New Euro data protection regime ups the ante for UK pension plan trustees and sponsor groups

UK Prime Minister, Theresa May, has indicated that the Article 50 exit negotiation will be triggered by the end of March 2017. Absent the unanimous agreement of all other 27 EU member states, the UK will automatically cease to be in the EU and subject to its rules and regulations two years after the notice is given. In the meantime, the EU’s new General Data Protection Regulation (GDPR) will come into force across the EU on 25 May 2018 and will be “directly applicable” i.e. be law in UK without the need for domestic legislation. Thereafter, the UK is likely to remain substantially aligned with the GDPR (subject to the terms of any Brexit deal).

For a key points summary of the GDPR on UK pensions, see our communication and our blog. However, the focus of this blog is on how the significantly enhanced potential for GDPR based fines could play out in a UK pensions context. Remember that under GDPR, the Information Commissioner’s Office (ICO) will be able to levy fines of up to €20 million or 4% of global turnover if greater. This dwarfs the current maximum fine available of just £500,000.

Assume a UK “pension plan” is fined by the ICO. It would actually be the trustees of the plan who would be fined as the trustees are the data controllers for data protection law purposes. This is true both now and under the GDPR. The question then is how the fine gets paid. Pensions law prohibits trustees being reimbursed out of plan assets for financial penalties imposed following conviction for an offence and for payment of fines payable under pensions legislation. As ICO data protection fines do not follow conviction for an offence and are not made under pensions legislation, it seems there is no statutory bar to fines being paid from plan assets. But that is not to say that making a payment from the plan will be problem free. Among other things, the payment may put a strain on plan cashflow and funding, will be subject to audit review, may need to be reported to members and could attract the attention of HMRC as a potentially unauthorised payment.

But trustees must also consider the terms of their plan’s governing rules. Many scheme rules reflect the statutory position above but others are more generic meaning that the trustees could be unable to use scheme assets and would instead have to rely on an indemnity from the plan’s sponsor group. In the face of a potentially significant cash call following a fine, some sponsors may examine the terms of the indemnity. Such indemnities often contain exclusions for “knowingly” (or similar words) doing or omitting to do something so trustees who have ignored or deferred data protection compliance could find the indemnity doesn’t work. Which leaves trustees either personally exposed or relying on any available insurance policy. This is perhaps another good reason for traditional unincorporated trustee boards to incorporate.

Which leads us on to another GDPR related complication. Most (but not all) trustee companies have been incorporated as a £100 shell subsidiary within the plan’s sponsor group. Any fine therefore is likely to make the trustee company insolvent which would disqualify the trustee company from acting as a trustee and could cause the sponsor group problems, for instance under group finance documents or for the group brand. It could also cause problems for individual trustee directors. So, one might expect the sponsor group to step in to help pay the fine.

But consider this. ICO has freedom to fine by reference to 4% of turnover of an “undertaking”, including its economic group. In very serious cases, where sponsor group turnover exceeds €500 million and ICO felt a €20 million fine was inadequate, ICO could arguably look to fine in excess of €20 million. That level of fine would likely be problematic in many corporate groups, especially as it is probably not “on radar” as a corporate risk. Note that this problem would not arise in relation to a corporate trustee which is not part of the sponsor group, such as a company limited by guarantee.

These issues will be of particular concern to professional trustees, who mainly operate via corporate entities. Any fine would be reputationally damaging. A fine which cannot be paid by the pension plan and is not paid by the sponsor could have significant implications for the business.

All of which points to a pressing need for pension plan trustees to put GDPR readiness on their agenda and devote time and resource to achieving and maintaining compliance.

UK Pensions Regulator exercises powers to correct serious error by pension trustees

The Determinations Panel of the Pensions Regulator has recently exercised its rarely used power under section 67G of the Pensions Act 1995 to declare a deed amending the rules of a pension plan void in its entirety.


The DCT Civil Engineering Staff Pension Fund was a small pension plan with only 11 members and assets of around £1 million.  In 2010, the former trustees of the Fund mistakenly executed a deed that replaced the existing rules of the Fund in their entirety with a new set of rules.

