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Pensions Bulletin 2019/05

Pensions & benefits
Donna Matteucci Senior Consultant

Proposals to overhaul UK stewardship regime published

On 30 January 2019 significant changes were proposed to UK arrangements for stewardship in co-ordinated announcements from the Financial Reporting Council and the Financial Conduct Authority. They relate to how investment managers and asset owners (such as pension schemes and insurers) monitor assets and service providers, engage issuers and hold them to account on material issues, and publicly report on the outcomes of these activities, to create sustainable value for beneficiaries, the economy and society.

Three documents were published:

  • The overdue FRC consultation, which runs until 29 March 2019, on a revised UK Stewardship Code (see Pensions Bulletins 2017/52 and 2018/29)
  • An FCA consultation, which runs until 27 March 2019, on proposals to implement the elements of the revised EU Shareholder Rights Directive (SRD II – see Pensions Bulletin 2017/02) that fall within the FCA’s regulatory perimeter; and
  • A joint FRC and FCA discussion paper which calls for input by 30 April 2019 on how best to encourage the institutional investment community to engage more actively in stewardship of the assets in which they invest

A revised UK Stewardship Code

The FRC has rewritten and significantly strengthened the Stewardship Code which was last updated in 2012. The revised Code will apply to signatories who are asset owners, asset managers and service providers. The proposed changes include:

  • An expansion of scope from UK listed equities to all assets
  • Replacement of the seven existing “comply or explain” principles by ten “apply and explain” principles and 27 “comply or explain” provisions for asset managers and asset owners
  • Separate principles and provisions for service providers such as investment consultants and proxy voting advisers; and
  • Enhanced reporting by signatories, namely a statement of their stewardship policies and practices plus annual reports setting out the stewardship activities they have undertaken and outcomes achieved

Most notable amongst the new principles are:

  • Additional requirements for signatories such as disclosing how their purpose, values and culture enable them to meet their obligations to clients and beneficiaries
  • Clarification that signatories are expected to take into account material environmental, social and governance (ESG) issues, including climate change, when fulfilling their stewardship responsibilities. This aligns the proposed Code with the revised Statement of Investment Principles (SIP) requirements for pension schemes that were published in September 2018 (see Pensions Bulletin 2018/36)

Implementing the Shareholder Rights Directive

Meanwhile, the FCA’s consultation covers the SRD II provisions that apply directly to FCA-regulated financial services firms (broadly asset managers and insurers) and to issuers in respect of related party transactions. Under the proposals, asset managers will be required to:

  • Develop and publicly disclose (on a comply or explain basis) an engagement policy and disclose annually how this policy has been implemented; and
  • Disclose to asset owners’ information about how their assets are being managed, including
    • How their investment strategy and its implementation contribute to the medium to long-term performance of the assets
    • Whether, and if so how, they make investment decisions based on an evaluation of medium to long-term performance, including the non-financial performance, of the companies they invest in; and
    • Whether any conflicts of interest have arisen in their engagement activities, and, if so, what they are and how the asset manager has dealt with them

The proposed changes to the FCA handbook aim to establish a minimum regulatory baseline by implementing the relevant SRD II provisions in a proportionate manner having regard to UK conditions, with the Stewardship Code promoting higher standards beyond this. As currently, FCA-regulated firms that manage assets for professional clients will need to comply with the Stewardship Code or explain their alternative approach.

The consultation assumes that the UK will be required to implement SRD II by 10 June 2019 under an EU withdrawal implementation period – in which case the FCA’s proposals will apply from the start of the first financial year following 10 June 2019. In the event of a no-deal Brexit, the FCA will not proceed with the current proposals, but consult on revised proposals once the Government has decided how to proceed.

The FCA says that the DWP plans to implement SRD II requirements for better engagement and disclosure for occupational pension schemes (whether DB or DC) largely through existing legislation. This would seem to be a reference to the SIP changes effective from 1 October 2019.

The FCA/FRC discussion paper

Finally, the joint discussion paper covers stewardship and why it matters, what effective stewardship looks like, key challenges to effective stewardship and the scope of the regulatory framework for stewardship. It seeks views on the proposed balance between regulation and the Stewardship Code (as set out in the consultation papers) and how to deal with specific issues such as the institutional, asset class and geographical scope of the regulatory framework.


The revised Stewardship Code, if widely adopted, will significantly change monitoring, engagement and voting practices across the UK investment industry.

