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).

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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?

Financial services and not-for-profit firms should consider new PPF proposals on insolvency risk scorecards

The UK Pension Protection Fund (PPF) is reviewing its insolvency risk model with Experian. The proposals being considered are particularly relevant to the financial services and charity sectors. They would be introduced from 2018/2019 (and will not be part of the draft levy rules and levy estimate for 2017/18, which we expect will contain few changes).

In summary, the PPF is considering:

  • Using credit ratings and industry-specific scoring for regulated financial services providers. In the PPF’s experience, the current model is less reliable for financial services providers, as there is limited correlation between the PPF’s scoring and ratings agency data.
  • Using information from the Charity Commission to adjust the not-for-profit scorecard. The model has worked less well for not-for-profit companies, and makes use of data on companies which are not actually sponsoring employers.
  • Changes to how companies who submit small accounts are reflected in the scoring. Again, the model has worked less well for smaller companies.
  • How to integrate scores on ultimate parent companies, which are based on ratings, with scores on unrated subsidiaries. These changes are expected to impact only a small proportion of employers.
  • Changes to reflect the new FRS102 accounting standard. The PPF will analyse the effects on the first 500 DB sponsors which file on an FRS102 basis for the first time in 2016. The PPF will considering alterations to the scorecards in light of this analysis.

Other areas which the PPF expects to consider include investment risk and certifying deficit reductions, contingent assets and asset-backed funding structures. The PPF also suggests – briefly – that it is considering simplification for smaller pension plans.

A formal consultation is expected at the end of 2016/early 2017. However, any firm or pension plan that has found problems with the current PPF model can contact the PPF to ask if their issue is going to be considered as part of the forthcoming consultation. The PPF welcomes comments on its approach by email to

Firms in the financial services and charity sectors should pay particular attention to the scope of changes outlined by the PPF. As any “substantial” changes would likely be with us for at least three years (until the PPF’s next triennial review of its framework), we suggest all firms and pension plans with an interest should be poised to react to the consultation when it arrives. Be warned, however, that the PPF’s consultations are rarely short – parity with “War and Peace” springs to mind!

The Executive Remuneration Games: updated guidance

The GC100 and Investor Group have recently published updated directors’ remuneration reporting guidance to reflect the changes in practice since their original guidance in 2013 and the voting patterns of the 2016 AGM season.  The large majority of the FTSE100 will be putting new remuneration policies to a shareholder vote next year on the expiry of the 3-year policies they put in place in 2014.  The amended guidance should (hopefully!) help companies avoid the negative shareholder votes that were so in evidence this AGM season, as we reported in our review of the 2016 directors’ remuneration reports (DRRs) of the FTSE100.

Following on from Team GB’s great success in the Olympics, we thought we would set out what the coaches (the guidance) suggest are the extras that Team GB PLC needs to focus on in order to ensure favourable scoring from the judges (shareholders) next time round.

High Jump:

There is a much stronger steer on the disclosure of performance targets relating to incentives.  The bar should be set high – “any decision to rely on the commercial sensitivity carve-out should not be taken lightly”.  For short-term incentives (usually annual bonuses), in the 2016 DRRs there was near-universal reliance on commercial sensitivity in order to explain non-disclosure of annual bonus targets.  In only a very few cases were there any company-specific circumstances disclosed to explain why the performance measure or target in question was considered commercially sensitive.  The coaches remind us that the judges expect retrospective disclosure of these targets, with an indication of when disclosure will be made.  Some members of Team GB PLC indicated that it may never be appropriate to disclose their short-term performance targets.  In the 2016 DRRs, targets for performance conditions for long-term incentives were almost universally disclosed prospectively.


The coaches emphasise that the policy table should include an indication of the weightings of each performance measure or groups of measures which may be expressed as a range, for both short-term and long-term incentives.  In the 2016 DRRs, Team GB PLC was pretty good at this discipline.


Virtually all of Team GB PLC put in place their first remuneration policies in 2014.  A significant number (13) of FTSE100 companies put forward a new policy early, in the 2016 AGM season.  The coaches stress that putting in place a new policy mid-cycle requires a coherent rationale to be put to the judges as to the reasons for doing so.  This seemed to be a big ask in some cases in 2016; two companies didn’t even get the simple majority vote in favour required.


The judges, as always, will be concentrating on long-term performance and Team GB PLC must demonstrate the link between the overall remuneration packages of the directors and the company’s strategy.  The remuneration committee chairman’s statement should set out clearly the linkage between the company’s remuneration policy and its annual strategic report.  A notable feature of Team GB PLC’s DRRs this year was the general beefing up of the remuneration committee chairman’s letter.