The Fund had always been administered on the basis that it was a defined benefit pension plan.  The effect of the 2010 changes was to convert members’ accrued benefits from DB to defined contribution benefits.  The Fund actuary had written to the former trustees warning them that the proposed new rules purported to change the basis of the accrued benefits from DB to DC.  The actuary also pointed out that it would be very difficult to make this change without obtaining individual members’ consent.  It appeared that, by an oversight, the former trustees overlooked the actuary’s advice and the deed was executed.  However, all parties continued to administer the Fund as a DB pension plan.

The sponsoring employer went into administration in January 2014 and an independent trustee was appointed as the sole trustee of the plan.


If the 2010 deed was valid, Plan members might not be eligible for compensation from the Pension Protection Fund and would receive significantly lower benefits from the Fund than the compensation they would otherwise receive from the PPF.  The independent trustee, therefore, wrote to the Regulator to ask for an order declaring that the 2010 deed was void in its entirety.

Legal considerations

Section 67 of the Pensions Act 1995 gives the Regulator power to make an order under section 67G declaring a regulated modification void to the extent specified in the order as from the time when the regulated modification would otherwise have taken effect, unless certain requirements have been complied with at the time the amendment was made.  In other words, in certain circumstances, the Regulator may declare that a purported amendment is void and of no effect as from the date the amendment was originally made.

A regulated modification is defined in section 67A as being either a “protected modification” or a “detrimental modification”.  A protected modification is, in effect, a modification of an occupational pension plan which would or might have the effect of converting benefits accrued prior to the date of the amendment into DC benefits.  A protected modification can only be made with the consent of the individual members.  If members’ consent is not obtained, the modification is voidable.


The Panel concluded that:

  • Section 67 applied to the Fund.
  • Since the effect of the 2010 deed was to convert DB benefits into DC benefits, it constituted a protected modification.
  • The Panel had the power to issue an order declaring the 2010 deed either wholly or partly void.
  • There was no evidence that the trustees had obtained members’ consent to the changes made by the 2010 deed.
  • Furthermore, it appeared that the trustees had not intended to change the nature of the members’ benefits.
  • It was in the members’ interests to make the order declaring the 2010 deed void.

The Regulator has published a report  in which it comments that the Panel will take various factors into account when deciding whether to declare an amendment void.  In particular, the Panel will consider the impact on members’ benefits.  In this case, the 2010 deed had a serious impact on the value of members’ benefits.  The Panel, therefore, considered it appropriate to act to protect members’ benefits in this case “even though the scheme concerned involved only a small number of members”.  This is positive in demonstrating that, in appropriate cases, the Regulator will take action in favour of those very small pension plans to which, in normal circumstances, we would not expect the Regulator to pay great attention.

It is, however, worth noting that the Regulator’s report points out that, rather than the Panel exercising its power, the independent trustee could have applied to the court for an order for rectification.  In this case, an application for rectification would have been disproportionate and would have increased the cost to the PPF of accepting the Fund.  Does this suggest that the Panel would have been more reluctant to exercise its power in the case of a larger or better funded pension plan where it did not have to take account of the interests of the PPF?

Board games: Employees to be fairly represented on the boards of UK companies?

Originally mooted by Theresa May during the hustings for the leadership of the Conservative Party (see our report), the proposal to enable employee representation on the Boards of UK companies finally assumed the status of formal government policy on Wednesday (5th October 2016) with the measure being specifically mentioned in the Prime Minister’s closing speech to the Conservative Party conference.  The policy is likely to form part of various measures designed to enhance corporate governance and, so the Prime Minister maintained, help protect workers’ rights as part of a commitment to a wider ‘fairness’ agenda.

Some of the issues that will need to be addressed, and the potentially far-reaching implications of this policy becoming reality for UK companies (in a post-Brexit world), are examined in more detail in our “A change has got to come!” post on our Down the Wire blogsite.

Although detailed proposals are still awaited, and while the Commons Business Innovation and Skills (BIS) Select Committee is currently conducting its own inquiry on this and related matters, it is perhaps worth re-emphasising that the final detailed proposal (when it comes) is likely to include some form of automatic right for employee representation on a company’s remuneration committee.

Assuming that conclusion is correct, and while acknowledging that changes in this particular area will probably reinforce the more exciting changes in the culture surrounding executive pay, there could be some interesting knock-on effects. For example, one area where the final detail will be critical will be confidentiality issues and the extent to which employee directors will feel able to speak their mind publicly, especially where they disagree with a particular decision or outcome. It may be that, as a practical consequence, some remuneration committees will find that they can no longer make decisions on a consensual basis and formal votes will be required more frequently. That will represent (no pun intended) a cultural change in itself but probably one that companies and committees will just have to get used to. And quickly.

