New dealing rules for executives of UK quoted companies: implications for share plans

The EU Market Abuse Regulation (MAR), which contains new rules about dealing in shares by directors and “persons discharging managerial responsibilities” (PDMRs), will come into force on 3 July 2016.  Unlike the current rules, which are different for companies on the full list and those on AIM, the MAR will apply to all quoted companies.

So how will MAR affect share plans?

Old regime – companies on main market Old regime – companies on AIM New regime
Applicable dealing code Model Code under the Listing Rules


Rule 21 of the AIM rules for companies (this will be amended to require AIM companies to update their policies to comply with MAR by 3 July 2016) MAR
To whom does it apply? Directors and “persons discharging managerial responsibilities”


Directors and “applicable employees” PDMRs:

(a) members of the administrative, management or supervisory body of the company; or

(b) senior executives who have regular access to inside information and the power to take managerial decisions about the company

Periods during which dealing is prohibited A close period or any period during which there is “inside information” A close period or any period during which there is “unpublished price-sensitive information” The 30-day period prior to the announcement of year-end results and any interim results
End of close period Date of announcement of preliminary results (or if no preliminary announcement, date of publication of report and accounts) Date of publication of report and accounts or date of announcement of half-year or quarterly results Not clear without further guidance, but possible that announcement of preliminary results may no longer suffice

Companies should:

  • review the rules of their share plans to see if amendments to references to the Model Code or the AIM dealing rules need to be made;
  • re-visit the relative timing of vesting of awards where tax is to be funded by the immediate sale of some of the shares by the participant;
  • consider delaying vesting if it will fall within the new definition of close period; and
  • update their guidance for the company and relevant share scheme participants about insider dealing.

Shareholder Spring 2: Rabbit Emerges From The Hat

After weeks of media headlines criticising FTSE 100 executive remuneration, the Investment Association have finally pulled their rabbit from the hat!  The nattily entitled “Executive Remuneration Working Group” set up last year under the auspices of the Investment Association (see our previous blog post) has published its Interim Report (which can be downloaded from the link in the first line of the IA press release).  This no doubt explains why, given all the media attention on executive pay over the last few weeks, we have not been seeing the IA quoted alongside other interested parties such as PIRC and ISS.

The Working Group will be hosting round table discussions involving interested parties before producing their final report this summer.  The report will be used to inform a revision of the IA’s “Principles of Remuneration”, which have been very influential over the years (most notably when they were maintained by the Association of British Insurers).

The report is short and to the point and well worth a read.  Essentially, they are looking to fix an executive remuneration system that they feel is no longer “fit for purpose”.  Their proposal is for companies to abandon a “one size fits all” approach (which companies may have otherwise been attracted to, looking for safety in numbers).  Instead, they want remuneration committees to propose simplified remuneration structures that fit the needs of their companies.  If you are now asking yourself whether it is possible to go for a bespoke solution and simplify at the same time, the answer is “yes” – but only once you have freed yourself from the tried and tested salary/benefits/bonus/LTIP formula.  The Interim Report provides some thoughts on how that might work and asks for other suggestions.

The Working Group has been prepared to contemplate solutions that few remuneration committees would have been brave enough to propose on their own, including structures that will give more predictable outcomes and which may vary less with swings in corporate performance.  They have also attempted to look at the potential knock-on effects to ensure that the overall quantum of executive remuneration is acceptable – this is a very important point because in the past significant changes in the design of executive pay packages have tended to fuel the seemingly relentless rise in the amounts that FTSE 100 executives take home.

Clearly, this is a development that is likely to impact remuneration in the longer term, starting with new policies put forward for shareholder approval next year.  In the meantime, shareholders are reliant on expressing their dissatisfaction through their AGM votes on remuneration reports.



Shareholder Spring revisited?

Until this week, the remuneration side of this year’s FTSE 100 reporting season was looking decidedly pedestrian, with deckchairs being shuffled ahead of the 2017 AGM season, when all of the  remuneration policies that were approved at the 2014 AGMs are up for re-approval.

