It’s the year of the rooster – what are we cock-a-doodle-doing in pensions?

After a busy 2016 in the pensions world it looks likely that 2017 will be just as eventful. The UK government will be following up on various consultations and finalising numerous pieces of legislation that are currently in draft.

The planned green paper on DB pension reform should also make for some interesting reading, especially if the government takes up any of the recommendations made by the Work and Pensions Committee on 20 December 2016 following its consideration of the BHS pension plan and interviews with (amongst others) Sir Philip Green, Chief Executive of the Pensions Regulator (Lesley Titcomb), Chief Executive of the Pension Protection Fund (Alan Rubenstein), former Pensions Ministers Steve Webb and Baroness Altmann CBE and Chief Executive of the Pension and Lifetime Savings Association (Joanne Segars). See our recent blog on this.

Pensions legislation expected to come into force during 2017 includes:

  • The implementation of an increase in PPF compensation for long service pension plan members.
  • The introduction of a new income tax exemption and NICs disregard to cover the first £500 worth of pensions advice provided to an employee in a tax year.
  • An increase in insurance premium tax to 12% from 1 June 2017, potentially prompting some employers to review their employee benefit programmes.
  • Rules around the authorisation and administration of master trusts.

What else could there be that will impact on the sponsoring employers and trustees of pension plans in 2017?

Trustees, as usual, will have a bit of a minefield to negotiate:

  • They will need to comply with the Insurance Act 2015 when renewing or taking out insurance – in particular, trustees will need to be familiar with the new duty of ‘fair presentation’ and make sure that they supply all relevant data to the insurer.
  • For those trustees who operate a formerly contracted-out salary-related pension plan and who wish to take advantage of the trustee modification power to change the date from which fixed rate revaluation is used in respect of GMPs, will need to pass an appropriate resolution before 6 April 2017.
  • Trustees will also need to take action during 2017 to ensure trustees are compliant with the new General Data Protection Regulation by 25 May 2018.

Employers will remain occupied by the usual funding issues for occupational pension plans and more widely by automatic enrolment:

  • Uncertainty in the global economy is likely to impact on inflation and interest rates. If we assume that recent interest rate rises by the US Federal Reserve are followed by a similar rise in the Bank of England base rate, that will have an effect on pension plans. The precise impact depends on where the plan is in its investment cycle but for those who are not already liability matched it is likely that liabilities will be reduced and pressure on corporate sponsors eased.
  • Whilst the largest employers continue to implement three yearly re-enrolment, the smallest employers are reaching their first staging date.
  • Employers bringing in new recruits in reaction to the Apprenticeship Levy (from April 2017) will also need to consider their pension entitlements. See our recent blog on this subject.

Finally, the Courts will also be busy during 2017 with various questions of pensions law. IBM (employer’s duty to act in good faith towards pension plan members), British Airways (trustees’ power to amend a plan to grant discretionary pension increases), Bradbury v BBC (capping pensionable salaries), Hampshire v PPF (level of cap on PPF compensation), Safeway v Newton (equalisation), Steria (requirement for actuarial certificates) and United Biscuits (reclaiming VAT on pension fund management services) are all set to make pensions headlines this year.

Watch this space!

Choppy waters (a tale of tycoons, yachts and pension plans)

Just as the demise of Robert Maxwell led to a sea change (excuse the pun!) in the governance of pension plans via the Pensions Act 1995 it seems that the equally high-profile collapse of BHS may herald a major shift in the regulation of pension plans.

The Work and Pensions Committee report on defined benefit pension schemes published on 21 December 2016 – essential holiday reading – makes a raft of recommendations which, if implemented, would have an impact on the roles of both the Pensions Regulator and the Pension Protection Fund.

The aims of the recommendations are clear:

  • avoiding another BHS
  • avoiding a knee-jerk reaction, and
  • avoiding box-ticking regulation.