Further changes to triviality rules affecting DC and hybrid plans – not such a trivial issue?

New legislation has corrected an anomaly that has arisen in relation to trivial commutation rights for members of certain UK Defined Contribution (DC) and hybrid pension plans.

Following changes made on 6 April 2015 to the statutory definition of “trivial commutation lump sum” (TCLS), a TCLS can now only be paid from a Defined Benefit (DB) arrangement. The rationale for this was that members with DC benefits would be able to access their benefits in lump sum form by making use of the new DC pension flexibilities introduced in April 2015.

However, the reality is not so simple for members of certain DC and hybrid plans – particularly those with more complex benefit structures such as a DB contracted-out underpin. It is not always possible or cost-effective for these pension plans to enable their members to make use of the new DC flexibilities. As a result, some members with DC benefits worth less than the £30,000 triviality limit are unable to take their benefits as a lump sum – even where a DB member of the same pension plan could take a TCLS. Members may be able to transfer their DC benefits to another pension plan offering lump sum options, but this will almost certainly involve fees, which may not offer the member good value for money for a relatively small pension pot.

The Finance Act 2016, which received Royal Assent on 15 September 2016, seeks to address this potential unfairness by extending the definition of TCLS to include money purchase benefits that have been secured as in-house scheme pension. It is likely that in practice the new legislation will permit deferred members to receive a TCLS, if the transaction can be construed on the basis that the member’s benefits come into payment as an in-house pension that is then immediately commuted. This partially aligns the triviality rules for DB and DC benefits worth up to £30,000, which will come as welcome news to both members and trustees of hybrid schemes with significant volumes of these smaller liabilities. Trustees of hybrid and DC pension plans may wish to check their plan rules and retirement processes to ensure that they can give members this option to take their DC benefits as a TCLS. Rule amendments may sometimes be required, such as if the triviality rules only apply to DB benefits or if benefits are required to be secured as an external annuity.

Mind your head(room)! Further moves to limit UK executive pay?

Legal & General Investment Management (LGIM) recently published its Corporate Governance & Responsible Investment Policy – UK  and backed it up with a letter to the chairs of the FTSE350.  Looking at the section on remuneration (the largest part), there is a strong sense of déjà vu.  Not surprising really, since LGIM is a member of the Investment Association (IA), contributing to the development of the IA’s principles of executive remuneration and it sent a letter to remuneration committees in 2013 confirming its support of the GC100 and Investor Group guidance on directors’ remuneration reporting.  So you might expect them all to be singing from the same song-sheet.

However, it contains three little words which very much break new ground ….

Time for a small diversion into the history of the limits on the use of shares for incentives.  The old Association of British Insurers (ABI) guidelines on executive remuneration always had two limits on the new issue of shares for this purpose, which are still there in the current IA principles.  Essentially in any rolling ten-year period:

  • no more than 10% of a company’s share capital can be the subject of incentive awards (outstanding and paid out) under all its share plans; and
  • no more than 5% can be used for executive (discretionary, as opposed to “all-employee”) plans.

These were/are under the heading of “dilution limits”, suggesting that shareholders were prepared to allow their holdings to be diluted by up to 10% (that is, have a slightly smaller slice) against the expectation that the incentives would encourage the employees to grow the size of the cake.  Already-issued shares – such as shares bought in the market – didn’t count for the purposes of these limits, which seemed logical, as they were non-dilutive.  Then along came treasury shares in 2003.  The ABI felt sufficiently sure of its clout to say that these shares should be counted under the dilution limits if they were used to satisfy awards under share plans (although many thought that treasury shares should fall into the “already-issued” category).  Prior to  2004, companies had to provide in their accounts for the cost of buying shares in the market, but not for the shares issued on the exercise of options.   Then the accounting standards for share-based payments were changed, so that the P and L account was hit by the cost of both market-purchase shares and newly-issued shares.  Cue the growth of LTIPs, usually consisting of nil-cost options.  To avoid offending against the company law prohibition on issuing shares at less than nominal value, shares to satisfy these awards had to be transferred from an employee benefit trust (EBT) rather than newly-issued.  Although the guidelines said/principles say that no more than 5% of a company’s shares can be held in an EBT without shareholder approval, for many years it has been possible to use the market purchase route to circumvent the limits and create more headroom for share plans.

