Personal Finance Society news update from 9 September 2015 - 22
September 2015 on taxation, retirement planning, and
Taxation and Trusts
Taxation and trusts
Autumn statement date announced
(AF1, AF3, AF4, JO2, JO3, JO5, RO2, RO3, RO8, CF2, FA2, FA7)
The Chancellor of the Exchequer has announced that
a joint Autumn Statement and Spending Review will be published on
Wednesday 25 November 2015.
Trustee investment opportunity
(AF1, RO3, JO2)
In this article we provide a reminder of the factors trustees
should take into account when investing trust funds.
The investment of trust funds is one of the most difficult
duties for trustees. They have to take account of numerous factors
before deciding how trust assets should be invested. So how do
trustees decide what to invest in so as to deliver a suitable
outcome for the beneficiaries? As a starting point trustees should
look at the express powers given to them under the terms of the
trust. In addition, trustees should be aware of their statutory
powers and duties and how these may differ depending on the
capacity in which they act. For example, a professional trustee is
expected to have a higher standard of care compared to a lay
You should also be aware that as well as the express powers in
the trust, trustees in England and Wales are governed by the
statutory powers created by Trustee Act 2000. These statutory
powers give most trustees wide investment powers to invest trust
assets and are in addition to any express powers contained within
the trust - but subject to any restriction or exclusion imposed by
the trust instrument. For most trusts (subject to specifically
stated exclusions) this means that most retail investment solutions
- notably collective investments and investment bonds - will be
"within scope/permissible " in principle.
The Trustee Act 2000 also imposes a statutory duty on trustees
to exercise reasonable care and skill when considering investment
matters though. With this duty comes a requirement to ensure that
trust funds are invested in a suitable manner, with appropriate
diversification and on the basis of proper advice. It is also
essential for trustees to review the investments of the trust fund
on a regular basis.
The need to obtain advice
In exercising their power of investment or when reviewing
investments trustees should obtain proper advice before proceeding.
Exceptionally, trustees need not obtain advice if they reasonably
conclude that it is unnecessary or inappropriate to do so. This
exception will normally apply where the value of the trust fund is
small or where the trustees are sufficiently qualified to give
'Proper advice', in this context, is the advice of a person
reasonably believed by the trustees to be appropriately qualified
by ability and practical experience of financial and other matters
relating to the proposed investment.
Where individuals are acting as trustees in the course of a
business or profession, they are treated as having such special
knowledge or experience that might be reasonable to expect of a
person in that kind of business or profession.
Importantly, this means that solicitors or accountants who act
as trustees in a professional capacity will be subject to a greater
standard of care than, say, family members. This requirement for
trustees to seek "proper advice" is excellent news for financial
advisers and offers a very good opportunity to collaborate with
other professionals, e.g accountants and solicitors, who are often
the "gatekeepers" to trustee investment funds.
Regular reviews, trust suitability and tax
The regular review of the trust investments should take account
of both investment returns and the objectives of the trust.
Trustees must give consideration to the size of the trust fund, the
way in which trust investments will be taxed and the nature, needs
and tax positions of the beneficiaries. It is also advisable to
make changes in the assets held where appropriate.
Where professional advice is sought, it is common for a
suitability report to be completed when carrying out a trust
review. A suitability report will enable the trustees to identify
whether existing allocations meet the current objectives of the
The report can also cover other aspects, such as how the current
assets are taxed and comment on the current diversification
strategy. This is of particular importance as trustees are required
to diversify, where possible. It can also provide an overall
summary of the current position of the trust.
Case law has, in the past, implied that trustees who do not
carry out regular reviews could be held liable. The leading case of
Nestle -v- National Westminster Bank Plc  1 All ER 118 was
decided by the Court of Appeal in favour of the trustee bank.
However, it was held that the bank had misunderstood the scope of
its investment powers, and had therefore breached its duty both to
undertake regular reviews of the investments and to diversify out
of the limited range of equities that constituted the relevant
estate. However, the appellant was unable to establish causation.
It was for her to prove on the balance of probabilities: -
- that if the bank had regularly reviewed the investments and had
understood its investment powers, it would, as a prudent trustee,
have diversified the portfolio; and
- that the notional diversified portfolio would have been worth
more than the actual portfolio. This was a matter of expert
evidence and the appellant was unable to discharge the burden of
proof. So, based on the facts, the appellant lost.