The Regulator came in for a fair amount of criticism by the Committee regarding its involvement with BHS, not only in relation to the sale of the company but also in connection with the delay in intervening following the pension plan valuation process, in which a 23-year recovery plan had been agreed. The Committee wants the Regulator to be ‘nimbler’ so it can intervene earlier ‘to nip potential problems in the bud’. It also suggests changes to the valuation timetable and the acceptable length of recovery plans.

Perhaps the main headline-grabbing recommendation of the Committee is the proposal that the Regulator should have the power to impose fines in addition to a Contribution Notice or Financial Support Direction that would treble the amount demanded. The Committee sees this power as a ‘nuclear deterrent’ to incentivise sponsors to seek clearance for corporate transactions which may be detrimental to their pension plans. However, the Committee does not want clearance to be mandatory in all cases, but suggests it ought to be in certain circumstances.

In situations where a sponsor is facing insolvency, the Committee noted that Regulated Apportionment Arrangements are rarely used despite potentially providing an outcome that is better for pension plan members, sponsors and the PPF than the insolvency of the sponsor. It describes the RAA process as an emergency measure that does not operate at an emergency pace and recommends streamlining the process.

With regard to the sustainability of pension plans, the Committee recommends enabling trustees, with the approval of the Regulator, to:

  • consolidate small pension plans into an ‘aggregator fund’, and
  • change the indexation of pension benefits, which could be conditional on arrangements to revert to the original indexation ‘when good times return’.

It suggests that the PPF manages the aggregator fund.

The Committee also calls on the PPF to consult on changes to the calculation of the PPF levy to incentivise good pension plan governance and ensure certain types of sponsors such as SMEs and mutual societies are not unfairly disadvantaged.

The Committee, in what seems to be a departure from the aims set out above, also recommends a relaxation of the rules for taking small DB pensions as a lump sum and providing members who might wish to utilise the option with access to advice and guidance.

It’s fair to say that in its report the Committee presents a clear view as to the problems it believes face DB pensions and their regulation and the measures that are necessary to address these problems.

The Government is due to publish a Green Paper on DB pensions in the near future and it will be interesting to see how many of the Committee’s recommendations are included.

Where pensions and employment law meet – what to look out for in 2017

The first half of 2017 will see the introduction of the apprenticeship levy in the UK, which is expected to encourage larger employers to take on more apprentices.  Where an employer’s payroll is more than £3m, there is no escaping the levy and many will seek to recoup their levy cost by hiring new employees as apprentices.  As with any new workers, employing apprentices will create pension responsibilities, which employers should bear in mind.  Whilst the size of an employer for apprenticeship levy purposes is different to the way in which the size of an employer is determined for automatic enrolment purposes, it’s likely that if you are subject to the apprenticeship levy you will have passed your ‘staging date’ and will already be subject to the pensions automatic enrolment legislation.  This means that you will need to assess each new apprentice to decide what pension obligations will apply.

In respect of a school leaver apprentice, there will be no obligation to automatically enrol him or her into a workplace pension plan as the minimum age criterion (of 22) will not be met.  However, your new apprentice would still have an entitlement to opt into a workplace pension plan.

Depending upon the number of hours your new apprentice undertakes in any given period, he or she might also be entitled to employer pension contributions if he/she does choose to opt into a workplace pension plan.  An apprentice will be eligible for employer pension contributions if weekly earnings are above £112.  An apprentice aged 19 or under (or in the first year of apprenticeship) will be paid a minimum of £3.40 for each hour of work and training.  A 37 hour week would mean weekly earnings in excess of £112, entitling the apprentice to opt into a pension plan with employer pension contributions.

If the apprentice’s weekly earnings are £112 or less he/she would still have the right to opt into a workplace pension plan, but would have no entitlement to employer contributions and the plan offered could be different to your automatic enrolment pension plan.

In both cases, you would need to inform the apprentice of his/her rights so far as joining your workplace pension plan is concerned.