Now back to the three little words.  The LGIM policy says that these “restrictions should apply to all shares whether market purchased or newly-issued”.   So, the gloves are off – despite this wording being under the heading of “equity dilution”, it’s clearly no longer only about that.

LGIM are focusing on headroom not only for share plans in the ordinary course, but also for share-based payments to a newly-appointed director.  The Listing Rules (LR 9.4.2 for those who are interested) allow a share award to be made to a single director without shareholder approval in order to recruit or retain that individual.  LGIM has made it clear that it will “not support the use of Listing Rule 9.4.2 … if there is sufficient headroom in existing arrangements”.  By “not support” it means voting against both the remuneration report and the re-appointment of the chairman of the remuneration committee.

So why this new approach?  The introduction to the remuneration section notes the “significant increase to [sic] executive remuneration which has not necessarily been linked to the growth in shareholder value”.  Witness the shareholder revolts expressed through voting against executive remuneration policy and implementation over the 2016 AGM season, covered in our previous post.   It looks like LGIM considers that, in the current climate, with so much high-profile bad press about “excessive” payments to directors of big companies, it is time for it to be bold enough to plug this back-door route of using shares purchased in the market to deliver value to executives.

All in all, LGIM’s policy seems to be marking companies’ cards at the time when they will be considering the contents of their remuneration policy, which in many cases will need to be put anew to a binding shareholder vote in 2017.  It will be interesting to see whether the IA follows suit in a few weeks, the usual time for it to update its principles of remuneration.  Presumably it will also harden its stance on this issue.

Coming in the same week as the launch of the enquiry by the Business, Innovations and Skills Committee into corporate governance, including hard-hitting questions on executive pay (see our post on this), it is clear that there is pressure on all sides to limit what is seen as excessive growth in executive remuneration.

Because they’re worth it? More scrutiny of UK executive pay

The Business, Innovation and Skills Committee has launched a corporate governance inquiry, which includes a focus on executive remuneration.

The chair of the committee, Ian Wright MP, said: “Whopping pay awards to senior executives are not only vastly bigger than workers could ever expect to receive but often seem to have very little relationship to company performance. While there has been some recent shareholder actions against these ever larger pay packages, can we have any confidence that the current framework for controlling pay is working? As a Committee, we will want to look at whether executive pay should take account of companies’ long-term performance and whether the Government should intervene to control executive pay.”

Questions raised about executive pay are:

  • What factors have influenced the steep rise in executive pay over the past 30 years relative to salaries of more junior employees?
  • How should executive pay take account of companies’ long-term performance?
  • Should executive pay reflect the value added by executives to companies relative to more junior employees? If so, how?
  • What evidence is there that executive pay is too high? How, if at all, should Government seek to influence or control executive pay?
  • Do recent high-profile shareholder actions demonstrate that the current framework for controlling executive pay is bedding in effectively? Should shareholders have a greater role? (see our post on Legal & General’s views on this issue)
  • Should there be worker representation on … remuneration committees? If so, what form should this take? (for further information, see our post on this topic).

The deadline for written submissions is 26 October.

Corporate professional trustees breathe collective sigh of relief

The UK Companies Act 2006 currently allows companies to appoint a corporate director as long as at least one of the directors is an individual. As most professional trusteeship providers operate as companies, the law effectively allows them to be appointed as a corporate director of the corporate trustee of a pension plan. However, the Small Business, Enterprise and Employment Act 2015 is set to change that (part of UK’s response to G20 commitments to increase corporate transparency – think Panama Papers and such like), so that only a natural person may be appointed as a director of a company unless the appointment falls within one of the exceptions provided for by regulations. The expectation was that professional pension trusteeship companies would benefit from an exemption.  The new regime was expected to come into force in October 2016. As there was no sign of the exemptions emerging from Westminster and with the deadline looming, some professional trustee companies were becoming understandably nervous, in spite of the promise of a one year transitional period.

However, and without publicising the fact, the Companies House website now simply says: “You won’t be able to appoint corporate directors, although there are some limited exceptions. The detail of these exceptions are still under development. Any further information including a date for implementation will be provided on GOV.UK as soon as it’s available.”

