Public Sector Pensions Update | August 2019

Welcome to the latest edition of our Public Sector Pensions Update.

In this edition we:

• report another development in the McCloud case;
• report three developments relating to survivors' benefits;
• give an update on the Competition and Markets Authority's final order;
• discuss a new requirement to establish an "effective system of governance";
• highlight a High Court decision on protected pension ages and a new good practice guide on transfers;
• refer to two annual reports and accounts that schemes might be interested to read;
• discuss one open and one projected consultation on changes to the NHS pension scheme;
• highlight two other consultations; and
• proudly report that Osborne Clarke has gained the National Equality Standard.

If you would like to discuss any of the developments in this newsletter, please contact one of the experts listed below.

Update | Valuation and costs cap: the McCloud case

Since we issued our July update, the Fire Brigades Union has written to the Chief Secretary to the Treasury to ask for "an increase in pension benefits and the decoupling of the cost-control mechanism from the FBU’s legal victory on age discrimination". The letter says that "[y]ounger workers have been discriminated against - ending that discrimination should not prevent improvements to public sector pensions. Our understanding of this is clear – these costs fall outside the valuation exercise".

Survivors' benefits | Unmarried partners

On 17 July 2019, the Court of Appeal ruled that provisions in an Armed Forces compensation scheme, which provide for death benefits to be paid to the surviving unmarried partner of a scheme member, but do not allow payment if that partner is still married to another person, amount to unlawful discrimination which is not "justified or proportionate". Our insight looks at the decision in Langford v The Secretary of State for Defence and the question of whether it could affect other schemes.

Read more >

Survivors' benefits | Walker v Innospec

In a written statement, pensions Minister Guy Opperman has confirmed that, in light of the judgment of the Supreme Court in Walker v Innospec: "the Government has decided that in public service schemes, surviving … same-sex spouses and civil partners of public service pension scheme members will, in the majority of cases, receive benefits equivalent to those received by widows of opposite sex marriages. The exception to this may be in specific schemes where, in the past, improvements in female members’ survivor benefits have led to increased contributions. Departments will consult on and take forward changes as soon as possible. Schemes will notify their members of changes and any actions they need to take". The statement also confirms that the government "will not make any further retrospective changes … to equalise survivor benefits".

The statement about survivors' benefits for same-sex spouses and civil partners confirms what we already know (see, for example, the changes that have been made to the LGPS and the Teachers' Pension Scheme). However, the second statement seems to confirm that the government does not intend to remove the differences that still remain between the benefits paid to widows and widowers.

Survivors' benefits | Opposite-sex civil partnerships

The Government Equalities Office is consulting on the scope and content of legislation to allow opposite-sex couples to enter a civil partnership. The consultation will be open until 20 August 2019 and the government hopes that regulations extending civil partnership to opposite sex couples will come into force before 31 December 2019 (a deadline set by the Civil Partnerships, Marriage and Death (Registration etc.) Act 2019). Survivors' benefits for opposite-sex civil partners will need to be in line with the survivors' benefits for opposite-sex spouses.

The government is also seeking views on a "time-limited right for opposite sex couples to convert their marriage to a civil partnership and then bring all conversion rights to an end…including the right for same-sex couples to convert from civil partnership to marriage". This time-limited right would be legislated for separately, perhaps in 2020.

Update | Investment: CMA's final order

On 1 August 2019, the LGPS Scheme Advisory Board updated its briefing note on the CMA's final order to take account of correspondence with the CMA and two consultations.

The two consultations are:

• The Department for Work and Pensions' consultation on draft regulations to amend occupational pension scheme legislation to: reflect the 'mandatory tendering' and 'strategic objectives' remedies in the CMA's final order; and give the Pensions Regulator power to oversee compliance with those new requirements; and
• The Pensions Regulator's consultation on draft guidance on: running a competitive tender for fiduciary management services; running a competitive tender for investment consultancy services; setting strategic objectives for investment consultancy providers; and choosing an investment governance model.

The draft DWP regulations are not expected to apply to the LGPS, because MHCLG is the body that would need to bring forward legislation for the LGPS. However, some of the Pensions Regulator's guidance will apply. LGPS funds should read the Scheme Advisory Board's updated briefing note. In particular, the Scheme Advisory Board's comments that it was never the intention for the objective of 'mandatory tendering' of fiduciary management services to apply to LGPS scheme managers, but that funds should assume that the requirement to set strategic objectives for investment consultancy service providers will apply. LGPS funds might also like to respond to the Pensions Regulator's consultation, which will remain open until noon on 11 September 2019.