An easy win, this.  The coaches recommend that even if a company made no payments for the loss of a director’s office or payments to ex-directors, a simple negative statement to that effect should be made.

Subjective scoring:

The coaches caution against remuneration committees applying their discretion in an upwards-only direction.  It may be true that on a mathematical or qualitative basis, performance criteria have been satisfied.  However, a member of Team GB PLC will be in danger of receiving votes against where payments are based simply on the tariff without any subjective analysis of the overall performance of the company, if that has been lacklustre.  The key is to make sure that the “outcome balances management performance and the shareholder experience”.


The coaches clarify the fact that not only must the future policy table specify the maximum that may be paid in respect of all aspects of remuneration (on which, judging from the 2016 DRRs, Team GB PLC have a way to go yet), but the maxima must be stated for each individual director, expressed as either monetary values or percentage of salary.


The judges will mark Team GB PLC down for choosing too narrow a comparator group (for example, just senior executives) for the disclosures relating to the percentage change across the year in salary, benefits and bonus paid to the CEO as compared to the average of these percentages for other employees.  From our review of 2016 DRRs, the choice of the employees used for the comparator group is something that shows a wide degree of variation across the Team and it will be interesting to see how it responds.

Yellow cards:

Where a member of Team GB PLC has received a significant percentage vote against a remuneration resolution, it must disclose the reasons for this (if known) in the DRR and say what it has done to appease the judges.  If the reasons are not known, the company must say what it has done to try to find out the reasons.  In the 2016 season, there was a mixed response to votes against.  Of the nine companies that had a significant vote against, only a few took the trouble to speak to investors early enough (before the AGM) to be able to put the reasons at the bottom of the announcement of the votes; the others didn’t comment on the vote against.

If companies manage to incorporate these changes to the guidance, with a bit of luck, next AGM season will see more medals and fewer thumbs down for DRRs.

Better late than never: what to do if you receive a share schemes penalty notice

HM Revenue & Customs (HMRC) are in the process of issuing penalty notices for the late filing of share scheme annual returns.   This will happen in any case where a scheme has been registered online with HMRC but an annual return for that scheme was not filed online with HMRC by the deadline of 6 July 2016.  The penalty is £100.

Among the teething troubles that surrounded the introduction of online filing in 2015, there were many reports of companies registering share plans wrongly; for example, because the name or type of the plan was entered incorrectly.  This was a pain because there was no ability to make corrections once the online form had been submitted.  You had to start again, entering the correct details of the scheme as a new plan, to which HMRC gave a different unique reference number.   However, you were supposed to tidy up by closing the incorrect scheme and also submitting a “nil return”for that scheme on or before 6 July.  You can bet your mortgage that a good number of the penalty notices relate to incorrectly-registered plans that weren’t closed and/or didn’t have a nil return filed.

If you correctly registered a plan online, but there just happened to be no reportable events (for example, grants or exercises) under that plan in the 2015-2016 tax year, you still need to submit a nil return for that year and every year during which the plan is outstanding.

Of course, if you have a properly-registered plan and the annual return was overlooked, make sure you correct the situation in good time, because a further £300 penalty will be due if the return is still outstanding at 6 October 2016.  If you have a “reasonable excuse” for the annual return not being made in time, you can appeal against the penalty, but the examples are limited to serious situations – “I was on holiday” won’t cut the mustard!



Second bite: Court decides a pension deficit for service company employees must be paid by the trading company

Many group companies operate a service company to employ staff and second them to other group companies. These arrangements are often not fully documented, particularly in groups who see themselves as one business. However, this can cause issues on an insolvency, as shown recently in the case of MF Global UK Ltd (In Special Administration), Re [2016] EWCA Civ 569.

 The MF Global Group carried on a brokerage business. The main trading company was MF Global UK Limited (the trading company). All relevant employees were employed and supplied by MF Global UK Services Limited (the service company). The service company did not trade, but it charged the trading company for salaries and ongoing pension contributions to a defined benefit scheme.

There was no written contract between the service company and the trading company. The only written agreement was between the service company and the group’s holding company. This agreement said that the holding company must ensure that the trading company paid “payroll costs” to the service company.

The main MF Global Group companies went into administration in October 2011. This triggered a debt payable by the service company of over £35 million under Section 75 of the Pensions Act 1995. The trading company and the service company asked the Court to decide who was liable for the pension deficit.