Also in 2017 we will see the end of salary sacrifice for most types of benefits.  However, it will still be possible to sacrifice salary in return for a higher employer pension contribution.   The Government has said that it has no plans to change that at this time.  Salary sacrifice is a way for employers to save on national insurance contributions and, of course, for those employers that might potentially be subject to the apprenticeship levy, the more salary that is sacrificed the lower their payroll bill will be.  This might mean that some employers, who would otherwise be subject to the new apprenticeship levy, would fall beneath the annual trigger threshold of £3m.

If you have any queries in connection with the apprenticeship levy or in relation to your pension obligations as an employer (either generally or in respect of a specific employee) please speak with your usual Squire Patton Boggs contact.  Alternatively, please contact Matthew Lewis – Partner in the Labor and Employment Team ( or Matthew Giles – Partner in the Pensions Team (

EU Directive on Institutions for Occupational Retirement Provision (IORP II)

On 8 December 2016 the European Council published that it had adopted IORP II, which was approved and agreed by the European Parliament on 24 November 2016.

The European Council set out in its publication that the directive is aimed at facilitating the development of institutions for occupational retirement provision (IORPs) and better protecting pension plan members and beneficiaries as well as achieving the directive’s four specific objectives. These are:

  • clarifying cross-border activities of IORPs;
  • ensuring good governance and risk management;
  • providing clear and relevant information to members and beneficiaries;
  • ensuring that supervisors have the necessary tools to effectively supervise IORPs.

We examine each of these objectives in more detail below.

Cross-border activities

The directive aims to facilitate cross-border activities by clarifying the relevant procedures and removing unnecessary obstacles. In particular, the full funding requirement in relation to cross border plans has been tempered slightly.

Additionally, some confusion had arisen under the original IORP Directive, as to whether pensioners emigrating to one member state, whilst drawing a pension earned in another member state, might render a plan cross border.   The recitals of the directive clarify the position on this “where the sponsoring undertaking and the IORP are located in the same Member State, the mere fact that members or beneficiaries of a pension scheme have their residence in another Member State does not in itself constitute a cross-border activity”.

The directive also provides additional measures regarding cross-border transfers including the requirement for national regulator permission to such transfers.

Good governance and risk management

Key functions

IORP II has introduced some detailed requirements in relation to the governance of IORPs. IORPs are to have in place key functions, which include risk-management, internal audit and, where applicable, actuarial.  Persons who effectively run the IORP, persons who carry out key functions and, where applicable, persons or entities to which a key function has been outsourced  must meet the requirements of being “fit and proper”.

Fit” means:

  • in relation to those persons effectively running the IORP, their qualifications, knowledge and experience are collectively adequate to enable them to ensure a sound and prudent management of the IORP;
  • in relation to those people carrying out key functions, their qualifications, knowledge and experience are adequate to properly carry out their key functions;
  • in relation to those people carrying out actuarial and audit key functions, they are also required to have professional qualifications.

To be considered ‘proper’ means to be “of good repute and integrity”.

Competent authorities are to ensure that they are able to assess whether persons who effectively run the IORP or carry out key functions fulfil these requirements.

Own-risk assessment

IORPs are required to carry out an own-risk assessment “in a manner that is proportionate to their size and internal organisation, as well as to the size, nature, scale and complexity of their activities”.

This risk assessment is to be carried out every three years or after any significant change in the risk profile of the IORP or of the pension plans it operates.

Many of the governance and risk management measures have similarities with the existing requirements and expectations placed on trustees of UK pension plans by domestic legislation and the Pensions Regulator.

Providing clear and relevant information to members and beneficiaries

The directive also sets out general principles in relation to the requirement for a “Pension Benefit Statement”, which should be a “concise document containing key information for each member taking into consideration the specific nature of national pension system and of relevant national social, labour and tax law.”

Ensuring that supervisors have the necessary tools to effectively supervise IORPs

The main objective of national regulators is required to be the protection of members and beneficiaries and to ensure the stability and soundness of the IORP.

