POINTS OF LAW Sledgehammer approach
The use of judicial review has recently been restricted because it should be used when no other remedy is available, explains Robin Ellison, Pinsent Masons
- judicial review is less available now as a remedy against regulatory excess, even though it can short-circuit expensive alternative remedies
- regulatory fines which are applied too often and without discretion can bring the regulator into disrepute and simply become a cost of doing business
- DB schemes are being looked at again as a method of benefit provision for employees, but in an alternative form
- the government is exploring what to do with a trivial surplus arising from the general levy.
It was Ronald Reagan (for younger readers, a former US president) who famously said that: “Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.” For the purposes of this article, he also said: “The most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”
The intervention of the government in pensions in the UK is, of course, notorious. And, in most cases, there is little that the concerned citizen can do apart from sigh. But occasionally the government can go too far and the only remedy is to ask a court to intervene. The ability of the courts to overrule a government minister or a regulator is high profile at the moment, for a number of reasons. First, there is the Daily Mail response to Gina Miller, who persuaded the High Court and later the Supreme Court to require the government to put the Brexit issue to Parliament. The case crystallised two opposing points of view. The argument of the government and the Daily Mail was that certain things are nothing to do with judges, that Parliament is supreme, and that a decision of a minister is a decision of Parliament. The argument of the courts is first, that yes Parliament is supreme – but a minister or a regulator is not Parliament. And second, that we are all, including ministers and regulator, subject to the rule of law.
The way in which the courts intervene in government is by way of a procedure called judicial review. The courts will examine the actions of government to see if they are in accordance with the law. It is, in the history of English law, a relatively recent development. It is not a power which is granted by statute and it is one which the courts have given themselves. And that creates a political issue: every time a regulator or minister loses before the courts, they claim it is no place of the judges to interfere in the proper running of government.
Judicial review is now becoming more important in pension matters. A year or two back, one employer was forced by the Pensions Regulator (TPR) to auto-enrol its staff, which the employer thought it did not have to do. There was no process for appeal against TPR, so it sought a review by the court as to whether TPR was right. In fact, TPR was held to have been wrong.
Now, in some ways, applying for judicial review is something of a sledgehammer; applying to the courts is expensive and only for the big boys, which gives a regulator an unfair advantage. This is why legislation usually provides for a cheaper and simpler way of appeal against a decision of a regulator. In the case of TPR, that appeal is by way of a review of a determination by the determinations panel, which is a semi-independent body.
But even that can be expensive. In a recent case, without going into the merits or otherwise of the arguments, it would have cost the firm several millions (and several years) to adduce the evidence it needed to respond to a warning notice to pay contributions in an allegation of abandonment, and then if necessary to conduct the case through the various levels of appeal. It sought to short circuit that procedure and those costs by applying to the court for a review of whether TPR’s process was fair in all the circumstances. Oddly, a judicial review was cheaper (if successful) than the – in theory – simpler proceedings of a determinations panel.
The court rejected the application. And the reason was that the use of judicial review has been restricted by recent law. The Criminal Justice and Courts Act 2015, not referred to in the judgment, operated as a slap on the wrist of the judges and in particular made it clear that the procedure could only be used if there was no other remedy. Of course, in pensions there is another remedy if you are unhappy with the regulator, and that is that you can usually appeal to a determinations panel.
In relation to fines (although not a compliance notice) in connection with auto-enrolment, you can appeal to the panel and then to a tribunal. And the number of fines is set to explode, as auto-enrolment extends to smaller firms. In January, I happened to be in the office of a motor engineering firm to get my car fixed, when the office administrator told me she was struggling to get her 12 staff on to the NEST system, because she could not formulate the language of the letters she had to send to staff in the right way. The staff at TPR were unable to help in a practical way and instead simply referred her to documents on the website. Here was someone trying to do the right thing, struggling with the system, but subject to an unsympathetic regulator and faced with the inevitable prospect of fines. Contrary to the views of NEST and TPR, the auto-enrolment stuff is hard for non-experts to understand. It is improbable that the auto-enrolment materials were tested on garage administrators before being issued.