The proposed FCA rules and FRC Code will affect many asset managers of UK pension schemes. The enhanced disclosures should make it easier for trustees to understand how their managers are exercising stewardship on their behalf. This will support them in implementing their own engagement policies (to be documented in the SIP by 1 October 2019).

FCA publishes rules and guidance to improve fund manager transparency

The Financial Conduct Authority has published new rules and guidance to improve the quality of the information available to consumers about the funds they invest in. This initiative has its roots in the FCA’s asset management market study (see Pensions Bulletin 2017/27) which presented evidence of weak price competition in many areas of the asset management industry.

These new rules and guidance were consulted on last April (see Pensions Bulletin 2018/15) and complement separate rules finalised then to ensure that fund managers act as agents of investors in their funds.

The FCA’s now finalised rules and guidance:

  • Set out how fund managers should describe fund objectives and investment policies to make them more useful to investors
  • Require fund managers to explain why or how their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund
  • Require fund managers who use benchmarks to reference them consistently across the fund’s documents
  • Require fund managers who present a fund’s past performance to do so against each benchmark used as a constraint on portfolio construction or as a performance target; and
  • Clarify that where a performance fee is specified in the prospectus, it must be calculated based on the scheme’s performance after the deduction of all other fees

The new rules and guidance and the guidance related to benchmarks come into force on 7 May 2019 for new funds and on 7 August 2019 for existing funds. The FCA’s rules on performance fees also come into force on 7 August 2019. The FCA expects fund managers to take its guidance on fund objectives into consideration when reviewing fund documentation with immediate effect.


The intention is that these reforms will make it easier for investors to choose the best fund for them and help them achieve their investment objectives. The performance fee requirement is intended to promote fairness.

HMRC confirms Lloyds GMP inequalities case gives rise to pensions tax issues

HMRC’s latest pension schemes newsletter covers a number of topics, with perhaps the most notable item being an acknowledgment that HMRC is considering the pensions tax issues arising from the Lloyds Bank judgment on GMP inequalities and that it will give more information and advice on this through pension schemes newsletters in the coming months.

Other items include the following:

  • A revision to recent incorrect guidance to scheme administrators on how they should report death benefits that are entirely non-taxable on the Real Time Information (RTI) online service
  • A reminder that the 31 March 2019 Master Trust authorisation application deadline is looming; and
  • More information on the January 2019 notification of residency status reports and the annual return of information declaration for those schemes that operate the relief at source method of tax relief on member contributions

HMRC has also dropped “and Register” from the name of one of its online services, which is now called “Managing Pension Schemes”.


Many tax traps can be set off by schemes as they respond to the Lloyds judgment – both in terms of “business as usual” benefit processing and when they come to implement inequality resolution solutions, so it is good to hear that HMRC is “on the case”. However, there is much to be done as this codified regime simply did not envisage such a situation from ever arising.

DWP looks to encourage DC schemes to invest in illiquid assets and also to “bulk up” through consolidation

The DWP has launched an interesting and wide-ranging consultation on Investment Innovation and Future Consolidation of occupational DC schemes.

The consultation sets out three proposals to facilitate investment by such schemes in less liquid assets such as smaller and medium-sized unlisted firms, housing, green energy projects and other infrastructure. These will:

  • Require larger DC schemes to document and publish their policy in relation to investment in illiquid assets, and report annually on their approximate percentage allocation to this kind of investment
  • Require some or all smaller DC schemes to conduct a triennial assessment of whether their members may receive better value if the scheme consolidated into a larger scheme; and
  • Offer an additional method of assessment for compliance with the charge cap, so that performance fees, which are commonly found in funds that offer illiquid assets, can be taken into account

The first and third of these proposals follow from the announcements made in the October 2018 Budget about enabling DC pension funds to become key institutional investors in long-term “Patient capital” (see Pensions Bulletin 2018/43). The Government believes this could be a “win-win” situation whereby members of DC schemes, who are invested for the long-term, could benefit from the illiquidity premium such investments can confer and UK plc can also benefit from having another source of long-term investment to tap into.

The Government is proposing that schemes in scope (ie above a certain size where investment in illiquid assets is feasible) are required to state their policy about this in their Statement of Investment Principles and then report on this annually via their Implementation Statement (a new requirement coming in from October 2020 – see Pensions Bulletin 2018/36). The Government wants to avoid generic statements and so is proposing that quantitative data should be included in the Implementation Statement.

