And so it begins … the 2017 shareholder spring

As we recently reported, 2017 is the year when most FTSE100 companies will be putting their new remuneration policies to a shareholders’ binding vote, against an increasingly hostile background of criticism of the size and complexity of directors’ pay packages.

For the early starters in the FTSE100, there have already been casualties.  Imperial Brands withdrew the resolution to approve a new remuneration policy at its AGM in early February, saying “A considerable number of shareholders supported the policy during consultations, but over time views changed and in these circumstances we believe the right course of action is for the Board not to seek shareholder approval for the new policy”.  It will have to fall back on its existing policy.

Thomas Cook received a 21.7% vote against its new remuneration policy.  Shareholders also voted 22.5% against the remuneration implementation report and 32.7% against the introduction of a new 2017 Strategic Share Incentive Plan.  According to the guidance on directors’ remuneration reporting issued by the GC100 and Investor Group, any vote over 20% should be viewed as “substantial” and in such a case the company should report the measures it has taken to address shareholder concerns.  Good as gold, the company added to its announcement of the AGM results an explanation of what it considered was the issue (“there remain concerns about the level of information around the possible strategic objectives and the size of the maximum potential award” under the new plan) and the action it would take (not to use the new plan in the coming year and to consult fully with major shareholders about its rationale and strategic objectives).

There was also a 15% vote  (reportedly from Standard Life) against the re-election of each of the directors on the remuneration committee, an action forewarned in publications by Hermes, Institutional Investor Services and the Pensions and Lifetime Savings Association.

David Cummings from Standard Life recently said on the Today programme that chairs of remuneration committees are “too obsequious” when it comes to CEO pay and that shareholders must signal more clearly that they are not happy.  Investors must work together to try to limit pay rises because if not, the Government is likely to introduce more Draconian measures, which will be far less flexible.  The week before, the chairman of the FRC, Win Bischoff, said that if Theresa May is talking about tackling excessive pay, to prevent legislation, shareholders will have to be much more prescriptive on remuneration and take their stewardship role more seriously.

Contrast this with recent statements on behalf of the Investment Association, which says it is sinking under the weight of submissions from companies of new remuneration policies and plans, expecting it to rubber stamp them before they are put to shareholders.  Investors have made noises for some time about wanting consultations with companies to be about wider strategy, rather than being hijacked by remuneration.

There seem to be a lot of potentially conflicting issues here, suggesting that there might be another “interesting” AGM season ahead ….

Avoidable headache caused by GMP revaluation – do you have a contracting-out hangover?

With Christmas and New Year parties well and truly over, and whilst trying to recall last year’s events, hopefully you will have remembered that contracting-out on a defined benefit basis was abolished with effect on and from 6 April 2016. Since then it has been a roller-coaster nine months (not just for pensions) so you would be forgiven for forgetting that trustees only have until 5 April 2017 to pass a resolution to prevent a GMP revaluation underpin arising.

The general position for GMP revaluation prior to 6 April 2016 was that section 148 revaluation was used whilst a member remained in contracted-out employment, and trustees of plans had a choice between using section 148 revaluation or fixed rate revaluation when an individual ceased to be in contracted-out employment prior to GMP age. As detailed in our earlier client alert, regulations now require GMP revaluation to be calculated on the section 148 basis until the member leaves pensionable service. However, many pension plan rules will not reflect the new legislation and will still provide for a switch to fixed-rate revaluation to occur at the cessation of contracted-out employment.  If such a plan had active members immediately before 6 April 2016, and those active members ceased to be in contracted-out employment on that date but remained in pensionable service, there could now be a clash between the plan rules and legislative practice. In these circumstances, particularly if a plan uses fixed-rate revaluation after a member leaves, there is a risk of an underpin arising from 6 April 2016, where the affected members could potentially be entitled to GMP benefits revalued by the higher of the GMP revaluation provided by the rules and the GMP revaluation required by the revised legislation.

This is not an insurmountable headache: there is a remedy to the problem via use of a statutory power available to trustees to resolve to amend their plan’s GMP rules to prevent the underpin arising. The power allows trustees to amend rules retrospectively to 6 April 2016, but must be exercised prior to 6 April 2017.  To alleviate this particular symptom, we therefore recommend that the best remedy is action before the deadline.

There are some additional hangovers from the abolition of contracting-out which trustees and employers will need to consider if they have not done so already.