In the Court of Appeal Staughton LJ held there was no breach of
trust. Despite this the trust company fell 'woefully short of
maintaining the real value of the fund, let alone matching the
average increase in price of ordinary shares'. The company had not
acted 'conscientiously, fairly and carefully' and there was 'not
much for the bank to be proud of in its administration of the…
trust'. So that's the "take away" message. And it's an important
Finally, taxation and administration costs should be taken into
account prior to investing the trust fund. Regard should be given
to optimising the tax position of the trustees and the
beneficiaries. For example, it may be possible to reclaim tax
deducted at source for a non-taxpaying beneficiary on any savings
income or it may be possible to assign a bond/segments to a
beneficiary who is a low rate taxpayer pre encashment rather than
having the trustees encash the investment when the gain may be
assessed at a higher rate on the trustees or the settlor -
depending on the circumstances.
There are also the new dividend tax changes (to take effect from
6 April 2016) to take into account. It seems tolerably clear
(although we await the draft legislation) that trustees will be
liable to tax on dividends at the highest rate of 38.1% and with no
£5,000 dividend allowance.
This article will hopefully serve as a helpful reminder of the
factors to consider when investing trust funds and perhaps, equally
important, remind financial advisers of the opportunity that
trustee investment offers for collaboration with other
The referred to imminent dividend tax changes offer a valid
reason (arguably a requirement) for a comprehensive review of
An overview of the main duties imposed on trustees
(AF1, JO2, RO3)
The primary duty of a trustee is to ensure that they take
control of the trust property and manage the trust in accordance
with the terms and provisions contained in the trust deed on behalf
of the beneficiaries.
In the preceding article we considered the factors which should
be borne in mind when investing trust funds. While trustee
investment is regarded as one of the key roles that a trustee is
required to fulfil, there are also a number of other duties imposed
on trustees. We therefore take this opportunity to provide you with
an overview of some of these other duties.
Trustees must exercise reasonable skill and
The standard of care and skill expected of a
trustee varies according to whether they are unpaid or a
professional. Section (1) of the Trustee Act 2000 sets out a
duty which it refers to as the 'duty of care'. This statutory 'duty
of care' is the duty to exercise such care and skill as is
reasonable in the circumstances having particular regard to:
- any special knowledge or experience that the trustee has or
holds themselves out as having; and
- where he or she acts as a trustee in the course of a business
or profession, to any special knowledge or experience that it is
reasonable to expect of a person acting in the course of that kind
of business or profession.
Where professional connections are acting as trustees in a
professional capacity, provided they do so in the course of
business they will be subject to a greater standard of care than,
say, family or friends.
Trustees must act in good faith
The appointment of a trustee is a personal one and cannot
usually be passed on to someone else by the person appointed. The
position is a fiduciary one. Therefore, trustees must act in good
faith and in the best interests of the beneficiaries at all times.
Trustees must not allow their personal interests to conflict with
those of the beneficiaries.
Trustees must act impartially
Essentially this means that trustees must consider and ensure
that all of the beneficiaries' entitlements are considered. For
example, if the trust states that one beneficiary is entitled to
income and another beneficiary is entitled to capital, the trustees
need to invest appropriately to produce both income and capital
growth. So, if the trustees invest to produce capital growth and no
income, the needs of the income beneficiary would not be fulfilled
and thus the trustees would not have invested in a suitable
investment. Advisers will be well placed to help trustees make
investment decisions in accordance with the terms of the trust.
This is particularly relevant when considering investment in life
assurance investment bonds which are, of course, non-income
Trustees must act unanimously
As a general rule, trustees must normally act unanimously in any
decisions they make, although there are a number of exceptions, for
example, the trustees of a charitable trust may act by majority
Trustees must keep proper records and
Trustees should keep records of any changes they make to the
investments and of money paid or loaned to a beneficiary. They
should also keep records of any professional advice they may have
received. They also have a fundamental duty to maintain and prepare
accounts and to attend to compliance obligations such as the
completion of tax returns. In addition, all other trust
documentation, for example deeds relating to the trust, must be
kept up to date.
