There is never a dull year in pensions and 2021 has been no exception. Looking ahead, there are several notable cases to look out for next year including the RPI judicial review and the novel legal challenge against the trustee directors of the Universities Superannuation Scheme (USS). There are also a number of evolving risks which could crystalise for some schemes and sponsors in 2022, including claims and complaints relating to the new transfer conditions and ESG-related risks, as well as the threat posed by the Regulator’s new powers.
The threat from Covid-19 has also not gone away and we wish all our readers a happy and healthy Christmas and New Year.
RPI judicial review
The hearing in the legal challenge, brought by the trustees of the BT, Ford and M&S defined benefit (DB) schemes, regarding the UK Statistics Authority’s plans to align the methodology used to calculate RPI with that used to calculate CPIH from 2030, is due to be heard next Summer.
If the challenge is successful, this could have significant funding implications for DB schemes. Even if the reforms still go ahead, the judgment could increase the prospects of schemes that lose out receiving compensation. The outcome of the related private law claim, regarding whether the so-called “cessation clause” contained in the terms and conditions of new style gilts (i.e. RPI-linked gilts issued by HM Treasury since September 2005) will be triggered in 2030, could also have implications for some commercial contracts and corporate bonds, where they contain similar clauses that would be triggered by the cessation of RPI.
Novel USS claim puts trustee directors on notice
The outcome of the claims brought two lecturers against the trustee directors of the USS could also have important implications for other occupational pension schemes, particularly those with a corporate trustee. The claimants argue that the trustee directors acted in breach of their duties in conducting “a flawed valuation and predicting a so-called ‘deficit’, when there is now a multibillion surplus”, as well as proposing cuts that will disproportionately impact women, minorities and young people; and “super-inflating” the scheme’s operating costs “from £40.6m to £160m between 2008 and 2020”. These claims stem from the trustee directors handling of the scheme’s 2020 valuation and, therefore, the judgment could have implications for how trustees approach valuations more generally (particularly in times of market turbulence).
Even more significant, however, is the nature of the claims themselves. They have been brought by the members as a ‘derivative action’ on behalf of the trustee company against the trustee directors in their personal capacity. If these claims are allowed to proceed (even if they are ultimately unsuccessful) this could open up a new avenue for members to pierce the corporate veil and make claims directly against trustee directors, significantly eroding the protection that individual trustee directors thought they enjoyed.
Two high risk areas to look out for in 2022 are transfers and ESG.
Since 30 November 2021, pension providers, trustees and administrators have been required to apply the new transfer conditions which are designed to help prevent members falling victim to pension scams. If the final regulations are applied as they are written they could hold up a large number of legitimate transfers and place incredible strain on the new scams guidance service. Consequently, schemes and administrators have been put in the unenviable position of having to decide to what extent and in what scenarios it is ok to adopt a pragmatic rather than a strict approach.
Schemes are damned if they do and damned if they don’t. Hold up or refuse a transfer and they face the prospect of a member complaint or a claim for compensation for a lost investment opportunity. Allow a transfer to proceed to what turns out to be a scam arrangement and they face the prospect of having to reinstate the member’s benefits. Although neither option is appealing, erring on the side of caution and holding up or blocking higher risk or complex transfers where a judgment needs to be made is likely to be the safer approach as, in most instances, it will be easier to defend.
In any event, we can expect the first complaints and claims relating to the application and operation of the new transfer conditions to start coming through during the course of the next 12 months.
Climate change and other ESG related risks can also be expected to remain front and centre in 2022. Some ESG related claims and complaints against schemes have already been seen. Indeed, alongside the claims relating to the 2020 valuation, the lecturers bringing the claims against the USS trustee directors are also claiming that the trustee directors are in breach of duty by failing to divest the scheme’s assets from fossil fuels. More ESG related complaints and legal challenges can be expected as the focus on the steps schemes are taking to address ESG risks continues to intensify.
Future threats of Criminal Prosecution and Regulatory action
Scheme sponsors and directors and third parties, such as lenders and investors, also face an increased threat of regulatory action now that the new criminal offences and regulatory sanctions are in force. There is no doubt that directors of companies and groups with DB schemes are having to be more mindful of the impact of their actions on their scheme, as everyone gets used to how the new sanctions, which operate in some peculiar ways, should be applied in practice. Ultimately, greater clarity will only emerge when we start to see the real world scenarios in which the Regulator decides to take enforcement action (or not), as the case may be. Whether such illumination awaits us in 2022, only time will tell.
Finally, there are some important procedural changes relating to the use and preparation of witness statements in pensions cases to look out for, which could impact the way in which is pension rectification claims are handled in future. Full details are due to be set out in the updated Chancery Guide which is expected to be published early in the New Year.
If you wish to discuss how any of these developments may impact your scheme or organisation please contact one of our specialists or speak to your usual Herbert Smith Freehills’ contact.