Prudential supervision must include, where applicable, conditions of operation, technical provisions, funding of technical provisions, regulatory own funds, available solvency margin, required solvency margin, investment rules, investment management, system of governance and information to be provided to members and beneficiaries.

The general principles for prudential supervision should be forward-looking, a risk-based approach and comprise of a combination of off-site activities and on-site inspections.

Implementation of IORP and Brexit

Member States will have two years to transpose IORP II into their national law from 20 days after its publication in the Official Journal of the EU (publication is expected to be in early 2017). Based on current projections, the deadline for implementation of IORP II will fall before the UK’s exit from the EU, although the anticipated implementation deadline will fall very close to the expected timing of Brexit.  Post Brexit, IORP II may need to be observed under agreements established between the EU and the UK going forward, depending upon the outcome of the negotiations.


The slight relaxation on cross border requirements is helpful and the governance obligations should dovetail with the current direction of travel in the UK on improving governance. Trustees and plan sponsors should monitor developments and ensure the IORP requirements are included in business planning over the next year or so.

Populism, profit-shifting and UK pensions

The demand for corporates and wealthy individuals to adopt greater tax transparency continues to build momentum – the significance of the global reaction to it makes the recent Autumn Statement seem like chicken feed. The reforms being formulated could have a dramatic impact upon tax strategies and corporate governance generally. Whilst it will no doubt present a headache for some C-suite executives, it may make the job of a pension plan trustee easier when assessing the value and strength of the sponsoring employer, particularly where that employer is part of an international group of companies.

Recent developments in this area include:

  • In November 2015 the G20 endorsed an OECD action plan to tackle BEPS (Base Erosion and Profit Shifting) by large multinationals. This is attempting to target an estimated loss to global tax revenues of US$100 to 240 billion annually. In addition to the G20, it has involved a group of 80 developing countries.
  • On 12 April the European Commission proposed a directive obliging large multinationals to publicly disclose their tax and earnings in the European Union.  Separately EU member states have also agreed on a directive to automatically exchange amongst authorities tax-related information on the activities of multinational companies.
  • Since 30 June UK non-listed corporate entities are required to file with Companies House a record of their “Persons with Significant Control”.
  • On 24 November, more than 100 jurisdictions concluded negotiations on a multilateral instrument that will implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The signing ceremony will be in June 2017.

The combined effect of these developments and other is that top executives in large companies will be under increased pressure to ensure that the tax strategies employed in relation to their corporate and personal wealth are fair and reasonable. Even if no change of approach is necessary, they may need to comply with additional red tape.

Whilst this may present a challenge to corporates, the resultant increase in financial transparency may make the job of a pension plan trustee a little easier. A key role of a defined benefit occupational pension plan trustee is to understand the ability and willingness of the sponsoring employer to make good any funding deficit. It is often hard to identify the value of the so-called “employer covenant”, particularly where the sponsoring employer is part of a wider group of companies some of which have no direct obligation to the UK pension plan.

Even if the result of these developments is just greater corporate transparency, then it will help trustees undertake an analysis of where the value sits in the group and how easily it could be moved beyond the reach of the pension plan. The outcome of this analysis may be to agree a monitoring process or some preventative measures. If the impact of the trend is more dramatic and multi-national groups become less inclined to shift profits to lower tax jurisdictions, this may mean more profits remaining in the UK and the greater availability of funds for UK pension plans. Either way, this populist trend could be a rare example of a recent development which is making the role of a pension plan trustee a little easier.

Bringing UK “big business” into line: corporate governance reform

As trailed in our recent blog post, the green paper on the reform of corporate governance was published today by the Department for Business, Energy and Industrial Strategy (formerly BIS).  The paper sets out 14 questions for consultation.

The consultation covers three main areas:

  • executive pay, “which has grown much faster over the last two decades than pay generally and than typical corporate performance”;
  • strengthening the voices of employees, customers and wider stakeholders; and
  • corporate governance in large private companies (BhS springs to mind).

