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.

Sounds like boom times doesn’t it? That’s what’s so odd. The happy chatter of the pensions industry schmoozing over free-flowing champagne jars rather with the stark warnings of imminent economic disaster from the speakers. Stephanie had some particularly scary slides. One had the chances of a Greek default as 100 percent (so “quite likely”, she cheerfully emphasised). She then went on to show how the other European countries could topple in turn: from Greece to Portugal to Ireland to Italy to France.

When you see a graph showing that, if her domino analysis is right, then France has about a 50 percent chance of default, it might be time to start stockpiling camembert.

Alistair Darling continued in much the same vein – he believed we were in a worse position than in 2008 because at least then there was the political will and leadership to take drastic action quickly.  His anecdotes from the turbulent Autumn were extraordinary.  He recalled how he was pulled out of a European Finance Minister conference by a call from the Chairman of a major bank.  They were about to run out of money.  How long can you last Alistair asked?  Three hours was the answer.  The Chairman politely then asked what Alistair proposed to do about it…

On a (slightly) more positive note, Minister Steve Webb reassured us that “2012 would definitely happen next year”.  I’m hoping he meant that auto-enrolment wouldn’t be delayed – if it was reassurance that 2011 probably wasn’t going to be the end of days, then the Government is definitely not telling us everything.

What else?  In response to a question on Solvency II, Commissioner Andor reassured us that Europe understood that pension schemes are different to insurance companies.  He didn’t say he cared but at least he understood.  Steve Webb banged his drum again about incentivised transfers and pension increase exchanges.  Doesn’t look like there is going to be a legislative prohibition.  He is setting up an industry body to develop best practice instead.  Not sure the conference matched his mood on this issue though.  The work stream session on how to do an incentivised transfer was standing room only…

So that’s it for this year.  Hats off to the NAPF for a top notch conference.  The gala dinner accompanied by a full orchestra and fireworks finished things off with a spectacular bang.  If we are on the edge of ruin, in at least this corner of Manchester, people seemed surprisingly chipper about it.

Neil Bowden is a partner at Allen & Overy LLP.

Except, like everything in pensions, it’s not quite that simple. There are live issues currently being debated with HMRC about how exactly a scheme should make the deduction where DB benefits are involved, since the official guidance seems to suggest that the most obvious route – deduction from AVC funds – is not necessarily favoured by HMRC.  There’s also the question of whether or not any allowance can be made for costs (the initial proposal was that the scheme pays facility should be free of charge for members, but the legislation only says that the adjustment must be made ‘on a basis that is just and reasonable having regard to normal actuarial practice’, which seems to allow some wiggle room on expenses).    

More urgently, there’s an issue for retiring members.  The deadlines for making a scheme pays election fall significantly after the end of each tax year – but a retiring member who wants his or her scheme to pay any annual allowance charge must make that election much earlier, before the benefits come into payment. In practice, this could mean that a member gets a retirement benefit quotation, decides the future looks rosy, lets the employer know that he or she intends to retire, and only then (if at all) makes any scheme pays election. If that happens today, the election will only be for a charge arising for 2011/12, but in future years a member might suddenly notify the scheme administrator of up to three years’ worth of scheme pays elections. Of course, those elections are all going to feed into an adjustment to the member’s final pension, and could make a significant difference to the member’s income – and indeed to whether or not the member wants to retire after all. It may not be possible to unwind all the decisions that have been made, so things are going to get complicated.

What to do? My suggestions for scheme administrators are, first, to flag up to members that any relevant scheme pays elections must be made before they retire, and that as they approach retirement, doing this sooner rather than later will give them a more accurate idea about their retirement income.  Secondly, consider adding some standard wording to your retirement benefit quotations as a reminder that any elections must be made before taking benefits, and that the value of benefits will be affected by any elections which are made.  The risk of not doing this is that, even though you issue an entirely correct benefit quotation, the member ends up disappointed at the end of the day, and you get drawn into a complaints process which takes up time and effort even if it’s completely unfounded. With everything else that’s going on in the world of pensions, you can do without unnecessary disputes: so avoidance action now seems like the simplest option.

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

You might think that this is an old question – for example, on the previous scheme return you had to include those employers which are participating in the scheme.  But no, the question is asking something different which has not been asked for before.  And sadly the answer for many schemes is not easy.  There are different definitions of employer for the purposes of scheme rules, any debt due in the event of winding up, the obligation to comply with funding requirements and also when assessing entry to the Pension Protection Fund. 

Part of the reason for requiring schemes to think about this is because of situations which have arisen where people have paid PPF levies and then on insolvency discovered that the scheme is not eligible for entry to the PPF because there is no statutory employer.  Imagine being told you can have a return of your levy but the PPF won’t help you further than that!