Trustees must provide information to beneficiaries upon
Trustees must produce, on request, information and documents
relating to the trust when required by the beneficiaries. This
right extends to all beneficiaries so would include those under a
discretionary trust. Trust documents would include the trust deed,
accounts, legal advice, letter of wishes etc.…
Trust property must be secured
Trustees are under a duty to ensure any debts are recovered
otherwise they would be breaking the terms of the trust. So, in
cases where, say, a loan is made to a beneficiary the trustees must
take steps to make sure that any loan will be repaid.
Trustees must not use trust property to benefit
Trustees are not entitled to make a profit from the trust. For
example, if the trustee is a professional, say an accountant, they
must not manage the trust in such a way as to benefit from extra
work unless they are specifically authorised to do so.
Trustees must hold regular meetings
Trustees should hold regular meetings, annually at the minimum,
to ensure that the trust is actively managed and the trust fund is
invested appropriately. All important decisions should also be
recorded and kept with the other trust documentation.
The overview provided above should be enough to illustrate that
the role of a trustee carries a vast amount of responsibility and,
as such, it is essential that anyone acting in the capacity of
trustee understands what is required of them before agreeing to the
Dividends and mixed/multi-asset funds
(AF4, RO2, CF2, FA7)
The arrival of the personal savings allowance and dividend
allowance in 2016/17 raises some interesting questions about the
use of mixed funds (ie. funds which earn interest and dividends on
The rules for distributions from collective
funds currently offer the opportunity to 'convert' interest into
dividend income and vice versa for individual investors. Ignoring
the complexities of property authorised investment funds (PAIFs)
and tax-elected funds (TEFs):
- If the value of qualifying investments (broadly cash and
interest-paying securities) exceeds 60% of total fund value then
any distribution is classed as an interest payment and, for
individual investors, 20% tax is currently deducted at source. This
may change in 2016/17, when the personal savings allowance is
introduced - the government is currently consulting on its options,
which include making fund interest payments gross.
At present, the situation is that any share dividends received by
an interest-paying fund are effectively double taxed, although for
funds held within an ISA or pension plan, the 20% tax is either not
deducted or can be reclaimed by the plan manager.
- If the 60% qualifying investment threshold is not breached,
then any distribution is classed as a dividend and interest
received by the fund is subject to 20% corporation tax (matching
basic rate). As the distribution is a dividend, it is made with a
non-repayable 10% tax credit in 2015/16 (but not in subsequent
years). This treatment renders such funds generally tax inefficient
in terms of interest income for ISAs and pension funds (other than
insured schemes, which benefit from the income streaming
Now consider the situation in 2016/17:
- The personal savings allowance will make the first £1,000 of
interest tax-free for basic rate taxpayers and the first £500
tax-free for higher rate taxpayers. The 350,000 (ish) additional
rate taxpayers will receive no allowance.
- The dividend allowance will similarly mean no tax is payable on
the first £5,000 of dividends, regardless of the investor's
marginal tax rate. However, once the allowance is exceeded, tax
rates are effectively 7.5% higher than currently.
A fund that mixes interest and dividend income
will mean that either one or other of the new allowances is used,
but not both. This could be a drawback if the aim is to maximise
the use of both allowances with the appropriate type of income.
Separate fixed interest and equity funds, paying interest and
dividends respectively may make more tax planning sense.
Even so, a fund that changes interest into
dividend income could be advantageous for a higher rate taxpayer
with no personal savings allowance remaining or additional rate
taxpayer, provided they have unused dividend allowance. In these
circumstances the interest will only suffer 20% tax in the fund.
However, once the dividend allowance is exceeded, the situation
reverses: the effective tax rate on interest income becomes 46% for
a higher rate taxpayer and 50.48% for an additional rate
Gross interest to fund
Corporation tax in fund @ 20%
Tax on dividend @ 32.5%/38.1%
Net interest income
A basic rate taxpayer exceeding their dividend
allowance suffers an effective tax rate on interest of 26%.
A similar argument applies to mixed funds which
transform dividend payments into interest distributions, although
there is much less scope for planning here given the smaller
personal savings allowance and the likelihood that the investor is
already in receipt of some interest from savings/deposit
Multi-asset funds are increasingly popular, but often not enough
thought is given to their distribution tax treatment. This will be
harder to overlook from next April.