Executive pay

This takes the lion’s share of the questions.  Three are aimed at increasing the influence and engagement of shareholders in directors’ remuneration.  It is acknowledged that a binding vote on the remuneration report (as well as the existing binding vote on remuneration policy) could be tricky, since it would involve directors’ service contracts having to state that pay was conditional upon shareholder approval.  Views are sought on whether a binding vote should apply only to variable parts of the pay package (increase in salary, annual bonus and LTIP awards) or just to companies that have “encountered significant shareholder opposition to the remuneration report” (perhaps a vote against in the range 20% to 33% for the previous one or two years).  Alternatively, it is suggested that a remuneration policy must contain an upper threshold for all elements of pay and a binding vote at the AGM must be sought for any package that exceeds that threshold during the relevant year.  Another option is to make the remuneration policy subject to an annual vote (although it is admitted that this may encourage short-termism, which investors have all said they want to discourage), or to allow shareholders to require a binding policy vote sooner in the current three-year term in a case where the company’s circumstances change.  Finally the FRS could be asked to make the Corporate Governance Code more specific about how companies should engage with shareholders, particularly when there is a significant vote against the remuneration report.

One question asks whether more needs to be done to encourage shareholders to make more use of their votes, perhaps by making disclosure of institutional voting records mandatory, or by establishing a “senior shareholder committee” to scrutinise remuneration (whilst acknowledging that this would go against the UK’s long-established unitary board structure) and/or doing more to help individual investors to use their vote.

Suggestions for increasing the effectiveness of remuneration committees include requiring them to consult shareholders and the company workforce before formulating pay policy and requiring a director to have served on the committee for at least 12 months before becoming chair.

Then there is the vexed question of whether the ratio of the CEO’s pay to that of the “median employee” should have to be disclosed, as will be mandatory for US companies from January 2017 and as encouraged by the Investment Association in its recently-updated principles of remuneration.  Highlighted issues are “context is vital if ratio reporting is to add value” and the unintended consequence of encouraging companies to outsource or “offshore” their lower-paid employees.

The nettle of investors’ complaints about annual bonus targets not being disclosed is firmly grasped.  Certainly within the FTSE100 in the 2016 season, there was almost blanket reliance on the “commercial sensitivity” get-out allowed under the directors’ remuneration regulations, with most companies disclosing retrospectively the next year, some committing to disclose once the board considers the sensitivity has gone away and a very few saying never.

Finally in this section, should the release of LTIP awards be increased from a minimum of 3 years to 5 years?  This is currently encouraged by all investors’ guidelines and certainly within the FTSE100, there is already widespread compliance (albeit by varying routes), so this should be pushing at an open door.  Also, should “restricted shares” (annual share options with no performance conditions, just a requirement for the participant to remain employed) be used in preference to LTIP awards?

Strengthening the shareholder voice

Theresa May’s pledge in pre-PM days and since to have employee representation on boards has been largely watered down to questions as to how stakeholders, including employees, customers and other “interested parties”, can be given more say in board decisions, in particular how remuneration is structured.  Suggestions as to how this might be done include the creation of stakeholder advisory panels; the designation of a non-executive director (possibly a member of the remuneration committee) as the conduit to ensure that the views of interested groups, particularly employees, are put to the board; strengthening reporting requirements as to stakeholder engagement; and only as one option the appointment of stakeholder representatives to boards (acknowledging that election of representatives, potential conflict, delayed decision-making and confidentiality are challenges of this last approach and emphasising that this would not be made mandatory).  Ideas are invited as to which companies this should apply to – measured by number of employees or another size metric?  Should this aspect be legislative, code-based or voluntary?