The service company argued that there was an “implied” contract between it and the trading company. It further argued that the trading company was liable to the services company for the pension deficit under this contract.

The trading company argued that there was no implied contract between it and the service company, since it might have paid payroll costs for services for a number of reasons. These included its relationship with the holding company.

In 2015, the High Court decided in favour of the service company. However, the trading company appealed the decision.

Upholding the 2015 decision, the Court of Appeal decided that:

  • there was an implied contract between the service company and the trading company. Given the level of overall staff costs (some US $330 million per year), there must have been a contractual agreement.
  • the contract required the trading company to pay the pension deficit. Otherwise, the service company would have been taking on a potential debt that it would never have been able to pay. Further, the correspondence and accounting documents said nothing to cast doubt on the view that the trading company was to pay the pension deficit.

This decision arose from specific facts and other group arrangements may have been treated differently. Further, there is no suggestion that the decision would extend to a secondment arrangement between companies not in the same group. However, where there are intra-group arrangements, any contracts should carefully identify which company would be liable for a pension deficit.

Board stiff? – employee representatives on UK plc boards

As we reported previously, one of Theresa May’s promises at the hustings for party leader was to introduce employee representation on the boards of big businesses, as part of the drive to control executive remuneration.

The feasibility and potential pitfalls of this idea are considered in this thought-provoking post on our Employment Law Worldview blogsite.




Less is more: further consultation on simplification of taxation of termination payments

In a previous post, we were less than wholly welcoming to the Government’s proposals for the simplification of the tax and NIC treatment of payments in the context of the termination of employment.  The proposals were put out to consultation in July 2015 and a report on the responses, launching further consultation on the draft legislation, was published yesterday.

Thankfully, the dodgy proposals – that there should be a separate exemption from tax and NICs for payments in respect of wrongful or unfair dismissal and that the main exemption for termination payments would only be available in the case of statutory redundancy – have been kicked into the long grass by a majority of the 109 responses.  Best draw a veil over those then ….

The stated aims of the reforms are to make the taxation of termination payments:

  • simpler for employees and employers to understand and operate;
  • clearer and more certain, so as not to add to the employee’s burden at a difficult time;
  • fairer (so that the fat cats who can afford advice don’t get better tax treatment than the lowly-paid); and
  • not unduly expensive for the Exchequer.


Currently, contractual payments in lieu of notice (PILONs) are taxable, but non-contractual PILONs aren’t, Around two-thirds of respondents said that removal of the distinction would reduce confusion and complexity, so it is proposed that under the new rules all PILONs will be taxable.

Other termination payments

Again, these can be divided into contractual payments, which are currently taxed and non-contractual ones, which aren’t.  Responses in this case were much more evenly split.  A slight majority felt that the distinction was well understood – any contractual or customary payments (such as holiday pay) are ‘from the employment’ and should be taxed, whereas any payments relating to the loss of employment, for example statutory redundancy pay, should not.  The killer was respondents pointing out that if the distinction was removed, many legislative changes would be required to ensure that there was no manipulation of the rules.  As this would increase complexity, the Government has decided to retain this distinction.  However, only payments directly related to the termination will be exempt – reference to the employment contract and other terms and conditions will be required to establish which payments are contractual and therefore taxable.  For any non-contractual termination payments over £30,000, the excess will be taxable.


Currently, termination payments above £30,000 are subject to income tax but not NICs.  There was support from respondents for alignment of tax and NICs, both in this case and generally, and unsurprisingly the Government has plumped for requiring that from April 2018 NICs are to be paid on all termination payments that are subject to tax.

This will add considerable expense to the cost of terminating senior employees.  As companies look to limit the price they pay to senior executives for failure, this adds another 13.8% to the reasons to keep these payments to a minimum.

The £30,000 threshold

Respondents were strongly against the suggestion that the amount of the exemption should be based on length of service, not least because it would be discriminatory against young and part-time workers and those who have a career break.  The lack of support for reducing the threshold and the fact that currently most employees don’t have to pay tax and NICs on their termination payments means the Government is prepared to allow this to remain as is.


There was generally strong support for the current exemptions from tax on termination payments for certain categories of employees, and in particular on payments made in respect of legal costs for advice on termination settlements, to be retained.  However, in the cause of fairness the Government has chosen to remove the “outdated” Foreign Service exemption for payments made from April 2018 and has also clarified that the exemption for payments made on termination of employment due to injury does not extend to injured feelings.


The consultation document sets out draft legislation and as “this is a complex area” welcomes feedback on whether it “will achieve the intended policy effect with no unintended effects” by 5 October to