Incidentally, there is a press report that 40% of auto-enrolled members are inactive, ie not paying into the system. If that is so, there needs to be an analysis of how that is happening and if it is a problem…
The future of DB schemes
At the moment, we cannot move for think-tank papers on the future of defined benefit (DB) schemes. We have the recommendation from the Work and Pensions Select Committee suggesting new powers for TPR; we have a paper from the International Longevity Centre and Ince & Co on what kind of end game there might be for DB schemes, which suggests that the legal burdens on trustees should be lifted and that it would be in everyone’s interests to change the pensions expectations of members (however sensible that may be, the political capital required is too great); and we have a note from the Pensions Policy Institute on the reason why DB schemes have been hit by a succession of perfect squalls.
Quite a few commentators predict (though not in public) the revival of DB schemes, though in an unfunded form, which avoids tax issues, public policy issues, excessive regulation and the uncertainties of defined contribution (DC) arrangements. It is only a matter of time and the legal implications are minor.
The general levy on pension schemes has been recently consulted on. The levy is to pay for the Pensions Regulator (TPR), the Pensions Advisory Service (TPAS) and the Pensions Ombudsman (TPO). It was reduced in 2013 by 13% and raises around £45m a year and, lawks a’mercy, there is a surplus at the moment. It is about £13m, which is money to some of us, but it should not be to the levy managers, because it is only four months’ expenditure. In a business context, it would hardly be worth commenting on, let alone devising several ways of not spending it – and some regulators insist that you keep six months’ working capital anyway.
The consultation also tries to compare the costs of the levy to a one million member scheme (are there any?) with the costs to a 10,000 member scheme, with a hint that consolidating schemes will result in higher levy payments, which is not the object of the exercise.
The figures are puzzling, especially since TPR’s annual costs are around £60m, due to rise to around £80m, TPAS’s costs are around £7m and TPO’s costs are around £3.5m, which seems hard to reconcile with the levy receipts of £45m. All very odd. It might be best to use the surplus to pay the unfair fines imposed for technical breaches.
TPR is now fining master trust trustees for minor bureaucratic failures. The TPR board might want to recite the mantra, “just because we can does not mean we should”. Or maybe they should really push the boat out and seek jail or transportation for recalcitrant trustees.
Regulators are in an invidious position. They quite often make mistakes themselves, so they need to avoid being sanctimonious about others.
The FCA, for example, has just let 78 improper pension transfers take place under its nose, which shows a modicum of negligence at the very least. None of us is perfect and it helps both sides if mercy is part of the mix, especially if no one has died. Regulatory fining has become a fashion and regulators believe in fines as an effective remedy.
The EU and EMIR
If the UK leaves the EU by June 2019, UK schemes may not have to comply with the European Market Infrastructure Regulation (EMIR), which requires them to clear centrally certain derivative transactions, making them expensive, or more expensive, to enter into. There has been another extension of the pension scheme exemption, so it may be that such derivatives are worth looking at again.
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Cass Sunstein, Valuing life: humanizing the regulatory state, University of Chicago Press, 2014
Commission delegated regulation (EU) of 20.12.2016 amending regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the extension of the transitional periods related to pension scheme arrangements, European Commission, Brussels, 20 December 2016 C(2016) 8542 final
Criminal Justice and Courts Act 2015 Part 4
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Defined benefit pension schemes, House of Commons Work and Pensions Select Committee, Sixth Report of Session 2016-17, HC 55, 21 December 2016
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Rebecca Nicholson, The rise of dating scams reveals an endless capacity to hope, Guardian, 24 January 2017
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TPR, TPR issues first chair’s statement fines against master trust schemes, Press release, Ref: PN17-01, 9 January 2017