What schemes can learn from this year’s top 5 legal stories

We have seen a number of key precedents during the past year as schemes manage liabilities and respond to legal challenges within the industry.

Here are five of our top law and regulation stories from 2014.

Shell surpasses minimums in offer of same-sex spousal benefits

June 9

In June, the UK subsidiary of oil giant Royal Dutch Shell surpassed the legal minimum to guarantee same-sex married couples equal spousal benefits in its defined benefit pension fund.

Shell's same-sex spousal benefits are based on the employee's entire length of pensionable service rather than from December 5 2005 when the Civil Partnership Act 2004 came into force.

A Shell spokesperson said: “Shell decided to extend this entitlement to those in same-sex marriages, in order to further demonstrate its commitment to supporting greater diversity within our workforce, one of our core values.”

In February, the Employment Appeal Tribunal overturned a decisionby the Employment Tribunal in the case of Mr Walker v Innospec Ltd, which found a civil partner’s pension should not be restricted to the period after the act came into force.

Schemes may yet have to reconsider the way benefits for civil partners are written into their rules, and await the government’s response to its January consultationon civil partnerships.

NHS case lays precedent for increased pension loss payouts

October 1

The outcome of a tribunal appeal in October indicated employers could be liable to pay increased compensation relating to any pension loss incurred by an employee found to have been dismissed unfairly.

An employee brought a claim against Plymouth Hospital NHS Trust on the grounds of constructive unfair dismissal and disability discrimination, and was initially awarded £105,643 for past and future loss of earnings, and future pension losses.

At the appeal, the judge ruled the 'substantial loss' rather than the simplified approach should be used for calculating the future pension losses of the claimant.

The substantial loss approach will generally produce the higher award since it assumes whole-career loss. The employee's award was increased to £166,595. 

Anne-Marie Winton, partner at law firm Nabarro, said at the time: “[The] calculations in that guidance are based on assumptions that if you’re in a final salary scheme, when you get a new job you’ll go back into an open final salary scheme.”

Mark Howard, partner at law firm Clyde & Co, said: “Employers faced with claims should consider what the pension loss might be based on more up-to-date assumptions.”

Arcadia CPI judgment raises industry questions

August 6

A High Court ruling in August permitted the Arcadia Group to amend two of its defined benefit schemes, allowing them to calculate pension increases and revaluations using the Consumer Price Index rather than the Retail Price Index.

There’s a massive impact on the funding level – for some schemes it’s tens if not hundreds of millions of pounds

Duncan Buchanan, Hogan Lovells

Justice Newey found the definition within the scheme rules gave the power to select an index other than RPI and this was not confined to circumstances in which RPI has been discontinued or replaced. 

However, he ruled the power to change the index used rests jointly with the employer and the trustees.

Employers have been encouraged to assess whether they can switch from RPI to CPI to reduce their liabilities.

Zoë Murphy, partner at law firm Sackers, said the wording of a scheme’s rules is “crucial” in determining whether employers and trustees can change the inflationary index used to increase or revalue benefits.

Duncan Buchanan, partner at law firm Hogan Lovells, said from an employer’s perspective it was a positive decision.

“There’s a massive impact on the funding level – for some schemes it’s tens if not hundreds of millions of pounds,” he said.

Funding pressures ahead following HMRC tax ruling

June 23

An unexpected legal interpretation from HM Revenue & Customs in June led advisers to encourage DB schemes to take steps to ensure they can continue to recover VAT on professional services.

HMRC’s interpretation of a ruling by the Court of Justice of the European Union means VAT on administration services supplied to schemes is only recoverable by the sponsoring employer if it commissions and pays for services.

The ruling could ultimately increase the financial burden on schemes.

Prior to the new interpretation, this tax was recoverable on administration services commissioned by and delivered to the trustees.

Schemes were encouraged by legal representatives to talk to their sponsor about recovering VAT costs, and consider reviewing their invoicing and contractual arrangements in light of the new interpretation.

“In the past it wasn’t possible to recover VAT on investment costs,” said Zoë Murphy, partner at law firm Sackers. “People thought the case meant people would be able to start recovering investment management charges.”

What the revised Sorp means for schemes

December 3

A revised Statement of Recommended Practice was launched at the Pensions Research Accountants Group annual general meeting in late November, and will come into force early in 2015.

Scheme trustees, asset managers and those responsible for preparing accounts have been tasked with putting systems in place to boost the relevance and transparency of their disclosures in the revised Sorp, which includes breaking down transaction costs and providing a fair-value hierarchy of their assets.

The revisions will affect pension accounting periods commencing on or after January 1 2015 and so will impact on documents for the year ending December 31 2015.

Industry experts said that early planning would be crucial to ensure the new Sorp requirements are implemented smoothly.

Shona Harvie, partner at consultancy Crowe Clark Whitehill, said: “Fund managers and custodians need time to make sure they have the systems in place to provide the valuation hierarchy for schemes; [in turn] schemes will need to provide them with notice of their requirements to help them plan ahead.”