In our latest Insight we report on a recent case which confirms that, where certain matters are to be ‘determined by the actuary’, this will involve the actuary exercising judgment and discretion rather than simply carrying out a mathematical calculation. We also provide a round-up of all other key pensions developments.
High court rules on meaning of ‘determined by the actuary’ and ‘making good’ a shortfall
‘As determined by the actuary’ provides actuary with a discretion
The high court has ruled that the words “as determined by the actuary” in a shortfall rule of the Railways Pension Scheme involved “the exercise of judgment and discretion” rather than the actuary undertaking simply a ‘mathematical calculation’ to increase contributions in which case “the provision could and would have said ‘the contributions shall be increased by the actuary”. Furthermore, the actuary’s discretion extended to a decision that the contributions should not be increased at all.
Rule 21 of the Railways Pension Scheme
The rule in question (Rule 21) provided that if an actuarial valuation revealed a shortfall and the employer and trustee could not agree arrangements within six months to make good the shortfall, unless the actuary determined that the shortfall was trivial, the shortfall should be made good (so far as practicable) by the increase of member and employer contributions subject to a maximum of 130% with the actuary determining both the rate and period of increase. If there was still a shortfall, the rule also required that member benefits in relation to future service should be reduced as agreed by the employer and trustee, or if agreement could not be reached within nine months the actuary should determine the rate of reduction.
If the shortfall was not made good under the rules a statutory order would step in to oblige the employer to cover the amount that, in the actuary’s opinion, would be enough to provide for protected pension rights of both protected and unprotected persons (both were held by the court to be included because, as the court noted, the scheme was not segregated even though this might provide unprotected persons with protection or rights exceeding that provided by the scheme itself).
The trustee and employer position
The trustee argued for a wider interpretation of Rule 21 which would give the actuary a discretion based on affordability, value for money and collectability and which would require the employer under the statutory order referred to above to fund on a balance of cost basis the shortfall not met under Rule 21.
The employers argued for a more restrictive meaning of Rule 21 – that this provided an “exhaustive and comprehensive regime for eliminating any shortfall” and the actuary simply carried out a mechanical calculation with no discretion. They also believed that the statutory order did no more than say that the employer had a duty to contribute to a scheme where a person had protected rights and that the actuary should be involved in ‘assessing’ how much should be paid.
The court decided that the trustee’s interpretation of both provisions was the correct one.
Factors to be considered by the actuary, the trustee and employer
In arriving at their ‘rational’ determination, the court said that the actuary must take account of relevant matters and ignore irrelevant ones – relevant ones in this case included affordability, value for money and collectability (such factors being necessary ones for consideration as to what would be practicable as per the wording used in the shortfall rule). These factors were also ones which the trustee should take into account when considering whether to increase contributions or reduce benefits to remedy the shortfall – such consideration formed part of the trustee’s fiduciary duty to members. The employer could act in its own interests subject to its obligations of good faith towards its employees.
Meaning of ‘make good the shortfall’
In addition to ruling on the ‘as determined by the actuary’ wording, the court also held that the words “arrangements to make good the shortfall” were consistent with those arrangements not entirely removing the shortfall because the words ‘in full’ were not used and because the provision went on to outline the arrangements where a shortfall remained.
Relevance of the case to other schemes
Although the facts of this case are specific to the Railways Pension Scheme which was set up following privatisation of the railways in 1994 and so originated from a statutory scheme, the judgment is of interest and application to many occupational defined benefit pension schemes whose governing provisions often use the term ‘determined by the actuary’ in a variety of contexts such as contributions, augmentations, commutation and early and late retirement factors. Although the relevant factors that the actuary should consider may differ depending upon the context in which the provision is used, the case confirms that in each case the actuary’s determination will involve some judgment not just a mathematical calculation. Likewise, the interpretation of the term ‘make good the shortfall’ might be of wider relevance for those schemes which rules use wording of this nature.
(Railways Pension Trustee Company Ltd v Atos IT Services UK Ltd & another )
LDI – PPF, Regulator and FCA correspondence
UK Parliament has published three letters on liability-driven investment (LDI) and pension schemes following the recent gilt market volatility:
- an 18 January 2023 letter from the FCA
- one issued on the same date from the Pension Protection Fund; and
- a Pensions Regulator letter dated 20 January 2023, all three of which are addressed to the Work and Pensions Committee.
