Legal Panel (January 2008) - Busy times ahead

CHAIRMAN: James Malcolm, solicitor, DLA Piper
Malcolm has specialised in pensions law since qualification as a solicitor and has gained knowledge and experience in a broad range of issues. He is based in the London office of DLA Piper.

Kate Richards, partner, Nabarro
Richards is a partner in the pensions team at Nabarro. She specialises in advising companies and pension trustees on the formation, operation and winding-up of pension schemes.

Edwin Mustard, partner, Shepherd Wedderburn
Mustard joined the firm in 1993. He has a wide range of experience in pensions law work, advising employers, trustees and pension providers on occupational and personal pension/stakeholder schemes.
He is a full member of the Association of Pension Lawyers.

Monica Ma, partner, Simmons & Simmons
Ma is a partner in the pensions department of Simmons & Simmons. She has a wide range of pension experience including the design, establishment, revision and winding-up of pension schemes. Ma also advises trustees and employers on their powers and obligations.

Robin Simmons, associate, Sacker & Partners
Simmons advises employers and trustees on a wide range of pensions law issues. His recent work has focused on advising employers in managing their defined benefit liabilities. Simmons also advises on corporate mergers and acquisitions, notably advising the trustee of the Boots Pension Scheme in its deal with the KKR-led private equity consortium’s acquisition of Alliance Boots plc.


MALCOLM: What was your most challenging piece of work in 2007?

RICHARDS: We have been involved in several complex restructurings involving trustees taking security and negotiating guarantees to protect member’s interests. This is likely to be a growing trend with pensions lawyers continuing to develop their banking law expertise.

MUSTARD: The ongoing issues of affordability of pension provision for employers and security of benefits for trustees, have led to increasingly more complex areas in which advice is being sought. This has been seen in proposals to manage scheme liabilities through partial buyouts and in other areas, contingent asset arrangements and increasingly complex investment vehicles.

MA: 2007 was an eventful year. I have been involved in some high-value corporate transactions where the employer covenant would be affected which involved tricky negotiations with the trustees and the regulators, various difficult projects relating to benefit changes and some complex scheme mergers. However, the most challenging piece of work was undoubtedly getting planning permission from the council for an extension to my house!

SIMMONS: Advising (with Sackers’ partner Peter Lester) the trustee of the Boots Pension Scheme during negotiations with KKR, the private equity buyers of the sponsor’s group. The deal was novel for a number of reasons – the first FTSE100 company to be taken private and Europe’s largest private equity deal to date, with over £9bn of new debt being taken on by the sponsor’s group.
The pensions industry, and even the national press, were keen to see what financial package would be put in place to support the scheme. In the middle of it all, The Pensions Regulator issued its clearance “reminder” in May, expressing its expectation that trustees should seek “materially enhanced” mitigation in highly-leveraged deals.
Looking back now, I think the deal has been a catalyst for a sea-change among pension scheme trustees who find themselves in negotiations with a potential buyer of their scheme sponsor.


MALCOLM: What changes, if any, did you implement for clients in 2007 in relation to age discrimination and what, in your view, remain the main issues in this regard for the future?

RICHARDS: For many schemes the main change was the treatment of those still in service after normal retirement date (often referred to as postponed pensioners). Many of our clients’ schemes did not provide ongoing accrual after NRD but, instead, gave an actuarial uplift on retirement. We have advised these schemes be amended to offer postponed pensioners the choice of continued accrual or actuarial uplift.
On a similar note many schemes have also had to extend life cover to those still employed over NRD. A particular challenge has been reorganising the pension arrangements of employers offering “nursery schemes” (schemes where defined contribution benefits are offered with members then switching to defined benefit when they reach a specified age). It has been a challenge to re-organise those arrangements in a way which would not itself create new breaches of the age regulations.
Looking forward a major issue will be flexible retirement. It is something which many employers wish to offer but it is hard to design a policy which does not raise age discrimination issues. We are still awaiting some form of guidance or regulation from the department for work and pensions on this – but in view if the consultation paper issued last year this may be some way off (see our comments below).