The near 60% vote against the approval of BP’s Directors’ Remuneration Report at their AGM today signals a change in pace.  Ahead of the meeting it was difficult to gauge the real strength of shareholder sentiment:  there were headlines about resistance to a proposed 20% pay hike for the CEO, but in reality there was no salary increase in 2015 or 2016 and the 20% figure was taken from the “single figure” remuneration totals for 2015 and 2014, the difference coming from US pension disclosure.

However, it now seems clear that this is a more fundamental objection to the overall size of Bob Dudley’s remuneration package and that places BP on the back foot for discussions with major shareholders on the new policy to be put to the 2017 AGM.

Sun Capital: new risks for ERISA withdrawal liability

Our recent client alert provides an overview of a recent lower court case confirming the risks to commonly managed private equity funds when they collectively own directly or indirectly 80% or more of certain operating companies.

On remand from the First Circuit, the District Court for Massachusetts held private equity funds managed by Sun Capital Advisors, Inc. liable for ERISA withdrawal liability owed by a bankrupt portfolio company to a multiemployer pension plan. The First Circuit’s decision in Sun Capital Partners III, LP v New England Teamsters and Trucking Industry Pension Fund and the District Court’s application of the principles set forth by the First Circuit break new ground for determining withdrawal liability under the Multiemployer Pension Plan Amendments Act (MPPAA). As explained in our alert, the case shows that two or more private equity funds that are managed by the same persons can constitute a “deemed partnership” thereby exposing the funds to ERISA withdrawal liability.  The decisions also establish a roadmap for minimizing risk.

Great Expectations – the draft DC code of practice

“Code of practice no. 13: Governance and administration of occupational defined contribution trust-based schemes” may not be the most imaginative of titles, but to coin a popular phrase, “It does what it says on the tin”. It also sets out a vast number of ‘expectations’ to be placed upon trustees – we have counted 126 uses of the term “we expect” but we would accept any reasonable challenge on this point. Trustees need to be prepared for some investment time to assess how their pension plan stacks up against the UK Pensions Regulator’s (existing and new) expectations when the new code is published in its final form. It is set to come into force in July 2016.

The draft code is shorter than the previous version, well-structured and, in most cases, clearer. It consolidates existing material and regulatory messages contained in more recent statements (such as the charge capping and governance legislation introduced in April 2015). The code is divided into 6 sections covering trustee boards, scheme management, administration, investment, value for members and communicating and reporting. Very soon we expect to see the first drafts of the series of ‘how to’ guidance which will accompany each of the sections, expanding on the information contained in the code and offering practical guidance to trustees.

The ‘how to’ guidance should address some of the questions that will inevitably arise. Trustees often struggle with ‘value for money’ assessments because this is a subjective issue and potentially very time consuming.  How much time should be devoted to assessing what services are valued by members? The Guide issued by the Pensions and Lifetime Savings Association on this issue is useful but more help from the Pensions Regulator would be welcomed.

Another difficult issue is establishing the extent to which the DC assets are ‘protected’ and would be covered by the Financial Services Compensation Scheme, via indemnity insurance or through contractual agreement. Unlike ‘value for money’ this is not a subjective area; it can in fact be incredibly technical depending on the pension plan’s investment structure and the contractual arrangements in place. Therefore, we expect that the Pensions Regulator will do no more than provide additional information in this area, so that trustees are signposted in the right direction and understand the need to seek advice.

There are a number of ‘governance’ expectations in the draft code. The process for appointing a chair is required to be “robust and documented” and the process should consider the “leadership qualities of candidates and their ability to drive good practice within the scheme”, but it is not clear how trustees would handle this in practice where a chair has been in situ for some time.