HMRC action against "domestic" tax avoidance
Much publicity has recently been given to Follower Notices
(FNs), Accelerated Payment Notices (APNs) and Partnership Payment
Notices (PPNs). All of these are intrinsic to HMRC's strategy
for getting tax from those who have adopted what, in its view,
amount to aggressive tax avoidance schemes - without having to wait
for the outcome of the relatively long-winded assessment and
appeals process. This strategy is widely regarded as a bit of
a game changer; and it's where a lot of the recent publicity in
relation to tax avoidance has been focused, especially with the
recent failure to have the APN/PPN process ruled invalid by
Just to be clear, though, the APN process does not deny the
right to appeal against an assessment, just that if you have an APN
issued then the tax "at risk" will "rest" with HMRC pending the
outcome of the appeal as opposed to with the taxpayer. The
HMRC rationale for this is that "it's only fair" and "goes with the
territory" that you have to accept if you enter into a scheme that
has a DOTAS reference number. Of course, the recent proposals
(and draft regulations) to expand the number of schemes for which
DOTAS reference numbers can be issued is a really important part of
this strategy to increase the number of potential APN-generating
transactions that are in the hopper - so to speak.
The ability to "get tax in" on account and ahead of the appeals
process being considered has understandably been seen as highly
newsworthy. This is especially so as a number of relatively
rich and relatively famous people have been affected.
But, despite all of this interest in advance payments, it's
important that financial planners (and their clients) do not lose
sight of the much bigger picture in relation to the relentless HMRC
fight against what it sees as unacceptable, aggressive tax
avoidance. "Avoidance and legal interpretation" does, after
all, contribute around 24% of the tax gap of £35bn.
A really good reference point is the government Policy Paper,
"Tackling Tax Evasion and Avoidance". It has a very strong
focus on evasion and especially offshore (being a strong
contributor to the tax gap); but it also sets out a very clear and
multi-faceted strategy to combat domestic tax avoidance. Yes,
it was issued under the previous coalition government, but it was
issued in March this year and its contents remain, as far as we
know, in principle, very much part of the policy of this current
In the section of the paper on "Domestic Avoidance" HMRC states
that over a relatively short period the government has transformed
the way avoidance is tackled. Rather than just acting to block
individual abuses, the government's radical approach has altered
the underlying economics of avoidance by accelerating the payment
of disputed tax and stemmed the supply side by acting against the
highest-risk tactics of avoidance promoters. These actions have
been a significant leap forward but more can be done.
In the coalition (pre-election) Budget 2015, the government
announced it would introduce a range of new measures for those who
persistently enter into tax avoidance schemes which HMRC defeats.
Avoidance is the preserve of a small, persistent minority. The
measures the government has taken to date are working to reduce
that minority. Amongst those that remain, there are some who avoid
again and again, often using more than one scheme each year,
knowing that some will fail but hoping that one will not.
The government also announced that it is asking the regulatory
bodies who police professional standards to take on a greater lead
and responsibility in setting and enforcing clear professional
standards around the facilitation and promotion of avoidance to
protect the reputation of the tax and accountancy profession and to
act for the greater public good.
No one can be in any doubt regarding the level of official
commitment to stamping out what is thought to be aggressive
Excessive withdrawals from a donor's bank account are
sufficient evidence of an attorney's dishonesty
The Court of Appeal (Criminal Division) has held that, where a
general deficiency in a donor's funds can be attributed to
withdrawals made by an attorney acting under a lasting power of
attorney (LPA), this will be sufficient evidence to prosecute the
attorney for abuse of their position in accordance with section 4
of the Fraud Act 2006.
The case in point - R v TJC (2015 EWCA Crim 1276) -
involved an appeal against a decision of the Crown Court not to
proceed with the prosecution of a LPA attorney because there was no
evidence of specific fraudulent transactions. Instead, the case had
been based on a broad-spectrum evidence of withdrawals from the
donor's accounts by the attorney that had seemed unreasonably high
given the needs of the donor.
