© Shepherd and Wedderburn LLP

A Pensions Update for the In-House Lawyers Group of The Law Society of Scotland

Presentation by Louisa Knox and Richard

Jones

7 February 2012

Occupational pension schemes – where are we now?

27 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

37 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Agenda

● Introduction

○ What are occupational pension schemes

○ What are not occupational pension schemes

● The challenge of increasing longevity and reduced investment return

○ Improving life expectancy

○ Poor investment returns

○ Impact and reaction

● Increasing regulation and the role of the Pensions Regulator

○ The Pensions Regulator

○ Auto-enrolment

○ The Scotland Bill

● Discrimination and the European Dimension

o Barber and GMP equalisation

o Age discrimination

o Test Achats

Introduction

What are occupational pension schemes?

• Set up by employer to provide benefits for employees and dependants

• Commonly registered with HMRC

• 3 categories:

o Defined benefit (or final salary)

o Defined contribution (or money purchase)

o Hybrid

What are not occupational pension schemes?

●Personal pension schemes, including Group Personal Pension Plans

(GPPs)

●Stakeholder pension schemes

47 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing longevity and reduced investment returns -longevity

• Sharp improvement in longevity in past few decades

• Recent focus of impact on funding of occupational pension schemes

• At 65, average man can expect to live another 18 years, and average

women 20.6 years

• Impact on DB schemes

o Traditionally funded using assumptions which track actual

mortality rates – no assumption for future improvements

o Result – funding requirements have been set too low, leading to

BIG deficits!

• Impact on DC schemes

o Longevity risk sits with member

o Need more money in pension pot to fund longer retirement

57 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing longevity and reduced investment returns –investment

• Recent global financial crisis has resulted in reduced and more volatile

investment returns for occupational pension schemes

• Impact on DB schemes

o Reduction in scheme asset values

o Reassessing valuation assumptions and other calculation factors

o Need for increased employer contributions/support

• Impact on DC schemes

o Pension pot growth slowed

o Pension pot worth less than member expects on retirement

67 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing longevity and reduced investment returns –impact and reaction

77 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Impact - DB schemes

Increasing deficit

Increasing longevity and reduced investment returns –impact and reaction continued

Reaction - DB schemes

•Closure to accrual and move to DC/GPP arrangements

o Shifts longevity and investment risk to employee

•Swaps and liability hedging, including longevity swaps

•(Partial) buy-ins and buy-outs

•Liability management exercises

Impact and reaction – DC schemes

•Pensioners need to work longer to fund their retirement

•Increasing number of members working past normal retirement date

•Law developed to assist – flexible retirement, flexible drawdown,

prohibition on age discrimination and abolition of normal retirement date

87 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing regulation and the Pensions Regulator

• Statutory body established in 2006

• Regulates work-based pension schemes

• Statutory objectives

o Protect members’ benefits

o Promote good administration

o Reduce risk of calls on Pension Protection Fund (PPF)

o Maximise compliance with auto-enrolment obligations

• Key powers

o Issue codes of practice, guidance etc.

o Investigate schemes, intervene in funding process and request,

inspect and seize information

o Appoint and remove trustees, impose fines and instigate criminal

prosecutions

o Issue contribution notices and financial support directions where

employer is deliberately trying to avoid pension obligations

97 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing regulation and the Pensions Regulator – auto-enrolment

• All employers required to automatically enrol most employees into a

qualifying pension scheme and contribute to it

• Phased in between October 2012 and April 2017, largest employers

first

• Eligible employees

o Aged between 22 and state pension age

o Earn more than minimum earnings threshold - £7,475 in 2011/12

o Work or ordinarily work in UK

• Qualifying workplace pension scheme

o Use existing scheme, a new scheme or NEST (or a competitor)

o Must either make minimum contribution to a DC scheme or offer

membership of a DB or hybrid scheme meeting certain minimum

requirements

• Minimum contribution levels

o Phased between October 2012 and October 2018

o Total contribution rising from 2% to 8% of qualifying earnings –

currently earnings between £5,035 and £33,540

o Employer contribution rising from 1% to 3%

107 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing regulation and the Pensions Regulator – auto-enrolment continued