Additionally, the recruitment process for trustees should take into consideration the fitness and propriety of candidates, and this should be regularly reviewed across all board members. Although this seems reasonable, compliance may not be so easy in practice. For employer-nominated trustees, who exactly is responsible for carrying out these checks – the trustees or the employer? And just how far should trustee boards go to determine the fitness and propriety of their trustee colleagues whom they may have been serving alongside for a number of years? Perhaps this is the right time for Bill to announce that he had always thought that Charlie was “a bit dodgy”! Now that would make for an interesting trustee meeting…

Are we getting better at drafting effective regulations?

With over a third of the UK FTSE100 having published their DRRs, it looks like the trends identified in our post on 22 March are continuing. A really interesting question to look at, now that nearly half of the FTSE100 companies have published their reports, is whether all the new regulations and guidelines are changing behaviour – and in the manner they were designed to.

With few companies putting their whole policy up for re-approval, it is little surprise that a hot topic is disclosures of bonus targets.   We expect the Investment Association to continue to be disappointed.  Prospective disclosure would appear to be dead in the water, with little elaboration on why the targets are deemed to be commercially sensitive.  The emerging pattern seems to be that companies giving the best disclosure set out the performance metrics and weightings for the current year bonus and full details of the prior year targets and performance.  However, there is still a great deal of variability, with companies finding that personal/non-financial targets are presenting particular problems.

The other trends from the DRRs published to date are the small increments by which executive base salaries are moving and the ever-increasing periods before executives have the freedom to realise the value associated with share-based payments.

Requiring listed companies to disclose executive pay in 2002 had the unintended consequence of accelerating executive salaries (presumably because few companies would recruit or retain any executive director who didn’t deserve to be paid in the upper quartile).  In contrast, the requirement to put salary increases into an approved policy and compare percentage change in salary for the CEO to that of the broader workforce seems to have delivered the intended consequence.  Salary increases for the C Suite are much more muted and broadly mirror the pay-rise percentages applicable to the rest of the UK-based workforce.

There is little movement on performance periods, with three years still being the norm, but the number of companies imposing further retention periods is edging up, with an additional 2-year holding period being most favoured. These retention periods are designed to encourage executives to make decisions that will deliver sustainable growth as well as having a longer period during which to enforce malus provisions.  As these adjustments in the market feed in to policy discussions later in the year (at least for most companies) we’d expect to see some clear trends this time next year for extended timelines from grant to complete release from any obligations.  We think that a total wait of 5 years will be the most common approach, with longer periods used in the finance sector due to regulatory compliance requirements.  Whether the length of the performance periods themselves will start to move upwards next year remains to be seen.  Again, it looks like the new regulations could deliver on at least some of the intended consequences they set out to achieve.

The 2015 DRR Season: What’s New?

Admittedly, it is still early days to asses what’s new in FTSE DRRs for the 2015 accounting period.  Even so, it looks like this will be a slow year for developments in DRRs for medium and large listed companies.  Of course, that’s probably not surprising.  For a company to change its policy requires putting the whole policy to shareholders for approval – it’s not possible to put a minor change to shareholders for approval in isolation.  As we have discussed earlier, the majority of companies will have to put their policy before shareholders for approval at their 2017 AGMs.  There is no compelling reason in most cases to make changes any earlier.

Nonetheless, the trend of increasing clawback provisions to back up malus provisions continues.  Strictly speaking, the adoption of a clawback provision is a change to a company’s policy.  Notwithstanding the comment about there being no provision in the legislation permitting piece-meal changes to a remuneration policy, many companies have or are adapting clawback provisions without taking their full policy back to shareholders.  Presumably, comfort for taking this approach comes from the combination of:

  1. including clawback provisions is in response to investor pressure to do so; and
  2. the sanction for doing something outside an approved policy is a restriction on what can be paid to an executive director – quite the opposite of what a clawback provision is designed to do.

The other feature of the DRRs released so far is the move towards increased disclosure of bonus targets, albeit retrospectively.  Again, being cautious of using too small a sample size to come to any meaningful conclusions, there continues to be resistance to disclosure of bonus targets, even retrospectively.  This falls short of what the Investment Association is looking for, judging by their letter to the chairman of quoted company remuneration committees last year (see our previous post).