The Court of Appeal determined that it would be acceptable to
present an amended argument that the total value of the withdrawals
made by the attorney, when set against the reasonable costs that
would have been incurred over specific periods in providing for the
donor, showed that the attorney could not have been acting
This case is a reminder that, in extreme cases, the
investigation team at the Office of the Public Guardian may refer
suspected financial abuse by attorneys to the police. It also shows
that it may not be necessary to match withdrawals of specific
amounts from the donor's funds against specific expenditure for a
prosecution for financial abuse to succeed.
The August inflation numbers
(AF4, RO2, CF2, FA7)
Annual inflation on the CPI measure disappeared again in August,
with the rate falling from July's 0.1% to zero. The August inflation numbers from the Office for
National Statistics (ONS) were in line with market
expectations, which had also been a nil reading for last month.
The CPI showed prices rising by 0.2% over the month, whereas
they rose by 0.4% between July and August 2014. The CPI/RPI gap
widened by 0.2% this month, with the RPI increasing by 0.1% to 1.1%
on an annual basis. Over the month, the RPI rose by 0.5%.
The change in the CPI's annual rate was driven
by three main downward factors and two main upward factors,
according to the ONS:
Clothing and footwear: Overall prices
rose by 1.5% between July and August this year compared with a rise
of 2.6% between the same two months a year ago. Prices of clothing
and footwear usually rise between July and August as autumn ranges
start to enter the shops following the summer sales season.
However, the smaller rise this year follows a 2015 sales period in
which prices fell by less than a year ago.
Transport services: Overall prices rose
by 0.1% between July and August this year compared with a larger
rise of 0.8% between the same two months in 2014. Within transport,
the largest downward contribution came from motor fuels, with
diesel prices falling by 6.2p per litre this year compared with a
fall of 2.1p a year ago. Petrol prices also fell this year, by 2.4p
per litre compared with a fall of 1.8p a year ago. There was a
large downward contribution from sea transport, with fares rising
by less than a year ago. These effects were partially offset by a
small upward contribution from air fares, which rose by more a year
ago, particularly on long-haul routes. It is notable that air fares
have yet to react much to the oil price fall, a reflection of high
demand (blame the English 'summer') and the hedging strategies most
Year-on-year transport services prices are down
by 2.6%, worth about a 0.4% decline in the overall CPI. However,
the decline in the sector over 11 months (September 2014 - August
2015) is only 0.2%, a reminder that unless costs continue to fall,
the disinflationary benefit of the fall in oil prices will soon
Recreation and culture: Overall prices
fell by 0.4% between July and August this year compared with a fall
of 0.1% a year ago. The downward contribution came from a range of
sectors, most notably books and cultural services.
Furniture, household equipment and
maintenance: Overall prices rose by 1.7% between July and
August this year compared with a rise of 1.0% between the same two
months a year ago. The upward effect came principally from price
rises for furniture and furnishings.
Food and non-alcoholic beverages:
Overall prices were little changed between July and August this
year compared with a fall of 0.2% a year ago. Year-on-year prices
are down by 2.4%, worth about a 0.25% decline in the overall
Core CPI inflation (CPI excluding energy, food,
alcohol and tobacco) was an annual 1.0%, down 0.2% over the month
and unwinding half of last month's 0.4% jump. Three of the twelve
components of the CPI index are now left in negative annual
territory, one fewer than last month.
Fuel and food deflation continues to keep the headline CPI
figure in check although, as we mention above, the fuel effect may
soon disappear. The problem for the Bank of England remains much as
we have said before: a rise in base rates when CPI is zero or
thereabouts will be a hard sell. However, the Old Lady may gain
some transatlantic cover in the next few days, as the Federal
Reserve's long awaited September interest rate decision is due on
Thursday. US inflation (for July) was just 0.2%, although the core
rate was much higher at 1.8%.
The Fed holds back
(AF4, RO2, CF2, FA7)
After weeks of will-they-won't they, the US Federal Reserve has
decided not to raise interest rates - yet.
It is a long, long time from July to September.
The Federal Reserve, the US central bank, met on 28/29 July and set
hares running by tweaking its post-meeting statement to say that "…it will
be appropriate to raise the target range for the federal funds rate
when it has seen some further improvement in the labor market".