MUSTARD: The most common area in which changes have been made are in pension and death benefit provision for continued service beyond normal pension date.
Flexible retirement is clearly an issue in which clarity is needed amongst the pensions industry, and it is hoped a clearer way forward on this will follow the government’s consultation exercise. Clarification of certain areas of objective justification is likely: this is an evolving area amongst the courts and tribunals.

MA: The main changes related to the benefits to be provided to members who continue in service after normal pension date e.g. continuation of life cover and service accrual. Many clients also sought to formally close the schemes to new entrants. Reductions for early payment of deferred pensions and in respect of young partners are also subject to review.
Going forward, the major issue is, I think, flexible retirement, i.e. whether to comply with the age law, this must be offered to all members and what benefits can be provided to members who choose this option in respect of future service.

SIMMONS: 2007 was a year of analysis on age discrimination. We have worked through most clients’ scheme documents identifying potential “age” problems and helping them make changes to comply with the new laws.
The greatest focus has been on how to continue pension provision after normal retirement date (there is no applicable exemption). Scrutinising scheme documents has uncovered a host of other issues, from problematic contribution rates to minor (but odd) differences such as paying different benefits if a pensioner marries after age 70.
Flexible retirement is the one area where many schemes are struggling to know what to do, if anything. Trustees and employers – rightly so, I feel – have been reluctant to implement flexible retirement policies, particularly as the government’s recent consultation showed it is itself unclear how the legislation is intended to operate here.
The key difficulty at this stage is that the age discrimination laws are still in their infancy – so decisions taken to date, certainly around potential objective justification arguments, ought to be kept under review as best practice emerges.


MALCOLM: What in your view are likely to be major pensions law issues of 2008?

RICHARDS: Perhaps most keenly awaited are the amendments to the employer debt regulations.
If the final version bears any resemblance to the draft then employers will have more options in dealing with debts arising on scheme reorganisations and corporate transactions. It will be easier to reallocate buyout debts within group companies than is currently the case without falling foul of the regulator or jeopardising Pension Protection Fund eligibility.
On a similar theme is the revised clearance guidance from the regulator. This is expected to be less prescriptive than the original guidance, although it may throw up additional challenges for lawyers and other professional advisers in deciding when a clearance application should be made.
Want we would want, but may not get, is clear guidance from the DWP on flexible retirement. At the moment we are caught between two stools. HM Treasury policy is that individuals should be able to ease themselves into retirement by taking at least part of their pension whilst still working (perhaps with reduced hours or responsibilities). BERR (formally the DTI) says that we cannot discriminate on the grounds of age. It is very hard to design a flexible retirement scheme which does not in some way breach, or potentially breach, the age discrimination regulations.
HM Treasury and BERR have left it to the DWP to sort it out and the DWP in turn has asked the industry what we think it should do.
Other issues which might cause a flurry of interest in 2008 are new statutory rules relating to directors’ conflicts of interest (coming in October) and the ongoing Sea Containers/regulator tussle.

MUSTARD: It is hoped the changes proposed to the debt on the employer legislation will bring clarity to a number of areas, particularly for employers ceasing to participate in a multi-employer scheme.
Also, schemes will need to look at how they calculate transfer values following a shift at the end of this year from a process determined in accordance with actuarial guidance, to a scheme specific, trustee-driven process.

MA: The proposed changes to the employer debt regulations as they apply to multi-employer schemes will have significant implications for employers and trustees in the context of corporate transactions.
It will also be very interesting to see how The Pensions Regulator continues to evolve. When it was first established, there were concerns as to how involved it intended to be, in particular, whether it would hinder corporate transactions. So far, it would seem that it has chosen to truly flex its muscles only in extreme cases as evidenced by the fact that only one financial support direction has been issued so far. Whether this will change in 2008 remains to be seen.
The same could perhaps be said of the new ombudsman. While there were some criticisms during the previous ombudsman’s regime that cases took a long time to resolve, his decisions were by and large balanced. It will be interesting to see if the new ombudsman will take on a more member-friendly stance.