For the 20% or so of the FTSE100 that have released DRRs so far the overall impression seems to be one of edging up the level of retrospective disclosure of bonus targets (but probably still not to the level that the Investment Association is seeking) and leaving well alone with everything else, pending a full review of remuneration policy later in the year for adoption at the 2017 AGM.

In or out: a dog’s Brexit for UK pensions?

What would be the effect of a Brexit on the UK pensions sector? The short answer is nobody really knows. Nobody can know, in fact, until the two-year exit negotiations have been concluded and, even then, one suspects that the nitty gritty detail will take years to work out thereafter.

Let’s begin with what a Brexit can’t change in the UK pensions context. Trust law, contracting-out (although that’s about to end), indexation, preservation, pensions taxation, the employer debt regime, section 67, TPAS, the Pensions Ombudsman, the Pensions Regulator and auto-enrolment – to name but a few – are all home grown and won’t be impacted.

But many other features of the pensions world as we know it do have their origins in EU law. Perhaps the most notable of these are the scheme funding regime in the Pensions Act 2004 (which implements the IORP Directive 2003), the equal treatment requirements of the Treaty of the European Union which are now in the Equality Act 2010 and the Pension Protection Fund (which is the UK’s manifestation of the relevant pensions requirements of the Insolvency Directive 1982). As these have been written into UK law, Brexit won’t change them; and there is unlikely to be a great deal of legislative appetite to change them. The scheme funding regime is, by and large, working well and removing the social and financial protections provided by the Equality Act and the PPF would be politically “challenging”. Quite apart from that, the prospect of “un-Barbering” UK pension plans doesn’t bear thinking about!

Undoubtedly, the biggest impact of all on UK defined benefit pension plans is likely to be on investment and sponsor covenant.

  • The prospect of a Brexit creates economic uncertainty in the markets plans invest in. UK pension plans are, perhaps uniquely, already dealing with Brexit. For instance, Mark Carney, Governor of the Bank of England, has already admitted that there is a referendum premium in the value of the British pound which will impact all pension plans which don’t have currency hedges built into their investment arrangements. In due course, any Brexit-induced increased volatility in investment markets will also make trustees sense check that their sponsor covenant warrants the additional risk involved. However, uncertainty in relation to the UK generally could have a beneficial impact on plan liabilities if, as is being widely predicted, a Brexit would result in gilt yields increasing.
  • From a sponsor covenant perspective, the UK’s trading relationship with the EU would be fundamentally altered. Chances are it will be a bumpy ride for a number of companies. It is inevitable that some sponsoring employers would fail to anticipate the complex impact that a Brexit would be likely to have on existing contracts and contract renewals with their customers and suppliers. Sponsor covenants may weaken. Guarantor covenants may weaken. There would be a lot more for pension plan trustees to think about and consider in this regard post Brexit.

The quick fix for some corporates might be to transfer their UK operations to a group company elsewhere in the EU and novate contracts to preserve their trading status quo. Alternatively some PLCs may look to convert to a societas Europaeae. Either option could immediately attract the attention of the Pensions Regulator as potential abandonment.

For practical purposes, much would turn on the outcome of the UK’s exit negotiations with the EU. For instance, the UK might agree to maintain conformity with the EU data protection regime or the central clearing requirements of the European Market Infrastructure Regulation. If it does, no changes follow. However, if the UK decides to do something different, this could mean reviewing all agreements involving data protection provisions, IMAs, derivative contracts and so on.

Anything else? Frankly, who knows. But if Brexit changed the “mood music” so far as the GMP equalisation is concerned (the UK Government’s view that equalisation is required is based on EU law which would no longer apply) this would certainly be welcomed by many pension plan sponsors and trustees.

Testing the waters with L-ISA?

