Pensions Update, Summer 2014


Author: Declan Drislane, Philip Smith, Catherine Austin, Sarah McCague and Orla Ormsby

The recent Irish pensions case of O’Sullivan v Canada Life Assurances (Ireland) Limited [2014] IEHC 217 has confirmed that Personal Retirement Savings Account (“PRSA“) holders may transfer their retirement benefits to overseas pension scheme administrators in the EU, even if the member is living and working in Ireland. In those circumstances, the administrators are not required to look behind the bona fides of the transfer unless the facts of the case as presented give rise to a suspicion of the bona fides of the transfer.

In this case Mr O’Sullivan requested that Canada Life transfer his PRSA policy to a pension scheme based in Malta. Mr O’Sullivan was neither resident nor employed in Malta. Canada Life sought the approval of the Revenue Commissioners who said it was for Canada Life to determine whether to agree to the request. Canada Life refused to make the transfer and Mr O’Sullivan issued legal proceedings to compel them to make the transfer. The Court found that there was no evidence of mala fides by Mr O’Sullivan and that there was no requirement that he be resident or employed in Malta in order to transfer his PRSA policy there. 

For further information on this case, please see our briefing of May 2014: High Court clarifies rules for overseas transfer of PRSA funds“.

Recent pensions UK related case law

There have been a number of pensions cases of interest in the UK recently. While UK cases are not law in Ireland they are of persuasive authority and it would be prudent for trustees and employers to be aware of them.

Scheme changes: Employer duty of care

IBM UK Holdings & anr v Dalgleish & ors [2014] EWHC 980 (Ch)

IBM UK sought declaratory relief concerning changes which they proposed to make to two of their defined benefit pension schemes by closing them to new entrants and to future accrual, making future pay increases non-pensionable for DB purposes, opening an early retirement window for active members and ending enhanced early retirements. The defendants in the case were beneficiaries under the schemes and the sole trustee of the plan. IBM claimed that these changes were necessary in order to address their lack of competitiveness and profitability. The main issue was whether IBM had breached its contractual duty of trust and confidence to employees and the implied duty of good faith set out in the case of Imperial Group Pension Trust Limited v Imperial Tobacco Limited (the “Imperial Duty“).

It was found that members had a reasonable expectation that accrual and early retirement would continue (partially due to previous communications from IBM on the subject which stated that the defined benefit schemes were on a “firm“, “secure” and “sustainable” footing). The Judge found that no reasonable employer in IBM’s position would have proposed such changes and this breached IBM’s duty of good faith.  The judge found that the implied contractual employment law duty of good faith was distinct from the Imperial Duty but each derive from the same origins and in the facts of the case IBM breached both. He further found that IBM’s business justifications for such breaches were insufficient although the exercise of a discretion (such as the discretion to close the schemes to future accrual in this case) requires a genuine and rational exercise of the discretion and the employer’s financial and other interests are relevant in such a situation. However, IBM had withheld its main reasons for the change from members and had failed to consult with an open mind.

There will be a further hearing to determine what remedies will be applied and the amendments may not necessarily be reversed. In the meantime, IBM has announced its intention to appeal the decision.

This case demonstrates that employers need to approach any pension changes and the rationale for those changes with care before embarking on member consultation or communication. In particular, previous communication with members on pensions and approaching negotiations in good faith could be key to the successful implementation of any future change proposal.

Execution of deeds

 Briggs v Gleeds [2014] EWHC 1178 (Ch)

In this case the UK High Court determined that a defect in executing deeds of amendment had the result of invalidating the changes contained in those deeds. The principal employer of the pension scheme in question was a partnership and as such the Law of Property (Miscellaneous Provisions) Act 1989 (the “1989 Act“) applied to the manner in which it executed deeds. Instead of executing deeds as required by a partnership under the 1989 Act, it executed various deeds in relation to its defined benefit scheme as if it were a limited company. The result was that the signatures of the partners executing the various deeds were not witnessed. During the period in question (1991 to 2008 during which period some 30 deeds were executed), a number of significant changes were made to the scheme including: the benefits of the scheme were equalised to take into account the principle of equal pensions treatment; the benefit structure was amended (including a reduction in the accrual rate); two defined contribution sections were added; and the defined benefit section was closed to future accrual.

The principal employer claimed its consultants, who were advising on the scheme, impliedly represented that the deeds could be executed in the manner appropriate for a limited company and members were estopped from challenging the manner in which the deeds were executed. The judge disagreed and the consequences for the principal employer and the members are significant, especially those members who were in the defined benefit section and who, as a result of the judgment, continued to accrue benefit despite the attempted closure to future accrual. It is estimated that as a result of the judgment, the scheme’s deficit increased by £45 million.

This case is a timely reminder to trustees and principal employers to ensure that they execute deeds in accordance with trust law requirements. Failure to do so may invalidate the deeds and the amendments contained in them.

Draft IORP II Directive

The European Commission has published a proposed revision of the IORP directive (IORP II). This does not make any changes to funding requirements following opposition from an alliance of five Member State governments, including Ireland, to the Commission’s aspiration to bring the IORP directive into line with Solvency II for insurance companies. The revised directive focuses on governance and communication and prescribes a very detailed plan for a harmonised EU-wide format for member benefit statements. In addition, those who ‘effectively run the scheme’ are required to have professional qualifications. The current IORP directive puts this obligation on those running the scheme or the scheme’s advisers but the new draft now appears to envisage that trustees would be so qualified. The proposed Directive, if it becomes law, for which the approval of the European Parliament and the European Council will be needed, is scheduled to be implemented by Member States by 31 December 2016.

It remains to be seen the extent to which these change local law in relation to trustee training and experience.

Day to day changes:

Updated Revenue Pensions Manual

At the end of May, the Revenue Commissioners updated the Revenue Pensions Manual. The provisions of the Manual set out the basis of the Revenue’s discretion to approve schemes and while not technically law, in practice it has the effect of law. The update to the manual consolidates a number of e-briefs and circulars which have been issued by the Revenue since the last version of the manual. In particular the following practices have been updated:

– early withdrawal of additional voluntary contributions (“AVCs“) from occupational pension schemes;

– the taxation of pension contributions, the application of the earnings limit and the regime in relation to lump sums on retirement;

– the commutation of pensions and the payment of once-off pensions where the value of the pensions are considered “trivial” which practices have now been extended to Retirement Annuity Contracts (“RACs“) and Personal Retirement Savings Accounts (“PRSAs“); and

– the tax treatment of retirement benefits where members have private and public sector pensions.

Pensions Authority

The Social Welfare and Pensions (Miscellaneous) Provisions Act, 2013, which came into force on 7 March 2014, changed the name of The Pensions Board to The Pensions Authority (An tÚdarás Pinsean). All correspondence to the Pensions Authority should reflect this name change and all email addresses of personnel at the Authority have accordingly been changed.

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