So, corporate professional trusteeship providers breathe a sigh of relief – for now. But what they really want is to see a formal exemption written into legislation. Until then there will be nagging uncertainty as to whether their business model will still work when the new regime comes into effect.

Caps off to PPF consultation!

The Department for Work and Pensions (DWP) has launched a consultation on proposed changes to the Pension Protection Fund (PPF) compensation cap, which would increase the potential compensation for long-service pension plan members.

At present, members who have not yet reached their pension plan’s normal pension age when their plan enters the PPF are paid compensation that reflects 90 per cent of their accrued pension, subject to a maximum cap. This cap is currently set at £37,420.42 for 2016/17, which means that compensation at age 65 would be £33,678.38.

Many members and pensions activists have long campaigned for this cap to be amended to recognise long service and loyalty. This resulted in the then-pensions minister, Steve Webb, introducing primary legislation in 2013 to increase the compensation limit for long-serving members. However, while the changes were included in the Pensions Act 2014, they are still not yet in force.

The start of this consultation potentially signals the end of these delays, and pensions minister Richard Harrington has confirmed that he expects the long service cap to be effective from 6 April 2017.

Once in force, the amendments to the Pensions Act 2004 will increase the standard compensation cap by three per cent for each full year of pensionable service above 20 years, subject to an overall maximum of double the standard limit. The proposed amendments will also make provision for:

  • individuals whose actual pensionable service is unclear or which does not take into account transfers from a previous plan;
  • individuals in receipt of capped compensation when the legislation comes into force; and
  • pension plans in an assessment period or which are winding up when the legislation comes into force.

The consultation will run for eight weeks and the DWP would like respondents to confirm “whether the draft Regulations achieve their intended purpose, whether the long service cap operates appropriately in the situations covered by those draft Regulations, and that all necessary changes have been identified”.

With the PPF currently in surplus, the changes should not impact too significantly on its funding – though sponsoring employers and trustees of defined benefit plans may be wary that PPF levies could increase in years to come as the PPF looks to balance its increased costs with maintaining a healthy buffer.

Finally, in a separate but related recent development which we also reported on in August, the Court of Appeal has provisionally ruled that the current PPF compensation cap may be incompatible with European law, and has referred the question to the Court of Justice of the European Union. With the outcome of that reference (and the extent to which it will be affected by Brexit) still unclear, the changes to the compensation cap proposed by the consultation may not be the last we see over the next few years. Watch this space!

There is no such thing as easy cash

Following a change in UK legislation there is now uncertainty about if, and how, Guaranteed Minimum Pensions (GMPs) can be commuted for cash before GMP age (65 for males and 60 for females). Some pension plan advisers are suspending trivial commutations pending trustee instructions and we are increasingly being contacted by clients for advice on what they should do.

In brief, this issue has arisen because Regulation 25 of the Occupational Pension Schemes (Schemes that were Contracted-out) (No 2) Regulations 2015 (Regulation 25) introduced on 6 April 2016 is worded slightly differently to the previous legislation (which is Regulation 60 of the Occupational Pension Schemes (Contracting-out) Regulations 1996, in case you are wondering).

Continue Reading

UK pensions VAT – yet another update

Keen readers will recall the long-running saga of the correct treatment of VAT incurred by employers on pension fund costs. Following rulings by the ECJ, HMRC had determined that it needed to change existing UK practice. In particular, this affected defined benefit schemes where HMRC had allowed employers to recover some, but not all, of the VAT paid on investment managers’ fees. This ran counter to the ECJ’s decision in the PPG case.

In October 2015 we posted that the HMRC had issued an update on progress (or lack of it) in finding a workable solution that would allow employers to continue to recover VAT as input tax. A number of potential problems had been identified with the ideas that were circulating, including the use of tripartite contracts or adding pension fund trustees to the employer’s VAT group. To give everyone more thinking time, HMRC extended the transitional period during which the old practice could be used until December 2016.

Sadly, nearly a year on, it appears that the problems have not been solved. HMRC have today issued a short (brief?) Brief buying themselves, and employers and scheme trustees, more time. The transitional period has been extended to 31 December 2017, with the possibility of a further extension “if necessary” beyond that date. Welcome news, perhaps, but after so much time has been spent trying to find a solution, it does make you wonder whether the only way out of this conundrum would be to ignore the ECJ’s rulings. Brexit anyone?