In his eighth Budget as UK Chancellor, George Osborne resisted his radical impulses, apparently in the face of backbench opposition, to overturn pensions tax relief and left pensions alone.

In July 2015 HM Treasury issued a consultation “Strengthening the incentive to save: a consultation on pensions tax relief” which prompted a massive reaction from the pensions industry to the possibility of a fundamental change to pensions tax relief. In the run up to the Budget it became apparent that the most radical option (shifting from exempt-exempt-taxed (EET) to taxed-exempt-exempt (TEE)) was no longer being considered but questions remained about whether a flat-rate of tax relief would be introduced instead.  In the event, there is no change – for now.  Included in the papers published in connection with the Budget is the summary of responses to the consultation. HM Treasury has not commented on the responses.

The new Lifetime ISA (L-ISA) announced in the Budget looks a lot like pensions saving on a TEE basis. From April 2017, individuals aged between 18 and 40 will be able to take out a L-ISA and save up to £4,000 a year and receive a government bonus of 25%.  If they keep their savings in the L-ISA to age 60 they can then withdraw some or all of the value of the L-ISA (including the bonus) free of tax.  Withdrawals are permitted prior to age 60 but (unless the withdrawal is used to fund a first home purchase) will be subject to a deduction of the bonus, any interest on the bonus and a 5% charge on the remainder of the funds being withdrawn.

It remains to be seen how popular L-ISAs will become as a long-term savings vehicle and what purposes they will be used for by those taking them out. Many savers over 40 may wish they could also take advantage of L-ISA. It is possible L-ISAs could become an alternative to traditional pensions saving and really take off.    And then who knows – perhaps the Chancellor will revisit pensions tax relief and TEE will be back on the agenda.

Who really pulls your strings? How the new PSC requirements affect trustees

For those UK pension trustee boards out there who are incorporated (i.e. as a trustee company), from 6 April 2016 there will be a new requirement to keep a register of your “persons with significant control” (PSC).  In addition, from 30 June 2016 this information will need to be delivered to Companies House where it will be made publicly available.  Key details about the new requirements and what constitutes a PSC are set out in this newsletter from our Corporate colleagues.

As trustee directors you should make sure that whoever handles your statutory books and filings is aware of the new requirements and puts procedures in place to ensure they are complied with. It is worth noting that failure to maintain a PSC register will be a criminal offence.

Some of the key points from a pensions perspective are:

  • If you have a trustee company limited by shares, your PSC is likely to be your immediate parent company (typically a participating employer of the pension plan or another company in the group), although certain other individuals/entities could also be caught. If you have a trustee company limited by guarantee, it may be more tricky to identify your PSC as there is no “shareholding” as such. In either case, an analysis should be undertaken of the company’s constitution to understand who has control of the company in practice (in particular, who has the power to appoint and remove the majority of trustee directors).
  • If you are a trustee company whose PSC is an employer of the pension plan or another group company, you may view the new requirements as simply a matter of compliance. Indeed, there may be compelling reasons to maintain the status quo (such as the ability of the trustee to recover VAT paid to third party suppliers where the trustee company sits within the employer’s group). However, some trustee directors may be uncomfortable stating publicly that they are “controlled” by the employer’s group as this seems at odds with the fiduciary nature of a pension trustee.  In these cases, it may be possible to move to alternative structures such as a company limited by guarantee where the trustee directors are the members. However, this would need to be structured carefully to avoid the employer still being regarded as a PSC. For example, factors such as who has the ability to appoint and remove trustee directors, as well as the ratio of member-nominated to employer-nominated trustee directors, will likely have an impact.
  • Trustees considering potential moral hazard proceedings via the Pensions Regulator may find it easier to identify potential targets for regulatory action as companies within the employer’s group will have to identify their own PSC.

If you would like to discuss how the new requirements affect your pension plan or if your pension plan still operates with a board of individual trustees and you are interested in knowing more about the benefits of using a corporate trustee, please get in touch with your usual Squire Patton Boggs pensions contact.