The FCA’s letter
Of note from the FCA’s letter is the following:
- Statement of good practice: The FCA intends to publish a further statement of good practice this March;
- Asset manager action: The FCA expects asset managers to take relevant action when responding to issues regarding LDI resilience including operating so that market integrity and financial stability are not put at risk – liquidity buffers are only a ‘partial’ solution so fund managers must ‘learn lessons’ on operational matters such as rebuilding buffers, engagement and reliance on third parties;
- Communication: Asset managers must look at their ability to deliver essential information at an individual client level “(often in large batches) in a timely manner” and make sure that key stakeholders have processes in place to implement necessary actions so that liquidity can be realised when needed;
- Risk management: All market participants must include market conditions of the type that occurred in Autumn 2022 into risk management – the FCA will supervise firms on this; and
- Work with other agencies: The FCA is working with the Bank of England and the Regulator to “develop a longer-term resilience standard for LDI funds” and agrees that there is a “need for urgent international action to identify and reduce risks in non-bank finance, wider than in relation to LDI alone” (see also ‘The Regulator’s letter’ below on regulatory oversight).
The PPF’s letter
The PPF pointed to the PPF 7800 Index and its latest report (see our Insight) in response to the WPC’s query about any analysis the PPF has made of asset value changes in defined benefit (DB) schemes as a result of recent gilt market events.
The Regulator’s letter
The Regulator sets out the action it has taken in response to recent LDI events including how it will make sure that funds will maintain resilience and its plans for data gathering to assist with resilience monitoring:
- LDI buffers: Reference is made to the introduction of improved LDI financial buffers following the 30 November 2022 joint statement from the Irish and Luxembourg regulators and its guidance of the same date (see our Insight);
- Regulatory oversight: The Regulator will continue to collaborate with the FCA and overseas regulators to oversee resilience levels and to step in where needed;
- Additional data collecting: To enable the Regulator to ensure effective monitoring it will need to collect additional data and the Regulator is currently looking at what data is needed and how it will be collected;
- Potential new notifiable event: One of the ways in which this additional data may be collected is through a new notifiable event where, for example, schemes will notify the Regulator where they cannot maintain a minimum buffer level – if this approach is adopted, the Regulator would expect voluntary notification prior to the notifiable event legislation coming into effect; and
- Annual funding statement 2023 (AFS 23): The Regulator’s AFS 23 due this Spring will include the Regulator’s current position on minimum levels of resilience and adaptations that may be needed together with guidance on governance for schemes with leveraged LDI.
It appears that there will be further regulatory intervention in relation to LDI following the market upheaval last Autumn. This will include schemes having to provide more information in relation to their LDI arrangements and potentially a new notifiable event around resilience. We will provide further updates on these as they emerge.
Auto-enrolment: Department for Work and Pensions (DWP) to keep earnings trigger and lower qualifying earnings band the same for 2022/23
The DWP has published the outcome of its statutory annual review of the automatic enrolment earnings trigger and qualifying earnings band. For the 2022/23 tax year:
- the earnings trigger will remain fixed at £10,000 – the trigger determines who is eligible to be automatically enrolled into a workplace pension; and
- both the lower and upper ends of the qualifying earnings band in respect of which contributions are made will remain the same – £6,240 and £50,270 respectively.
FCA thematic review of income needs in retirement advice
On 19 January 2023, the Financial Conduct Authority confirmed that it will be carrying out a thematic review looking at the advice consumers receive on meeting their income needs in retirement. The review will consider how financial adviser firms are providing advice and the quality of consumer outcomes. In its press release, the FCA noted the importance of consumers receiving good quality advice at the time they access pension savings especially in the pension freedom era when a lot of consumers drawdown income from their pension savings rather than purchase an annuity. The review will start in Q1 2023 with a report expected in Q4 2023.
Legal challenge to FCA British Steel pension redress scheme
A day later, on 20 January 2023, the FCA issued another press release explaining that several pension advisory firms which form part of the British Steel Action Group have issued a legal challenge against the FCA’s decision to set up a redress scheme for former British Steel Pension Scheme members (see our Insight).
The FCA believes that the challenge is simply an attempt to delay paying redress and it will notify affected persons if the action means scheme timings will alter. It also warns former BSPS members who received advice before 30 April 2017 to: (1) make a complaint to the firm now and complain to the Financial Ombudsman if they are not happy with the financial adviser firm’s response, and (2) if they have already complained and are not happy with the response to submit a complaint to the Financial Ombudsman within 6 months of the response date. This is to avoid Financial Ombudsman complaints being out of time should the legal action result in the redress scheme being withdrawn.