This was a repeat of content of the June statement, but with the
important addition - to Fed watchers - of the word
The unemployment rate subsequently fell from 5.3% in June and
July to 5.1% in August, a seven and a half year low. Given that the
Fed's statutory mandate is to "foster maximum employment and price
stability", the 5.1% result looked to many like meeting the first
half of the mandate. Theory (and economic history) suggest that
once unemployment has reached a low, wage pressure then comes to
the fore, leading to inflation. The standard central bank reaction
is then to raise interest rates to cool things down. Janet Yellen,
the head of the Federal Reserve, had spent some time since the July
meeting explaining that she expected rates to rise in 2015 for that
Ahead of the Fed meeting on 16/17 September there was a virtual
50/50 split among the experts about whether the talk would become
reality. In the event, the Fed blinked. It repeated its phrase
about wanting "some further improvement in the labor market", but
gave a nod to world developments since the end of July: "Recent
global economic and financial developments may restrain economic
activity somewhat and are likely to put further downward pressure
on inflation in the near term".
The Fed's decision leaves us back where we were after the July
meeting: waiting to see if the next meeting (on 27/28 October) will
be 'lift-off'. This is reinforced by background papers showing that 13 of the 17
officials on the Fed's rate setting committee still believe that
the "appropriate timing of policy tightening" is 2015. However,
the median estimate of the short-term rate in the final quarter of
2016 shrunk 0.2% from its June projection, to 1.4%.
The Fed may formally be the US central bank, but it recognises
its decisions have a global economic impact. With consumer
inflation quiescent (0.2% in September), the Fed probably felt it
could afford to kick the can six weeks down the road. That could
well mean another six weeks of volatility. On this side of
the Atlantic, the Bank of England has been given a further reason
to procrastinate on its rate rise.
Enhanced investment diversification for NEST
(AF3, RO4, CF4, JO5, FA2, RO8)
NEST (National Employment Savings Trust) is planning to enhance
its ability to diversify members' portfolios by procuring an
emerging market bond fund mandate. This will be added to the
existing 'building block' funds that underpin the scheme's default
NEST Retirement Date Funds and some of its alternative fund
The scheme is searching for an actively managed pooled emerging
market debt fund that blends bonds denominated in both local and
hard currencies (predominantly US$). Details of the procurement process can be found
Mark Fawcett, NEST chief investment officer, said:
"Emerging market debt is becoming a strategic holding for a
growing number of pension schemes. This is in part because emerging
market bonds can offer attractive yields in an otherwise low
yielding fixed income environment. We think it's appropriate to
have emerging market debt among the growing number of asset classes
NEST can call on to deliver better retirement outcomes for our
NEST is committed to searching out new opportunities for
diversification where we see potential benefits for our members.
Emerging market debt has evolved over the past two decades. What
was once a small market of US Dollar-denominated sovereign debt is
now a diverse mix of local and hard currency sovereign and
corporate debt totalling more than USD 2 trillion. We want members
to be able to reap the benefits of exposure to this
We believe an active management approach can take advantage
of opportunities while managing the portfolio risk by avoiding
unattractive or risky borrowers. By having an investment universe
of both hard and local currency debt, the manager will have the
ability to invest in the most attractive areas of the
The deadline for receiving tenders will be in October 2015 with
a view to awarding the contract in early 2016.
Summary of NEST's investment approach
- Unique default option comprising of 47 single-year target date
funds, risk managed for each year of retirement,
- Focused fund range including Ethical, Sharia, Lower Growth and
Higher Risk options with the same low charge as the default,
- Sophisticated risk management driven by best practice
investment techniques, high quality analysis and transparent
- Cost-efficient delivery of innovative solutions powered by
leading global fund managers,
- Clear investment communications designed with and for members,
employers and their advisers.
NEST in Numbers
As at 23 August 2015:
- NEST has over 2.3 million members.
- Our opt-out rate is 8 per cent on average and lower for younger
- There are over 25,500 employers using NEST, plus over 1,000
- There are over 3,000 NEST connectors helping employers use
- NEST has approximately £535 million invested on behalf of our
DC OPS: Governance standards and charge controls
(AF3, RO4, CF4, JO5, FA2, RO8)
Changes to from 6 April 2015 mean that many occupational defined
contribution pension schemes offering money purchase benefits will
have to meet new these requirements.
