Case Law
Clarification on exit payments from the LGPS – Enterprise Managed Service Ltd & Anor, R (On the Application Of) v Secretary of State for the Ministry of Housing, Communities and Local Government [2021] EWHC 1436 (Admin)
This case concerned a claim for judicial review of the Local Government Pension Scheme (Amendment) Regulations 2020/179 ("the 2020 Regulations") with the Claimants challenging the lawfulness of regulation 1 of the 2020 Regulations, which gives retroactive effect to amendments to the Local Government Pension Scheme Regulations ("the LGPS Regs"). The Claimant here had entered into a contract with a local authority to provide services and had been required to become an admission body in the LGPS in order to meet requirements to give employees access to that pension scheme.
Whilst provision was made in the LGPS Regs from 14 May 2018 for an admission body to be entitled to receive an exit credit (in respect of any surplus/overfunding relating to their admission) on ceasing to be such a body the relevant provisions did not include any discretion over what could be determined and paid as an exit credit to take into account, for example that the local authority had borne all of the costs and the risk in relation to the contractor's liabilities to the pension fund through the life of the contract (commonly know as pass-through arrangements) and that any payment of an exit credit would therefore be a windfall to the contractor.
This was recognised as an oversight and as a result provisions allowing for certain factors to be taken into account when considering whether an exit credit may be paid and the amount of that exit credit, which could be zero were introduced on 20 March 2020, but with retrospective effect to 14 May 2018 including in relation to any payments of exit credit that would have been payable between 14 May 2018 and 20 March 2020, but that had not been paid.
When the Claimant's contract expired in June 2018 a surplus of £6,518,000 was identified, but was not paid.
Noting that a key question is whether there was a sufficiently compelling public interest in making the 2020 Regulations retroactive, preventing the payment not only of exit credits which were anticipated but also of those which had actually fallen due but had not been paid the court found that the Defendant was justified in correcting its own policy error with retroactive effect for a number of reasons including:
- exit credits can, at least in some cases, be fairly characterised as a windfall where parties made their economic bargain on the basis of pension risk which they knew about, but without any adjustment for the possibility of exit credits (which did not exist at the time this contract was entered into) or where the surplus would or could arise from the performance of a fund which, though notionally associated with the admission body at the point of admission, did not come from that body in the first place.
- The effect of paying exit credits which had fallen due when the 2020 Regulations came into force would be to diminish the ability of the LGPS funds to provide pension benefits, creating a real risk of future deficits which ultimately would fall on taxpayers.
- The benefit of the windfall would be for commercial companies.
Increases case overturned – Britvic Plc v Britvic Pensions Ltd and another [2021] EWCA Civ 867
We previously reported on the High Court hearing in this chain of case-law in which the court held that the index used to calculate increases under the scheme could only be changed from RPI where this would result in increases being greater than RPI.
Britvic PLC appealed this High Court decision which decision the Court of Appeal has now overturned.
Describing the main issue in the appeal as "beguilingly simple" the Court of Appeal considered whether the words "or any other rate decided by the Principal Employer" in a pension increases provision in the Rules of an occupational pension scheme mean "any higher rate" or "any other rate, whether higher or lower" decided by that employer. Finding that the wording used in the relevant Rule was clear and unambiguous and that there was no indication the drafter had made a mistake the Court of Appeal ruled that another rate may be selected regardless of whether such rate may be higher or lower.
New Law
Pension Schemes Act 2021 – provisions in force
A number of new provisions of the Pensions Schemes Act 2021 came into force on 31 May 2021. These are largely regulation making powers including in relation to climate change risk, duties to give notices and statements to TPR and in relation to transfers.
Consultation in relation to changes to transfers including proposed new regulations to protect members against scams concluded on 10th June and a response is awaited.
News
TPR confirms response to consultation on new TPR powers
Consultation on TPR's approach to the investigation and prosecution of the new criminal offences contained in the Pension Schemes Act 2021 has now closed and TPR has shed some light on the responses received.
Whilst a formal response to consultation is awaited, David Fairs, Executive Director for Regulatory Policy, Analysis and Advice noted in a recent speech that 49 responses to the consultation were received from different stakeholders.
Noting that these were overall supportive of the approach that the focus for the new powers is "on the more serious intentional or reckless conduct" suggestions for improvement have apparently been made as follows:
- improve the examples provided, eg in relation to TPR consideration of what is significant in determining whether a person has a reasonable excuse.
- more clarity with regard to the retrospectivity of the offences and language on the seriousness of behaviour caught by the offences.
- clarity over whether the use of statutory mechanisms such as apportionment arrangements or Company Voluntary Arrangements would provide some indication of a target having a reasonable excuse.
- clarity as to what extent getting a clearance statement could protect against prosecution.
On the last point it was noted that during Parliamentary debate it was made clear there was no intention for any immunity from prosecution, and TPR have no power to extend the effect of clearance statements to apply to the criminal offences.
HMRC – tax avoidance using unfunded pension arrangements
On 14 June HMRC published a new Spotlight in which it confirmed its view regarding certain arrangements involving unfunded pension obligations. HMRC does not consider that such arrangements achieve the tax outcomes promised by promotors or expected by users.
The form of the arrangements concerned follow the same broad pattern:
- A company enters into an agreement with its director to give that director the rights to receive a pension from the company in the future.
- This creates an expense in the accounts of the company for which a corporation tax deduction is claimed.
- Further steps may involve the transfer by the company of its obligation to pay the director a pension in the future to a third party in exchange for a payment.
- The third party is often a relative of the director or another director of the same company.
- The arrangements result in the director, or a third party closely associated with the director, receiving funds from the company with no immediate liability to Income Tax and National Insurance contributions, often resulting in unusual outcomes (e.g. a spouse agreeing to pay their partner a pension without receiving anything in return).
HMRC's view is that such arrangements, aimed at the reward of a director for services they provide to a company without paying Income tax and National Insurance contributions whilst also obtaining a Corporation Tax relief, do not work. HMRC clearly state that they intend to challenge anyone promoting such arrangements and investigate the tax affairs of all users to ensure the correct tax is paid, plus interest and penalties as appropriate. If you have any concerns regarding any of the issues raised in the above, please contact the DWF Tax or Pensions teams.