Large private companies

According to the table of figures given in the paper, there are 33,000 private companies (excluding LLPs and subsidiaries of UK quoted companies) that have an annual turnover of more than £36 million or total assets of more than £18 million and 2,200 that have more than 1,000 employees.  Views are sought as to whether to strengthen the corporate governance regime applying to these companies, and if so, how – extend the Corporate Governance Code to them, or invite the FRC or the Institute of Directors to formulate a code specifically for them?  Which companies should be caught and what should be the size threshold?  Should non-financial reporting requirements for private businesses (for example, gender pay issues, modern slavery prevention, prompt payment practices), currently based on their legal form, be applied on the basis of a size threshold?

The deadline for responses is 17 February 2017.

Great Expectations: Hermes joins the fray on UK executive pay

Three publications over the last few weeks are particularly relevant for companies preparing their new remuneration policies for 2017 (including most of the FTSE100).

Hermes Investment Management recently published its “Remuneration principles: clarifying expectations“.  This is its first solo effort – it previously was part of a group of large investors who jointly published their remuneration principles in November 2013.  We understand that a draft of the paper was sent to the chairs of remuneration committees in September, presumably to be timely for their deliberations about renewing their remuneration policies.  Pretty radical stuff, this – the paper calls for a fundamental rethink of remuneration practices and a challenge to the level of executive pay packages.  As we have seen before, “much simpler, more transparent and less-leveraged” awards are encouraged.  The suggestion is even made of a move to paying nothing but entirely fixed remuneration, “based primarily on shareholdings, together with a cash salary similar to today’s levels”.  The remuneration committee should be more accountable and its chair should:

  • write annually to employees to explain the basis for the CEO’s pay in the context of the company’s and the individual’s performance; and
  • seek and take account of employee’s views on directors’ pay and report on this process in the remuneration report.

The other two releases were updates of existing guidelines.

As covered in more detail in our previous post, the Investment Association updated its Principles of Remuneration to reflect issues arising over the 2016 AGM season on which we have previously reported.  Amendments include:

  • less reliance by remuneration committees on consultants;
  • greater emphasis on sustainable business performance and designing structures which support the strategy of the company;
  • retention of their personal shareholdings even after directors leave the company;
  • a statement by the remuneration committee in the event of a (non-binding) vote of 20% or more against the remuneration report (we note that in the 2016 AGM season, some FTSE100 companies commented, and even amended their practice on grants, in response to smaller votes against);
  • a preference for outstanding awards to be rolled-over on a takeover, rather than become exercisable, and performance to date to be the determinant of the extent of early vesting; and
  • guarding against windfall gains as a result of changes in share price (particularly relevant in these times of high share price volatility since the Brexit vote).

Institutional Shareholder Services (ISS) also updated its proxy voting guidelines, effective for meetings from 1 February 2017.  In common with other guidelines, the amendments place increased emphasis on simplicity, long-termism, alignment with the company’s objectives and ensuring that rewards are not excessive, along with support for “companies to consider pay models which do not fully align with the typical structure found in the UK market” (head above the parapet, anyone?).  The head that should roll would be that of the chair of the remuneration committee, who should “be held directly accountable where major remuneration issues have been identified”.

Plenty for remuneration committees to think about then, with the gauntlet thrown down for them to step up to the plate (if that isn’t mixing metaphors too much).  It remains to be seen how many companies will be brave enough to think outside the tried and tested remuneration box ….




A brake on executive pay? More on employee representation on boards

Tucked away right at the end of Prime Minister’s questions yesterday, immediately before the Autumn Statement, was a very short question: “Does the Prime Minister believe that big companies should put a worker on the board?”  Given recent headlines such as “Theresa May backtracks on putting workers on company boards” (The Telegraph, 21 November) and “Theresa May: I won’t force companies to put workers on their boards” (The Guardian, 21 November), one might be forgiven for thinking that this was a planted question, perhaps indicating that the press had got hold of the wrong end of the stick on this issue.  But no, the question was from Gloria de Piero (Lab, Ashfield).

