Pensions World

Lawyers have got their work cut out keeping up with the constant change and complexities of pensions legislation explains James Thomas, financial journalist.

After yet another year in which lawyers have bemoaned the excessive complexity, overwhelming volume and relentless pace of change of pensions legislation, one wonders how great the temptation must be to simply tear up the statute book and start again. Indeed, legislation it seems is more usually the cause of than the cure for many of the problems currently associated with pensions. As François Barker, Squire Sanders Hammonds, explains: “The legislation is simply not joined up. DWP legislation has lost focus to such an extent that every new provision is accompanied by piecemeal amendments to previous law with a corresponding lack of clarity. The Debt on Employer regulations epitomise this. A failure to reset the underlying principles has led to ever more complex and over legalistic requirements in an increasingly desperate effort to allow key stakeholders to cope with it.”

This constantly shifting target of legislation is set against a background of broader economic and political developments which have accelerated further the process of reinvention that pensions lawyers have undergone over the last decade. In the wake of the financial crisis, which has focused schemes’ minds firmly on deficits, and with an incoming government whose fiscal approach has resulted in major changes to the pensions tax regime, the last two years have represented a period of unprecedented change for the profession as schemes’ needs have grown in complexity, variety and client specificity. Accordingly, a new type of lawyer has emerged. As Jo Stern, Berwin Leighton Paisner, points out: “2009 was the year in which pensions lawyers came out of the back room and appeared in the board room. 2010 was the year in which pensions lawyers were key advisers in a number of corporate restructurings. 2011 is the year in which pensions lawyers have been able to give technical advice on the complex subject of pensions law whilst surrounded by corporate finance advisers, either in the context of scheme funding, scheme restructuring or M&A work.”

Pace of change

The lawyers argue therefore that, despite the steady erosion of their “traditional” areas of work – establishing schemes and so forth – the retooling necessitated by the current environment makes their services as in demand as ever. Indeed, this is compounded by a more active approach from the Pensions Regulator, which has, according to Lesley Browning, Norton Rose, “made its presence felt in recent years and has demonstrated a willingness to pursue employers with contribution notices and financial support directions where it considers necessary”.

So while the death of defined benefit (DB) has undoubtedly removed a tranche of work, several more have appeared immediately in its place. First is the area of liability management, which lawyers expect to create considerable work for years to come. Indeed, for François Barker, the evolution of de-risking strategies for DB schemes has been one of the main features of the past two years. “Not very long ago the term de-risking was synonymous with ‘buyouts’,” he says. “Now we can include enhanced transfer values, pensions increase exchange exercises and mortality swaps, not to mention the use of asset backed funding structures. The pace of change and innovation in this area is striking.”

Moreover, any suspicion of a decline in this area of work is countered by evidence of the scale of projects which have taken place in recent years. “The BMW longevity swap, on which we worked, was the largest of its kind and demonstrated an appetite in the market for such transactions,” suggests Lesley Browning.

“Similarly, the debt for equity swap undertaken by Uniq (with which we were also involved), shows employers’ willingness to look at creative ways to manage pension liabilities.”

Quick succession

Also keeping lawyers busy has been the change to the pensions tax regime, with two new regimes being introduced in quick succession; a drastic cut in the annual allowance (AA) from £255,000 to £50,000 from 2011/12 and the reduction in the lifetime allowance from 2012/13. From the client’s perspective, the devil here is in the detail and the impact in terms of scheme design of the AA changes has been a key area of recent focus for legal advisers.

According to Ian Pittaway, Sackers: “With so many more individuals potentially caught by the reduced AA, one key concern for pension scheme members is to ensure that they do not fall into the tax charge danger zone. To accommodate members likely to exceed the AA on a regular basis, many schemes have been looking to ‘aim off’ the AA (for example, by smoothing pensionable pay and accruals) so as to ensure tax charges do not bite. This is not as simple as it sounds and requires careful communication so that members understand exactly what benefits they are giving up in return.”

He adds that anti-avoidance provisions could also catch out the unwary, a view echoed by David Wright, DLA Piper: “There are aggressive anti-avoidance provisions, including the removal of tax advantages from employer financed retirement benefit schemes. This has involved us in assessing the impact of the change in relation to high earners, redesigning remuneration packages, planning ahead and ensuring that appropriate monitoring systems are in place; thereby improving employee relations and assisting with their retention.”