Up to now, one of the (many) reasons put forward as to why DC schemes do not invest in illiquid assets is that such investments frequently have charges partially or completely based on variable performance fees. It is commonly held that performance fees make it hard to determine whether a pension arrangement is within the “0.75%” charge cap mandated for default arrangements. To resolve this, the Government has set out an additional method for measuring compliance with the charge cap where performance fees are involved. In broad summary, this involves firstly carrying out the current “prospective method” of assessment for the fixed part of fund fees as normal and checking this is below 0.75%. Then an “additional assessment” will be carried out to check that the fixed fees and maximum performance fee are in total less than 0.75%.

The second main proposal in the consultation looks at another reason often cited as to why DC schemes do not invest in illiquid assets. That is that small DC schemes lack the scale required to be able to access illiquid investments in a satisfactory way. The Government’s proposal to resolve this is to suggest that small DC schemes should be encouraged to consolidate. Various ways of nudging trustees to do this are suggested including:

  • Carrying out a triennial assessment as to whether scheme members may receive better value if consolidated into a larger scheme – and reporting the conclusions in the DC Chair’s Statement. No details are included as to how this assessment would be carried out but, if it goes ahead, statutory or non-statutory guidance would be issued and it seems very likely that this would require, for example, trustees to take advice
  • More focussed campaigns asking schemes which fulfil certain criteria to consolidate or explain why they should not consolidate

Finally, the consultation also seeks to clarify which particular costs and charges are subject to the 0.75% charge cap and includes an updated non-exhaustive list of costs and charges intended to be in scope of the cap. The Government asks whether any further clarity is required.

A press release accompanied the consultation which closes on 1 April 2019.


The proposals to facilitate investment in patient capital are not unexpected and would seem to be workable, but it will be interesting to see how people respond to the points of detail in the consultation, for instance will there be consensus around the DWP’s proposed threshold of which schemes have to explain their policy in relation to illiquid investments?

The discussion around consolidation of DC schemes is perhaps more surprising. It is no secret that the Pensions Regulator is in favour of DC consolidation (primarily because its research shows that small schemes tend to have poorer governance), but we believe that this consultation is the first time that the DWP has shown its colours on this topic (in contrast to DB consolidation – see Pensions Bulletin 2018/50).

DC occupational schemes continue to grow at pace but consolidation is also starting to pick up

This is demonstrated by the wealth of statistics contained in the Pensions Regulator’s DC Trust: presentation of scheme return data 2018-2019 released last week.

Overall the statistics show a vibrant and rapidly expanding DC pension space, albeit one that is undergoing consolidation. There are many interesting nuggets to pick out but some that caught our eye are:

  • 61% of all private sector workplace pension members (including active, deferred and pensioner) are in DC schemes, and 90% of all those currently saving (active members) are investing into a DC scheme
  • Asset values (for occupational DC schemes with 12 or more members) now exceed £60 billion, an increase of 172% since the beginning of 2011, and up by more than £10bn in the last year, whilst contributions increased by 22% last year, to £6.5bn
  • 99% of members of DC schemes with 12 or more members are invested in the scheme’s default fund
  • Membership of Master Trusts now exceeds 13.4 million – a significant rise from being nearly 10 million last year – whilst assets have almost doubled in the last year, increasing by £13bn from £16bn to £29bn
  • Average assets per membership at retirement increased last year, from £9,000 to £9,800; and
  • Transfers in to DC schemes have increased from £2 billion to almost £5 billion

On this last point, David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at the Pensions Regulator states in his informative and readable blog about these statistics that most of the increase in transfer-in activity has been driven by consolidation of schemes into Master Trusts.


For those who still had any doubts, the facts are clear that in terms of numbers of members DC pension provision is now the dominant force in UK pensions. And within the DC space, the rise of Master Trusts continues unabated.

However, numbers of members is only half the story. The great Auto-Enrolment Experiment will only be deemed by history a success if it improves member outcomes and an average pot size at retirement of £9,800 suggests this is still unlikely to be the case for many. There is a strong likelihood that those middle-aged individuals who missed out on Final Salary pensions but will not benefit from the inertia-based lifetime savings model of auto-enrolment will find themselves caught in a pensions hinterland of a financially uncomfortable retirement.

Brexit “no deal” planning – revised DWP pension regulations approved

Last October’s “no deal” pensions regulations (see Pensions Bulletin 2018/44) have now completed their second outing in Parliament after an error was discovered in them – not by Parliamentarians, but by pensions practitioners.

