation and Development, or Hong Kong).

Whilst this requirement has not changed since the last PPF determination for the 2011/2012 levy, with the recent downgrading of several large financial institutions, many letters of credit which previously satisfied this criteria will no longer do so.

With the reduction in the number of financial institutions which meet this criteria, could this be the end of Type C contingent assets for PPF purposes?

Jessica Kerslake is a senior associate at Allen & Overy LLP.

One of the key reasons for an employer to put a Type A guarantee in place is obviously to reduce the PPF levy.  The trick is to find the right entity to give the guarantee.  The PPF has made some changes to make this easier and some to make it harder in this year’s levy determination, published in December 2011:

1. The range of people who can provide contingent assets has increased.  Previously, only a party who satisfied the Insolvency Act definition of being ‘connected’ or ‘associated’ to a scheme employer could provide a PPF-compliant contingent asset.  The PPF has now widened this to include persons who have a “pre-existing legal or commercial relationship” with an employer. 

This new easement is likely to be used only rarely (it is unlikely that anyone who doesn’t fall within the ‘connected’ and ‘associated’ definition would want to provide a contingent asset, though the PPF says that it does happen).  If an employer does want to use it, build extra time into your timetable as the employer will have to establish to the trustees’ satisfaction (and possibly the PPF’s) that there is such a relationship.  

2. The trustees must certify that they have no reason to believe that each guarantor of a Type A guarantee could not meet its full commitment under the contingent asset.  This requirement applies equally to existing guarantees, and trustees will look to be provided with evidence that this is the case, or in some cases may have to change guarantors or rely on only some of multiple guarantors.

The reason for putting a PPF-compliant guarantee in place is to replace the (more likely) risk of insolvency of the sponsoring employer with the (less likely) risk of insolvency of the guarantor when calculating the levy, thereby reducing the levy.  However, under changes to the levy formula for 2012/13, insolvency scores are grouped into 10 bands.  Therefore, not only must the risk of the guarantor’s insolvency be less than the employer’s, it must be sufficiently less to place it in a different band to the sponsoring employer.  Employers may need to look carefully at their D&B scores to work out which potential guarantors are appropriate.

By the time the employer has prepared all of their officer’s certificates and the trustees have received and considered their legal opinion, there is less time than you think to put a new PPF-compliant contingent asset in place.  It is worth seeing if you can instruct your legal advisers by the end of January.  It is possible to put a new contingent asset in place in less time than this, but acting early will help minimise stress in the run up to 30 March 2012.

* The same deadline applies to re-certifying existing PPF contingent assets

Chris Jackson is a senior associate at Allen & Overy LLP.

In an ideal world, trustees and employers will have clearly articulated between themselves the intention behind any proposed amendment to the scheme.  That intention will then be relayed to the legal advisers and given effect to in a properly executed deed of amendment.  Reality is quite different.  Often the intention behind an amendment evolves over time as the point is discussed between the trustees and the company at meetings and in correspondence.  Advisers are then asked, often orally in a quick telephone conversation, to document the amendment that has been agreed. 

There are, however, significant benefits in taking the time to send advisers clear written instructions setting out what the trustees intend the amendment to achieve.  In order to provide clear written instructions, the trustees must be clear themselves as to the purpose of the amendment.  Thus, it will help clarify in the trustees’ own minds exactly what it is they are trying to achieve and the consequences of that.  Clear written instructions will also allow the advisers to understand what the trustees’ intention is, ask questions, and flag any potential issues.  Both of these should result in fewer mistakes in scheme documentation.

However, if there is a mistake with the amending document then those written instructions will also play a vital role in remedying that mistake.  One of the most common – and appropriate – methods for remedying mistakes in scheme documentation is to ask the court to rectify the document containing the mistake.  In order for the court to grant rectification, it will need to see clear evidence of the parties’ intentions and be convinced that the document fails to reflect those intentions. Clear written instructions to advisers is potentially a great piece of evidence (far better than a ex-trustee being asked to recall the details of a telephone conversation they had with their advisers some years earlier). 

The better the evidence, the stronger the case for rectification and, if the evidence is particularly strong, it might be possible to obtain rectification by summary judgment.  Rectification by summary judgment could save a considerable amount of time and money as it would avoid the need for a full hearing that could last a number of weeks and be incredibly expensive.   Summary judgment is arguably becoming the norm for rectification, but it will only come to the trustees’ aid if the evidence is there.  Clear written instructions will help.

Jason Shaw is a senior associate at Allen & Overy LLP.

When it comes to discrimination laws, the general rule is that cost saving by itself has never been an adequate justification for discrimination. A question mark has been raised over this principle in the age discrimination case of Woodcock v Cumbria PCT.