Tricky

If these issues have kept lawyers and schemes busy over the past several months, the agenda for the coming months looks no less daunting. A further consequence of the flight from DB has been to shift lawyers’ focus towards defined contribution (DC) structures and this is set to increase with the introduction of auto-enrolment in 2012. Tellingly, this is an area which many lawyers feel their clients have, as yet, given insufficient consideration towards. According to Carolyn Saunders, Pinsent Masons: “As few as two in five employers are aware of what’s happening. Larger employers have been taking steps to get ready for auto-enrolment. Smaller businesses are certainly underestimating the difficulties.”

This reticence has been due in part to dithering by the government in delaying the Pensions Bill, as Däna Burstow, Allen & Overy, explains. “While we do finally now know how to tailor a money purchase scheme to qualify, that hasn’t left much time for strategy,” she says. “The complexities of who has to be admitted when and who doesn’t are extraordinary. And yet if you decide just to admit everyone to keep it simple, the opt-out rules are such that you end up stuck with benefits for precisely the individuals you didn’t have to admit in the first place.” Assisting clients with information packs and guidance has therefore been a priority.

With larger employers affected from October 2012 the timetable for auto-enrolment is short and the scale of the task is easily underestimated. Lawyers anticipate a surge in demand in the run up to next autumn as clients will require help interpreting how the legislation applies to existing or proposed arrangements. Scheme documentation will also need updating for those employers using trust based arrangements. According to Richard Goldstein, Mayer Brown: “Few employers, even larger employers, are close to being ready. Many have yet to make fundamental decisions about which eligible scheme to use for auto-enrolment and the shape of the DC offering for employees going forward.” The legislation has thrown up several “tricky” issues, he adds, one example being the different pay definitions used by the pension scheme as compared with the minimum statutory requirements; another the new self-certification requirements for DC arrangements.

For Carolyn Saunders, employers should seek advice to avoid failing to assess who “workers” are; failing to identify when the auto-enrolment requirement starts to apply to particular workers; failing to provide the right information within the deadlines; unwittingly inducing an employee to opt out; or accepting opt out forms despite those forms being invalid on a legal technicality.

And the incentive for employers to get up to speed on auto-enrolment should be strong, as David Wright reminds us: “Compliance with the new duties will be a key focus area for the Pensions Regulator and there are some hefty penalties for non-compliance so decisions cannot be put off for much longer.”

The “curse” of popularity

Finally, in this new DC-focused environment, several of the lawyers surveyed expressed strong concerns about the potential impact of the Bridge Trustees case on the definition of “money purchase” benefits.

If liability management has dominated the recent past and auto-enrolment is dominating the present and immediate future, the decision in Bridge Trustees could set the tone for the coming months, and in the view of Hywel Robinson, Clifford Chance, the government’s reaction to this case is likely to be the most important development in pensions over the next year.

“A policy statement has been issued to the effect that this definition will be ‘clarified’,” he explains. “If this is not done with great care, it could lead to many money purchase schemes suddenly being treated as DB.”

David Gallagher, Field Fisher Waterhouse, echoes that sentiment. “I am nervous that the DWP response to the Bridge Trustees case could produce a very unhelpful definition of what is not a money purchase benefit,” he says. “I fear that they will base it around their obligation to protect pensions on employer insolvency rather than the industry’s historic scheme design practices.”

Again, the result could be a yet greater call from schemes for the services of legal professionals, a trend which is already manifesting itself. “We are seeing more and more instances of difficulties with scheme documentation leading to litigation, since the correct assessment of the liabilities can be critical to an employer’s survival, and cases like Bridge Trustees illustrate the problems with the drafting of many of the basic statutory provisions,” says Jane Marshall, Macfarlanes. “Such cases will continue to arise.”

It seems, then, that pensions lawyers will continue to suffer the “curse” of popularity and schemes, that perhaps feel they have seen enough of their legal advisers of late, will be seeing plenty more of them in the future.

Table 1: Pensions lawyers – their practices and clients

Table 2: Fees

Table 3: Top performers