The regulations “domesticate” much of DWP pensions law, including that applicable to the Pensions Regulator, Pension Protection Fund and the Financial Assistance Scheme, by replacing references to the European Union and the European Economic Area with references to the UK etc. This is to ensure that should we leave the EU without concluding a withdrawal agreement, and as a consequence there is no transition period, DWP pensions law works in the post-Brexit environment as well as it did when we were members of the EU.

However, whilst for the most part it is simply a case of spotting an EU or EEA reference in the canon of DWP law and replacing it with something more UK-centric, sometimes that logic does not work. And when it became clear that one of the consequences of this approach was that post-Brexit occupational pension schemes would not be able to invest in any regulated market outside the UK (because the EU references had been removed and the definition simplified) something had to be done.


This particular issue is now fixed but thinking more widely one wonders what other unpleasant surprises are lurking in the hundreds of other Brexit-inspired statutory instruments that have made their way through Parliament, without any industry consultation and the many hundreds more that need to be rushed through.

Public service pensions – future service improvements paused

Elizabeth Truss, Chief Secretary to the Treasury, has announced that the Government is pausing an element of the valuations of public service pensions following a court ruling on part of the 2015 public sector pension reforms. In December 2018 the Court of Appeal found that transitional provisions offered to some older members as part of the reforms amounts to unlawful direct age discrimination – a decision on which the Government intends to appeal.

Last September Ms Truss announced that provisional valuation results indicated that the “cost control mechanism” for assessing the value of pensions, introduced as part of the 2015 reforms, would become engaged, triggering automatic changes to future service member benefits (see News Alert 2018/06). But given the potentially significant but uncertain impact of the Court of Appeal judgment, she is now saying that it is not possible to assess the value of the current public service pension arrangements with any certainty. So that part of the valuations that trigger automatic changes to member benefits is being paused until there is some certainty on the point before the Courts. However, the part of the valuations which set employer contributions will continue.


Although there has been an adverse reaction from some quarters to this announcement, it seems that the Government had little choice given that if it loses its case in the Supreme Court, the necessary adjustments it will have to make will likely impact future service benefits for many public sector workers and potentially negate the future service improvements that the cost control mechanism was indicating might have to be delivered.

FRC looks at accounting for multi-employer schemes

The Financial Reporting Council is proposing an amendment to financial reporting standard FRS 102, to specifically address the transition from DC to DB accounting for a multi-employer pension scheme.

In order to limit the different interpretations that currently exist in financial statements, the FRC is proposing to require the difference between, any liability for the contributions payable arising from an agreement to fund a deficit and the net defined benefit liability recognised when applying DB accounting, to be recognised in other comprehensive income, effective for accounting periods beginning on or after 1 January 2020.

At the same time, the FRC is also proposing amendments to FRS 101 to address an inconsistency in definition which affects insurance companies.

Consultation closes on 31 March 2019 and the intention is that this change will apply for accounting periods beginning on or after 1 January 2020 with early application permitted.

PPF compensation cap and levy ceiling rise in line with average earnings

The cap on PPF compensation will rise to £40,020.34 from 1 April 2019 and the overall pension protection levy “ceiling” for 2019/20 will be £1,058,176,617 – as confirmed in The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order 2019 (SI 2019/159) made by the DWP on 31 January 2019.

The compensation cap will increase by 2.6%, which is the increase in general level of earnings to the year ending April 2018. This is applicable at age 65, before adjustments for service in excess of 20 years or the 10% reduction.

The overall levy ceiling will increase by 3.3%, which is the increase in general level of earnings to the year ending July 2018. The actual maximum levy the PPF can take in 2019/20 is further constrained by other rules and is substantially less than the £1 billion permitted by this particular Order.

Mortality improvements – less emphasis on past data may be appropriate

The actuarial profession has published the results of its recent consultation on the core (default) value of the “period smoothing parameter” (see Pensions Bulletin 2019/04). As expected, this will be reduced in the next mortality projections model CMI_2018, to be more responsive to the reduction in mortality improvements seen recently. The CMI (Continuous Mortality Investigation) will also introduce a new addition to enable users to fine tune the mortality improvements between different populations.

As usual, CMI highlights that these core parameters reflect the general population of England and Wales, and urges users to ensure that they use values that are appropriate for their specific populations.

Spring Statement date set

HM Treasury has announced that the Government will publish its Spring Statement on 13 March 2019.


Under Philip Hammond’s new regime, this would not be a fiscal event as the Budget is now delivered in the Autumn, but Brexit makes this no normal year. What is currently billed as a Spring Statement could well turn into an Emergency Budget. We shall have to wait and see.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.