• Timings

o Employees must be auto-enrolled from employer’s staging date

o Employers can delay for 3 month waiting period

o Employees can opt-out but can’t be incentivised to do so

o Employees who opt-out must be re-enrolled every 3 years

• Employment protection

o Apply to all employers from October 2012 (i.e. no staging)

o Cannot take action which removes employee from qualifying

scheme or results in scheme no longer being qualifying

o Inducements to opt-out prohibited

o Cannot ask recruitment candidates whether they plan to opt-out

• Actions for employers

o Ascertain staging date

o Decide which scheme you will use

o Ensure office systems will facilitate implementation

o Factor in increased contribution and administration costs

o Ensure necessary information is provided to employees

117 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Increasing regulation and the Pensions Regulator –Scotland Bill

• Follows recommendations of Calman Commission

• Amongst other measures, gives Scottish Parliament more fiscal

autonomy – devolves part of basic income tax rate allowing SP to set

its own rate of income tax which may not be in line with rest of UK

• Impact

o Office systems will require to administer tax relief and tax

deduction at different rates

o Issues in determining residency will likely result in the need for

retrospective adjustments

o Costs associated with likely increased frequency of changes to

income tax rates and communicating these to members

127 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Discrimination and the European dimension - Barber

Barber

• Historically men were entitled to their occupational pension at 65 and

women at 60 - if a man wanted to retire at 60 his pension would be

actuarially reduced

• ECJ held this was contrary to the equal pay legislation

• Consequence – schemes obliged to equalise benefit accrual for men

and women for pensionable service from date of judgement, 17 May

1990

• Continues to raise issues

137 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Discrimination and the European dimension – GMP equalisation

• Guaranteed Minimum Pension (GMP) – pension arising in contracted-

out DB schemes as replacement for state pension benefit

• Unequal between men and women as payable at state pension age

(i.e. 60 or 65)

• Uncertainty followed Barber – should GMPs be equalised?

o Argument against – not “pay” – simply replacement for state

benefits

• January 2010 – Government announced schemes are obliged to

equalise GMPs

• January 2012 – consultation document on method of equalisation

147 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Discrimination and the European dimension – Age Discrimination

• Unlawful for employers, trustees or managers of occupational pension

schemes to discriminate against prospective or actual members on

grounds of age unless can be objectively justified

• Subject to various pensions related exceptions including waiting

periods for joining, minimum and maximum ages for admission and

using age-related criteria in actuarial calculations

• Scope of prohibition remains unclear in some areas

• Common discriminatory practices

o Not providing benefit accrual to employees in service after

normal retirement date

o Providing different death benefits or contribution rates for

employees in service after normal retirement date

o Maximum or minimum age for admission to a life assurance only

scheme

157 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Discrimination and the European dimension – Test Achats

• Recent ECJ case – March 2011

• Held that gender-related factors cannot be used in pricing insurance

products

• Previously permitted via derogation to equal treatment principles – this

is being annulled with effect from December 2012

• UK government current consulting on amendments to Equality Act

2010 to comply

• General view – won’t affect buy-in or buy-out contracts

• Impact on private pension arrangements and annuity purchases

• Similar derogation exists to allow occupational pension schemes to

use gender-related factors to calculate benefits e.g. transfer values

and early retirement adjustments

• Led to concern this derogation may also be held unlawful

167 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Public sector pensions: a brief update

177 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

187 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Agenda

● Introduction

○ What are public sector pension schemes

○ The main public service pension schemes

● The Hutton Report

○ Background

○ Recommendations

○ Implementation

○ Where are we now?

● The future of the Fair Deal

● RPI/CPI legal challenge

Introduction – what are public sector pension schemes?