The information needed to analyse this question will include historic information about employers, when they stopped contributing to the scheme and also when they stopped having employees.  That information might take a while to gather and it is likely that legal advice will be needed unless you fancy trawling through multiple sets of regulations and case law.  Any scheme return due from November onwards needs the answer so it is something to crack on with. 

Now I am not one for doing things for form’s sake.  But this is one of those circumstances when the legal analysis is complicated, as well as the facts, but the reasons for getting it right are very good indeed.  The question on the scheme return might be the trigger, but understanding the role that companies play in relation to the pension liabilities is fundamental to knowing where you stand. 

Trustees will want to understand the background better and to help them the Pensions Regulator has launched an e-learning tool which it would be worth spending a few minutes on.  http://www.thepensionsregulator.gov.uk/doc-library/biteSized/StatutoryEmployer/index.htm is the link.

 Däna Burstow is a partner at Allen & Overy LLP.

What is an estoppel claim?  Well, a successful claim in the pensions context might stop a trustee from saying to a beneficiary “you can’t have [x/y/z] benefit” if that person can show that they had been led to believe they had an entitlement to it and, crucially, has lost out as a result.  A classic example might be someone who, until now, hasn’t had the money to go on a cruise and then, in reliance on a pension “entitlement” they have been told to expect, blows it on the trip of a lifetime.  The logic is that, assuming he/she can’t get their money back from the holiday company, it would be unfair to deny them the benefit they were promised.

The benefit in question can often be significant so, as you might expect, the person bringing the claim has a tough job: he has to show that he was clearly told that he had a right, that it was reasonable for him to rely on what he has been told and that, as a direct result of that, he has lost something real that he can’t get back.  That’s the main reason why these types of claim have been relatively rare in pensions – and the success stories even more so.

So it came as something of a surprise when the case of Catchpole v Alitalia showed recently that estoppel claims are alive and kicking even in the pensions context.  The case itself makes for interesting reading – a couple decided not to get married after being told by the pension scheme trustee that, if the member died the scheme would pay out to her partner whether they were married or not.  Then, after the member had died that advice turned out to be wrong, but the High Court decided that the partner should still be awarded the benefit that he would have got if the advice had been right.  As the first successful estoppel claim in a pensions case in 20 years, I think it’s something worth anyone involved in pension scheme administration pausing over.

Then, in another High Court case – that of Grievson v Grievson – the Judge sent the case back to the Pensions Ombudsman, telling him to think about whether the facts of the case supported an estoppel claim even where estoppel hadn’t been raised by the person who brought the original claim. 

And then finally, in the Ombudsman case of Mrs A (79435/1), although the word “estoppel” doesn’t feature in the judgment, the Ombudsman ordered that, based on the wrong information that she had been given, Mrs A should receive a benefit from her scheme which was bigger than her strict entitlement.  That case marks an interesting departure from the Ombudsman’s usual approach of awarding compensation to put the member in the position that he/she would have been if they had been given the correct information.

Maybe not a sea-change, but perhaps a development worth monitoring?

Gareth Soanes is a senior associate at Allen & Overy LLP.

Whilst the new legislation may provide some welcome clarity on the subject, from the point of view of a pensions litigator who has spent much of his career dealing with the fallout from the Barber decision, I can’t help but wonder whether GMP legislation (and any associated guidance) will give rise to a host of new problems for pension schemes – in much the same way as the Barber judgment did. 

What about those few schemes that have been proactive and already tried to equalise GMP benefits?  What happens if their GMP exercise falls short of the new requirements?  To what extent will schemes be required to revisit earlier GMP equalisation exercises?  To be fair, I don’t think there are many schemes that have jumped the gun, except perhaps on scheme wind-ups.

One real issue that jumps out at me is the cost of the equalisation exercise and who will meet it.  An GMP equalisation exercise is likely to leave schemes with a significant bill.  You have the administrative costs of the check on benefits coupled with back payments to pensioners in payment (plus interest or other compensation for late payment).  The cost of the exercise will fall on the scheme and, ultimately, the scheme’s sponsoring employer.  I can see questions cropping up about the rights of members who have transferred out of, or into, a scheme, or whose benefits have already been bought out with an insurance company.  Who wins, and who pays? 

With transfers, it is not uncommon to see receiving schemes refuse to accept a transfer without a “GMP indemnity” from the transferring scheme, as was the situation in the Pensions Ombudsman case of Barnett.  Do schemes need to dig out old transfer terms?  Even where indemnities were given, how many have expired since?

Apart from transfers, disputes could arise in relation to benefits that have been bought out with insurance companies.   Some buyout agreements may be silent on the issue of GMP equalisation, some will exclude the GMP equalisation risk and some insurers, usually in exchange for an additional premium, will accept it.  I predict the GMP equalisation exercise will result in some dusting down and careful dissection of buyout agreements to see who will have to bear the cost of GMP equalisation.

The legal issues arising out of any legislation and guidance on GMP equalisation are likely to be many and varied, but they may still not be a patch on the practical problems!

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