Governance | New requirement to establish an "effective system of governance"

The Occupational Pension Schemes (Governance)(Amendment) Regulations 2018 introduced a new requirement for schemes to "establish and operate an effective system of governance", including internal controls. The regulations also contain a list of matters that the Pensions Regulator must address in a code of practice to help schemes to comply with the new requirement.

The Pensions Regulator has now announced that it plans to launch a formal consultation on code of practice changes later this year. It has also confirmed that it is thinking of combining all 15 of the current codes (including the code for public service schemes) to form one "single, shorter code". Once the updated code has been published, schemes "will need to be able to demonstrate that they have an effective system of governance within 12 months".

Administration | Negligent misstatement in relation to 'protected pension age'

The High Court has ruled that a scheme administrator is liable for negligent misstatement, after it told members who had a protected pension age that they would receive a tax-free retirement lump sum at a time when it knew it was going to re-employ them, and should have known that re-employment would trigger tax charges. Our insight looks at the decision in Corsham and others v Police and Crime Commissioner for Essex and others and Hazell and another v The Chief Constable of Avon and Somerset Police and others. The facts are unusual, but the judgment confirms some important points that are relevant for all schemes.

Read more >

Administration | PASA guidance on transfers

The Pensions Administration Standards Association has released the first of two new good practice guidance notes on transfers. The first note covers 'standard or straightforward' cases. The second note, due to be released later this year, will address more complex cases. The guidance is voluntary, but PASA expects the Pensions Ombudsman to refer to it when considering member complaints.

Administration and governance | Annual reports and accounts

The Pensions Ombudsman has published its annual report and accounts for 2018/2019. Amongst other things, the report includes: an update on changes; case summaries; discussion of cases which have been to the High Court on appeal; and an update on signposting.

The Pensions Regulator has also published its annual report and accounts for 2018/19. The report includes an interesting overview of what the Pensions Regulator has been doing and its future focus.

Open consultation | The annual allowance and the NHS pension scheme

On 22 July 2019, the Department of Health and Social Care launched a consultation on proposals "to give senior NHS clinicians more control over pensions growth". The consultation, which is open until 14 October 2019, seeks views on proposals to: help senior clinicians reduce the risk that they will incur an annual allowance charge (including a 50:50 option); and change the method used for 'scheme pays' to make it easier for members to understand the effect it has on their benefits.

On 7 August 2019, and in response to concerns that the 50:50 option does not go far enough, the government announced that the DHSC would "shortly open a new consultation asking people what they think about … proposals ... [that include] giving senior clinicians full flexibility over the amount they put into their pension pots". …"Starting from next financial year, the new rules would allow senior clinicians to set the exact level of pension accrual at the start of each year"…"For example 30% contributions for a 30% accrual rate".

In addition: "[g]uidance will … be given to employers setting out how they can provide flexibility at a local level this financial year for clinicians to do extra work without breaching limits for pensions tax relief"; and "HM Treasury will review how the tapered annual allowance supports the delivery of public services such as the NHS".

On 9 August 2019, the House of Commons Library published a briefing paper which explains the background to these consultations.

Open consultation | Merger of two LGPS funds

The Ministry of Housing, Communities & Local Government's consultation on the merger of the West Midlands Integrated Transport Authority Pension Fund and West Midlands Pension Fund and designation of Wolverhampton City Council as the administering authority for both LGPS funds will remain open until 7 September 2019.

Closed consultation | LGPS local valuation cycle and management of employer risk

The Ministry of Housing, Communities & Local Government's consultation on changes to the local valuation cycle and management of employer risk (discussed in our July update) closed on 31 July 2019. Osborne Clarke submitted a consultation response on 26 July 2019. We raised concerns that extending the valuation cycle from three to four years limited funds' opportunity to assess employer covenant risk, while the proposed panacea of interim valuations would add to funds' costs. We agreed with the proposal to introduce arrangements to defer employers' exit payment liability as long as they are at the discretion of the administering authority and subject to any appropriate employer covenant measures.

Osborne Clarke | National Equality Standard

Finally, we are pleased to report that Osborne Clarke has gained the National Equality Standard accreditation. This was a rigorous external assessment of our diversity and inclusion efforts and goes to show that we are dedicated to ensuring all our people can be themselves as individuals and have a sense of belonging at work.