• Public sector pension schemes

o Public service pension schemes AND

o Number of trust-based schemes offered by not-for-profit,

voluntary and educational institutions e.g. Social Housing

Pension Scheme

• Public service pension schemes

o Established by statute or similar

o Benefits underwritten by government

o Benefit structures – DB, DC and career averaged (CARE)

o Funded or unfunded

o Some allow private sector employees to participate e.g. LGPS

o Key pensions legislation only applies to limited extent

o Limited role for the Pensions Regulator

197 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Introduction – main public service pension schemes

The LGPS

• Funded, contributory final salary scheme

• 99 regional LGPS funds governed by a “Administering Authority”

• Available to:

o “Scheme Employers” who have a statutory right to participate –

county and district councils and further and higher education

corporations

o “Non-Scheme Employers” via an admission agreement

The PCSPS

• Consists of 3 closed final salary sections and a CARE section – all

unfunded

• Also a DC stakeholder arrangement

• Available to members of Civil Service and employees of various

museums, galleries etc.

207 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Introduction – main public service pension schemes continued

The NHSPSs

• Unfunded, contributory final salary schemes

• Available to

o NHS “Employing Authorities” such as NHS health boards

o Employees of other medical service providers operating under

NHS contracts

o Not-for-profit or voluntary organisations providing health services

e.g. hospices

The TPS

• Unfunded, contributory final salary scheme

• Available to

o Teachers and lecturers employed by state funded educational

establishments

o “Accepted function providers”

217 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

The Hutton Report - background

• Significant reform of main UK public service pension schemes 2007-

2009

• Improvements in member longevity and fiscal challenges driven

demand for further reform

• The Independent Public Service Pensions Commission, led by Lord

Hutton of Furness, established to:

o Conduct fundamental structural review of public sector pension

provision

o Make recommendations on pensions that:

� are sustainable and affordable in long term

� are fair to both public service workforce and taxpayer

� are consistent with fiscal challenges ahead

� protect accrued rights

227 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

The Hutton Report – recommendations and implementation

Key recommendations

• Move to CARE benefit structure

• Normal pension age rise in line with state pension age

• Maintain link to final salary for accrued benefits

Implementation

• Government confirmed intention to adopt recommendations

• Extensive negotiations with number of public sector unions

• 20 December 2011 – announcement that headline agreements had

been reached with most unions

• Ongoing negotiations as to detail

• Government committed to sustaining reforms for 25 years

237 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

The Hutton Report – where are we now?

The LGPS

• New LGPS scheme 2014 with CARE benefit structure

• Option for no increase in employee contributions

• Retirement age linked to state pension age for new scheme service

The PCSPS

• Move to CARE benefit structure with 1/44th accrual rate

• Retirement age linked to state pension age going forward

• CPI revaluation

The NHSPSs

• Move to CARE benefit structure with 1/54th accrual rate

• Retirement age linked to state pension age going forward

• CPI + 1.5% revaluation for actives and CPI for deferreds

The TPS

• Move to CARE benefit structure with 1/57th accrual rate

• Retirement age linked to state pension age going forward

• CPI + 1.6% revaluation for actives and CPI for deferreds

247 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

The future of Fair Deal

The Policy

•Fair Deal – applies where public service employees are transferred to the

private sector, e.g. on outsourcing

•Requires that new employer provides a “broadly comparable” pension

scheme for transferring staff and bulk transfer arrangements

•LGPS – may provide admitted body status for new employer

•“Broad comparability” certified by Government Actuary’s Department

(GAD)

•GAD “passport” can be obtained to allow future transfers without

reassessment

257 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

The future of Fair Deal continued

The Hutton Report

•Found that Fair Deal created barrier to public service outsourcing

•Result – UK Government consultation on future of Fair Deal

•December 2011 – announcement that Fair Deal would be retained on

basis of cost savings to be achieved by wider public service scheme

reforms

•Formal response paper expected from UK Government soon

267 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

Legal challenge to RPI/CPI decision

• 2010 Budget announcement that from April 2011 annual increases to

public service pensions would be calculated by reference to CPI as

opposed to RPI

• April 2011 – collection of pensioners’ organisations and unions applied

for judicial review of decision on grounds that:

o Decision to use CPI was inconsistent with the Secretary of

State’s statutory obligation

o Decision to switch to CPI was made having regard to irrelevant

considerations or for an improper purpose

o Employees had a legitimate expectation that benefits would be

increased by RPI

• High Court rejected all the arguments and held that the switch to CPI

was lawful

• Leave to appeal on first ground has been granted

277 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

287 February 2012A Pensions Update for the In-House Lawyers Group of the Law Society of Scotland

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