SIMMONS: “True” deregulation is certainly not on the cards this year – but major changes are still afoot.
We have all been waiting for the revisions to the employer debt legislation, in the hope of greater flexibility. The amendments will make key changes to when a statutory debt is triggered in multi-employer defined benefit schemes and how those debts can be managed.
The first part of 2008 should also see The Pensions Regulator implement the proposed revisions to its clearance guidance. TPR looks to be moving away from the clarity of its Type A events, towards a principles-based approach – probably sensible, but likely resulting in a wider role for advisers.
In October, the overhauled transfer value legislation should come into force – already pushed back a year from its intended implementation date. We may also see PPF levies increase yet further. And if Brussels finds the time, the European Court may rule on Heyday’s challenge to the UK’s default retirement age of 65.
2008 also holds in store yet another Pensions Bill (hoorah). Its focus will be personal accounts and their implementation – gearing us up early for the new era that awaits us all in 2012.


MALCOLM: Looking further forward what is your view of personal accounts and can you suggest a better name for them?

RICHARDS: In theory, personal accounts should be seen as a good thing – the aim is to give more people a reasonable level of retirement income. There are a number of potential difficulties.
One is the risk that it will encourage employers currently offering good-quality occupational schemes to level down to the personal account requirements. Another is that many people on lower incomes may not be any better off (or be worse off), as the personal account pension may result in the loss of means tested benefits – this raises mis-selling problems and puts a question mark over the automatic enrolment requirement. These are two areas on which further debate is needed.

MUSTARD: Given the large numbers of workers with either no or inadequate pension provision for their retirement, some form of lead/change from the government was needed.
The obvious concern lies with the level of compulsory employer contribution being set at a level which may lead to those currently making more generous payments to level down to the compulsory minimum.
As to the name, “personal account” for some might suggest a general savings vehicle and “personal retirement account” might be a more accurate reflection of the new plans.

MA: While personal accounts will probably not help the lowest paid (in fact, they may be better off not participating in order not to lose eligibility to means-tested benefits), they do provide a relatively simple vehicle for those with a reasonable income (but who currently do not save for retirement) to save for retirement.
Concerns have been expressed that some employers may use the introduction of the personal accounts as an excuse to reduce pension benefits to the personal accounts statutory minimum level. We can but hope the concerns do not materialise.

SIMMONS: I am all for some form of compulsion and auto-enrolment is a step in the right direction. The social reality is that many young people just do not (or do not want to) think about their own pension provision.
My main concern is that personal accounts could result in a lowering of the bar, where “good” employers who already offer a higher level of pension provision will provide less from 2012.
A better name? “LAWKs” (Life After Work Kitty – I had to get the word “law” in there somewhere).


DLA PIPER SOLICITOR JAMES MALCOLM introduces the background to January’s Legal Panel.

This is the first Professional Pensions Legal Panel of 2008! Accordingly, panellists have been asked to review 2007 and give their views of what is to come during the year ahead.
Firstly, the panellists were asked to cast their minds back over the past 12 months and tell us about the most challenging client work they were involved with during the year. No doubt they will be thinking about scheme specific funding issues, section 75 debt allocation, benefit changes, scheme mergers or corporate transactions. As well as the corporate deal activity, it has been a year in which some large companies have undertaken major strategic pensions projects. It has all kept pensions lawyers very busy.
Pensions lawyers are often asked questions about age discrimination by other pensions consultants. Over a year on since age discrimination became unlawful, where are we? In our experience very few scheme amendments have actually been made with the exception of amendments to change normal retirement age to 65 where this was not already the case. Watch this space for future discussion over flexible retirement as clearer guidance is hoped for in 2008. Who knows, there may even be case law?
Looking ahead, 2008 is likely to raise further issues for companies with more benefit re-design likely and possibly additional measures being adopted to manage deficits or even buy-out smaller schemes. The panel shares with us their predictions for the year’s hot topics.
We have a new Pensions Bill too and panellists have been asked to give their views on personal accounts which have been receiving much coverage in the pensions press. This political issue serves as a reminder that there are many people on low salaries and without adequate savings for their retirement. Will they really want a “personal account” though? Sounds a bit boring, doesn’t it? Let’s see whether the panellists, or even readers, can suggest a name to make personal accounts a desirable brand. Forget about the Blackberry, what you need is a “Raspberry”, or maybe what you really need is a “Genie” – and a lamp.