The background to this is of course the disquiet in the media and amongst the public about “excessive” levels of executive pay. Investors too are concerned, as shown by the numerous examples of significant votes (albeit non-binding) against the implementation of remuneration policies during the 2016 AGM season on which we previously reported.  Theresa May made pledges about corporate governance before she became PM, including not only having employee representatives on boards, but also making the vote on implementation of the remuneration policy binding.  The Business, Innovation and Skills Committee launched a corporate governance inquiry in September, focusing on executive pay.

Under the directors’ remuneration reporting regulations, companies are supposed to disclose what they have done to consult employees about executive pay packages.  In practice, usually this is either a blank or a statement that staff are not consulted, which doubtless has added fuel to the flames.

At the sharp end, there are definitely real problems with having employees on boards as pointed out in posts on our employment and corporate blogs.

The speech that generated the headlines on Monday was given by Theresa May at the CBI annual conference: “I can categorically tell you that this is not about mandating works councils, or the direct appointment of workers or trade union representatives on boards”.  The proposal was watered down to “ensuring employees’ voices are properly represented in board deliberations.”  A green paper has been promised later in the autumn “that addresses executive pay and accountability to shareholders, and how we can ensure the employee voice is heard in the boardroom.”

Odd then that the answer to The Question was “I believe that we should see workers representation on boards and … this government is going to deliver on that.”  Will they, won’t they?  We await the green paper with interest!


Salary Sacrifice and Termination Payments

Amongst a number of announcements relating to employment taxes in today’s UK Autumn Statement, forthcoming changes to the tax treatment of salary sacrifice and employee termination payments were confirmed.

The tax and National Insurance advantages of salary sacrifice schemes will be removed from April 2017 (i.e. the sacrificed pay will be subject to tax and National Insurance). Thankfully this will not apply to arrangements relating to pensions (including advice), childcare, Cycle to Work and ultra-low emission cars. All arrangements in place before April 2017 will be protected until April 2018, and arrangements in place before April 2017 for cars, accommodation and school fees will be protected until April 2021. This attack on salary sacrifice schemes appears harsh in principle but it was clear from the previous consultation that the government was committed to the change and the majority of salary sacrifice schemes will relate to the excluded benefits in any event.

The Chancellor also confirmed that from April 2018 termination payments over £30,000, which are subject to income tax, will also be subject to employer’s National Insurance. However, although as previously announced all PILONs will be fully taxable and NICable from April 2018 irrespective of whether there is a PILON clause in the contract, the government has adjusted its proposals in this regard following consultation. Rather than the taxable PILON amount including all compensation for benefits and bonus that would have been received during the unworked notice period, tax will only be applied to the equivalent of the employee’s basic pay for the unworked notice period. This is a sensible adjustment – the previously announced approach would have involved a number of unnecessary complexities (e.g. deciding how much bonus the employee might have received during the unworked notice period).

Employee shareholder status

The UK government has announced the abolition of the tax benefits of employee shareholder status in today’s Autumn Statement. The change applies to shares issued on or after 1 December 2016. Since there has to be a minimum 7 clear days notice between the individual employee being advised on the implications of employee shareholder status and the issue of the shares, this effectively means that unless employees have already received that advice, no further issues of ESS shares will be possible from today.

ESS shares have offered significant tax advantages to employees. In particular, gains realised on the sale of ESS shares have been free of capital gains tax, although a cap on this was introduced in the March Budget (which was an indication that the tax breaks might be on borrowed time). In addition, the first £2,000 worth of ESS shares were free of income tax when received by an employee. In exchange for these tax breaks, employees were required to contract out of various employment law rights, including the ability to claim unfair dismissal.

The original intention was for ESS shares to be used to provide employee shares to a wide range of staff. However, their use has generally been limited, not least by the restrictions around how they are issued to employees, so that in practice the benefits have been confined to a few members of senior management, often in the context of a private equity or venture capital transaction. This restricted use of ESS is the justification given by the government for today’s announcement.

On the plus side, existing ESS shares are unaffected and, in particular, will continue to benefit from the CGT exemption.