The key points to the changes are to:
- Ensure the scheme meets new governance standards and explains
how it has done so in an annual chair's statement.
- Ensure the scheme has an appointed chair who signs the annual
- Ensure the scheme is compliant with the new charge controls
where it is being used by employers to comply with their new duties
under the automatic enrolment legislation.
The Pensions Regulator (TPR) has developed a number of products to help with the
changes, including an essential guide to governance standards
and charge controls, a list of frequently asked questions, and a checklist to help complete the new questions
that have been added to the DC scheme return as a result of the
Police officers retirement: Indirect age discrimination
(AF3, RO4, CF4, JO5, FA2, RO8)
Following the Government's Comprehensive Spending Review in
2010, police forces were required to make 20% cuts in their budgets
over four years. Since 80% of their costs related to staffing
Forces across the country looked to reduce staff numbers. Police
Forces tended to use Regulation A19 forcing Police officers that
had completed 30 or more years' service to retire on full
Using Regulation A19, clearly disadvantaged officers over the
age of 48 and those affected argued indirect age discrimination.
Indirect age discrimination is not unlawful if justified as being a
proportionate way of achieving a legitimate aim. An earlier
Employment Tribunal decision ruled that the use Regulation A19 had
been discriminated against on the grounds of age.
Leave to appeal was allowed. That appeal has now been held, in
the Employment Appeal Tribunal, West Midlands Police v Harrod & Ors,
Regulation A19 allows a Police Officer to be forced to retire
where their retirement would be in the general interest of the
efficiency of the force. However it could only be applied to those
officers who had served long enough (i.e. 30 years) to be in
receipt of 2/3 Annual Pensionable Pay. Thus, the restriction
ensured that only those best able to suffer the financial
consequences of enforced retirement are subject to it.
This also meant of course that only those officers over the age
of 48 could be forced to retire and this is exactly what happened
when five police forces had to make manpower savings.
The claimants won their claims of age discrimination at the
Employment Tribunal, the Employment Tribunal rejecting the defence
of justification, saying that there were a number of alternatives
that meant that enforced reliance on regulation A19 was not a
proportionate means of achieving a legitimate aim. The respondents
The Employment Appeal Tribunal
Though the Tribunal was right to conclude that discrimination
potentially occurred when the Forces chose to use A19, it did not
focus upon the fact that what was discriminatory was inherent in
A19 itself, and that there was nothing inherently age
discriminatory in the practice of the Forces independently of that
within the terms of A19 itself.
The evidence before it required the Tribunal to hold that
certainty of achieving the necessary efficiencies was an essential
part of the aim or means, and that there was no other way in which
the aim could be achieved. It fell into error by failing to apply
the principles in Benson and Blackburn, and to enquire whether the
adoption of A19 was a reasonably necessary means of achieving the
aim of the Force's scheme: it was not for it to manufacture a
It wrongly concentrated on the process, and reasoning, adopted
by the Forces when deciding to utilise A19, rather than enquiring
whether at the date of the hearing before the Tribunal the use of
A19 was proportionate (and hence justified, objectively). It
applied too stringent a standard of scrutiny, and did so in part
because it failed to engage with the fact that Parliament had
chosen to make A19 in the terms it did, wrongly thought A19 was a
provision intended to provide security of tenure (which it
demonstrably did not, since it allowed for the opposite), and
failed to analyse the reasons of social policy which underpinned
the restriction of the use of A19 to those who had an immediate
pension entitlement. It wrongly put forward as alternative but less
discriminatory means of achieving the same object three matters two
of which were entirely speculative, and none of which offered the
The Employment Appeal Tribunal upheld the appeal.
Police officers are not employees, and their office will only
terminate (unless found guilty of misconduct or capability) upon
Regulation A19 of the Police Pensions Regulations 1987 allows
for retirement of officers who meet certain criteria, if doing so
is in the general interest of efficiency.
Overturning the employment tribunal's judgment, the Employment
Appeal Tribunal found the only way the forces could be certain of a
reduction in officer numbers was by use of A19, since there was no
power to make a police officer redundant, and their actions were