Pension schemes benefit from a number of exemptions in legislation where they are allowed to apply rules and practices which are age discriminatory, for example, the minimum and maximum age for admission to a pension scheme. However, where there isn’t an exemption that can be relied on the discriminatory rule or practice will need to be ‘objectively justified’ to be lawful. This means that the act has to be a ‘proportionate means of achieving a legitimate aim’. So far case law has stopped short of allowing cost reasons by themselves to satisfy the grounds of a ‘legitimate aim’. Another factor is also needed and this has become known as the ‘cost plus’ approach.

However, in the Woodcock case the Employment Appeal Tribunal said that this approach resulted in “artificial game playing – find the other factor”. Mr Woodcock was chief executive of a primary care trust and was given notice of termination on the grounds of redundancy as part of an NHS restructuring shortly before he turned 49, without formal consultation. With a one year notice period in his contract of employment, if due process had been followed before giving notice then his termination would have been delayed beyond his 50th birthday and this would have triggered an enhanced pension (with significant costs to the Trust). Mr Woodcock had been made redundant on the grounds of his age (at least in part). The question was whether or not the Trust’s decision could be objectively justified to avoid a breach of discrimination legislation.

The EAT found in the favour of the Trust using a ‘cost plus’ legitimate aim. The ‘plus’ was to avoid Mr Woodcock receiving a windfall. This doesn’t seem to be much of a ‘plus’. As Andrew Short QC noted at November 2011’s Association of Pension Lawyers conference it isn’t much of a ‘plus’ to say “our decision was not solely based on saving us money – we also wanted to stop you from getting it!”

The EAT went further in suggesting an alternative approach to ‘cost plus’: “In many cases the discriminatory impact in question may be such that the employer must avoid or correct it, whatever the cost. But there may equally be cases where the impact is trivial and the cost of avoiding or correcting it enormous; and in such cases we cannot see why the principle of proportionality should not be applied in the ordinary way.”

Mr Woodcock appealed the EAT’s decision and his appeal was heard in the Court of Appeal on 7 December 2011. In my view it would take a big step to break away from established case law on this point. However, in tight times could it be a better approach to allow an act to be justified solely on the grounds of costs being disproportionate and the impact trivial? We are waiting to see what view the Court of Appeal will take.

Stephen Richards is an associate at Allen & Overy LLP.

Unfortunately for purchasers, it’s hard to tell which sort of pension rights could transfer – and perhaps just as hard to tell whether they actually transfer or not. Until recently there hadn’t been any further developments on this subject, so it was a case of Beckmann Martin Overdue – we ain’t seen nothin’ yet. But there’s been a new Pensions Ombudsman determination on the subject, so it might be useful to review some of the arguments against pension rights transferring which come up on transactions.

1. The rights are conditional – for example where the early retirement benefit is initiated by and agreed with the employer.  This may be a category of pension provision which would transfer – it’s an early retirement benefit given otherwise than at the end of the member’s normal working life (which Martin suggested could also be covered by the principles in Beckmann).  But are they really ‘rights’ at all, given that the employer needs to consent?  It’s arguable that the right should be distinguished from those in the Beckmann and Martin cases as those cases involved an unqualified right to early retirement.  Even if the right would transfer, it’s hard to see why the employer consent element would be left behind.
2. The rights arise from the pension scheme, not the contract of employment –  the rights in the private sector are usually part of the pension scheme, not part of the employment contract.  Public sector benefits can work rather differently – the rights in Beckmann came from a collective agreement which was incorporated into the employment contracts and paid via a completely separate freestanding early retirement arrangement, rather than from the pension scheme.  If there’s no similar definite contractual provision in a private sector contract, this distinction could be a barrier to the right transferring.
3. Public sector and private sector schemes are fundamentally different – most of the transactions I deal with involve private sector employers and schemes.  Beckmann and Martin involved transfers from the public sector.  There may just be an argument that Beckmann and Martin should be distinguished on this ground and limited to public sector transfers.
4. Under the seller’s scheme, members would not actually be eligible for the rights – for example in the recent determination in Hunter (81760/2). When the seller’s scheme was closed, it made members ineligible for early retirement rights inherited from a previous TUPE transfer.  The early retirement rights did not then transfer on a second TUPE transfer because the rights were not “live” at the time it happened.  This puts a limit on what transfers and shows it is possible to change benefits that are inherited.

Ultimately, these arguments come down to who’s prepared to take the risk – the buyer or the seller.  Tricky at the best of times, but definitely not made any easier by the uncertainty of the legal position.

Rudi Pickup is an associate at Allen & Overy LLP.