First, prior to 6 April 2016, members and employers of a contracted-out plan paid a lower rate of National Insurance contributions (NICs).    If members of a formerly contracted-out plan were in active pensionable service on 6 April 2016, there will now be additional liability for both those members and employers in the form of increased NICs.  It is possible (under statute) for employers to unilaterally amend their plan rules to increase employee contributions to pension plans and/or adjust future benefit accrual, to offset the additional costs to employers of increased NICs. The statutory power must be used before 6 April 2021 and requires a 60-day consultation period with members.

Second, trustees should also check that their plan’s rules do not stipulate that certain increases to GMPs must be paid from the plan if they are not paid by the State. Prior to 6 April 2016, increases on pre-1988 GMPs and on post-1988 GMPs in excess of 3% p.a. were effectively covered by the State as part of the increases paid on the state second pension, but ceased to be so following the abolition of contracting-out. Generally speaking, it is rare that plan rules expressly provide that such increases must be paid from the pension plan, but trustees would be wise to check the position.  Likewise, trustees may wish to check what has been told to members in communications and plan booklets about increases on pre-1988 GMPs and on post-1988 GMPs in excess of 3% p.a.

We recommend a contracting-out rules review, particularly if the plan uses fixed-rate GMP revaluation, and an early remedy: it’s always best to avoid a headache where possible.

 

 

 

Roses are red, Violets are blue, Working or grandkids? What will you do?

What have Pierce Brosnan, Whoopi Goldberg, Donny Osmond, Kiefer Sutherland, Sarah Palin, Jim Carrey, Charlie Sheen and Priscilla Presley all got in common?  They all became grandparents before the age of 50.  They are not alone.  Many new parents have parents who are still of working age.  And as the goalposts for the state pension age keep moving it’s likely that there will be more and more grandparents in employment.

Valentine’s Day is already upon us, so what is the Government doing to “share the love” and help grandparents be part of their grandchildren’s first few months?

In the March 2016 budget, George Osborne announced that the Government would extend shared parental leave to working grandparents by 2018.  Some employers, such as Santander, have already introduced this as an employee benefit, allowing all employees who are new parents to share their parental leave with their parents as well as their partners. When this becomes law, employers and trustees will need to make sure that their pensions policies and plan rules are not at odds with the new requirements.

How will extending shared parental leave to grandparents work in a pensions context?  The Government’s consultation paper on this is still awaited, but it is likely that it will operate as an extension of the current form of shared parental leave.  Under the existing rules, during any period of paid shared parental leave the employee pays pension contributions calculated on the amount of pay actually received, whilst the employer calculates its pension contributions by reference to the employee’s former unreduced salary.  Under the existing rules for shared parental leave, there is no requirement for either the employer or employee to make pension contributions during a period of unpaid shared parental leave.

It’s not clear how popular grandparent leave will be – to date, there hasn’t been much take up of shared parental leave.  This may be because many employers provide the statutory minimum in respect of shared parental leave whilst continuing to offer enhanced maternity terms, meaning that the latter proves to be a more financially beneficial option for new families.

Time will tell whether the extension of shared parental leave to grandparents will result in a greater take up.  In the meantime, if music be the food of love, play on…

That Was the Year That Was: challenges in 2017 for remuneration committees

Before the 2017 AGM season gets into full swing seems an opportune time to look back at what happened in the executive pay sphere during 2016 and forward to the challenges that remuneration committees face this year.

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When should pension trustees flex their shareholder muscles?

In January 2017 the Pensions and Lifetime Savings Association (PLSA), as a representative body for pension funds, published its amended Corporate Governance Policy and Voting Guidelines.

The PLSA observes that many of its members hold equity stakes in UK companies as part of their investment portfolio and have a clear interest in promoting the success of those companies.

The policy document has been prepared following consultation with PLSA members and seeks to help pension funds:

  • engage with investee companies in order to maximise the long-term returns on pension schemes’ assets; and
  • ensure that the board and management of these companies are held accountable to shareholders.

The main themes of the policy document are around corporate leadership, accountability and remuneration. Please see the article on our corporate blog site for more information.

 

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 (matthew.lewis@squirepb.com) or Matthew Giles – Partner in the Pensions Team (matthew.giles@squirepb.com).

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.

Comment

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.

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