To infinity and beyond – anti-money laundering hits new heights

Buzz LightyearWhilst trustees of occupational pension plans are still grappling with the implications of the EU’s fourth money laundering directive, they will be horrified to hear that the fifth money laundering directive is already on its way! The fourth money laundering directive was implemented in the UK on 26 June last year and was the first one that has applied to occupational pension plans. Trustees (and many pension lawyers!) are still assessing the impact in terms of additional record keeping and whether or not to register on HMRC’s Trust Registration Service. In respect of the latter, certain types of investment structures, such as investments made through partnership arrangements, might have resulted in a tax liability rendering a pension plan a “taxable relevant trust”. This is against the backdrop of HMRC not expecting that any occupational pension plans would need to register on the Trust Registration Service.

The story does not end there, however.  The European Parliament was not satisfied that the fourth money laundering directive went far enough in terms of transparency of trust ownership. With the European Commission’s proposal to extend the fourth money laundering directive suggested in July 2016, the European Parliament took the opportunity to push for the same transparency for trusts as is currently in place in respect of corporate entities.

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“You gotta speed it up, and then you gotta slow it down…”

Two Glasses of Bucks Fizz

And, if you are a trustee or a pensions professional, you definitely have to play around before making your mind up whether a pensions transfer can go ahead.

Transfer legislation is changing from 6 April 2018 as highlighted in the three points below, and there are also further changes on the horizon.

1. Bulk transfers of formerly contracted-out rights

This is a hangover from the abolition of contracting out. After a fair amount of pressure from the pensions industry, the DWP intends to bring into force regulations that will allow, without member consent, bulk transfers of benefits that include contracted-out rights to schemes that have never been contracted-out. Safeguards will be put in place, which will broadly require the contracted-out element of the benefits to be provided on the same basis in the new scheme as they were in the old scheme. The regulations should assist those employers wishing to implement a bulk transfer of benefits to a newly established scheme. The DWP consultation closed on 17 January 2018 and we are currently awaiting the response to that consultation.

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But sir, my dog ate the scheme accounts!

Naughty dog

Four trustees of an occupational defined benefit pension scheme have been fined £500 each by the Pensions Regulator (TPR) for their failure to obtain audited scheme accounts on time without reasonable excuse.

This is the first fine of this type, and follows TPR’s announcement in 2017 that it was going to be “clearer, quicker and tougher” in exercising its regulatory powers.

Legislation requires trustees to obtain audited accounts within 7 months after each scheme year end. In this case, the trustees had failed to obtain audited scheme accounts on time for two consecutive scheme years ending 5 April 2015 and 5 April 2016. Continue Reading

What does US tax reform mean for non-US institutional investors – and UK pension funds in particular?

Colleagues have previously blogged about US tax reform and the impact on US retirement plan provisions. We highlight in this blog the key takeaway points from the US tax reform that will impact upon non-US institutional investors.  In particular, it is worth noting that pension funds investing through partnership structures and/or real estate may be affected by the new tax provisions.  Significant consequences of the US tax reform include:

  • Corporate rate reductions will, in conjunction with limitations on the deductibility of interest expense, cost recovery and international changes, impact the values of US corporations generally.
  • Rate reductions will impact the level of taxation of those non-US institutional investors that realize US trade or business income (commonly referred to as “effectively connected income” or “ECI”) or gains from disposition of certain interests in US real estate.
  • Tax law changes will impact the tax treatment and valuation of investment asset classes such as corporate equities and investments in real estate and private equity.
  • The tax treatment of private investment funds and their managers will also be impacted with potential collateral effects on non-US institutional investors.  Seeking to resolve a decade old controversy over the taxation of carried interests granted to fund managers, the legislation imposes a three-year holding period requirement for partnership interests held by fund managers in order for the gains to be treated as long-term capital gains that are taxable at preferential rates.  Non-US institutional investors may wish to be alert to possible proposals from fund managers to address this change.
  • Many non-US institutional investors currently use intermediary entities as investment vehicles, including US corporations that serve to “block” the ultimate non-US investor from US income tax payment and return filing obligations.  To promote tax efficiency, these US blockers have frequently been capitalized with a combination of debt and equity.  These arrangements may need to be revisited, both prospectively and retrospectively.

These impacts are only illustrative.  Others will no doubt emerge in connection with specific investments and investment structures and will be identified as the new legislation is analysed in more depth, as implementation issues arise, and as administrative interpretations are issued.  If you would like to discuss the potential impact of the US tax reforms for your business or pension plan please do get in touch with me, Lindsay M Fainé ( or my UK colleague, Timothy Jarvis (

Why might you need to know the birthdays of your pension plan actuary and investment manager?

Money Laundering Wheel

…… The answer is not so you don’t forget to send them a card!

If you don’t know, please read on.

We recently issued a communication in relation to the new anti-money laundering requirements affecting pension plan trustees, along with an earlier blog, which set out the steps that trustees should be taking in order to be compliant. One of those steps is to identify the “beneficial owners” of the pension plan.

“Beneficial owner” is widely defined in the money laundering regulations and captures some unlikely candidates. Whilst, as would be anticipated, the definition captures employers, trustees and plan beneficiaries, it also captures any other individual who could exercise “control” over the pension plan. For example, “control” would include a power (whether exercisable alone or jointly) to apply trust property, appoint trustees or add beneficiaries, amend a pension plan or consent to or veto any plan amendment.

The definition casts the net widely. It is going to capture the trustee directors of a corporate trustee, but it could also capture other professionals involved with the running of a pension plan. The definition might capture pension plan actuaries (for example, if their input is required before a pension plan amendment could be validly made). The definition might also capture an investment manager to whom discretionary powers have been delegated, as being someone who has the power to apply trust property. These examples are not exhaustive. Continue Reading

Watch out Rumpelstiltskin…

You never know who is listening!

Back in April last year we told the tale of the “granny turned wolf” as the Pensions Regulator (TPR) began to bare its teeth and prosecute those who had failed to comply with notices issued under s72 Pensions Act 2004 requiring information/documentation to be provided to it to assist in the exercise of its regulatory functions. In this blog we examine the disclosure of restricted information under s82 of the Pensions Act 2004 and the implications for anyone in receipt of a Warning Notice from TPR.

In the fairy tale, when Rumpelstiltskin revealed his name he thought no-one was listening but in fact the Queen’s messenger was close by. When contents of Warning Notices issued in respect of British Home Stores (BHS) were revealed, the media were on hand, ready to spin strands of straw into pure gold.

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U.S. Supreme Court grants writ of certiorari on Railroad Retirement Tax Act issue


The U.S. Supreme Court is poised to resolve a split between the Seventh and Eighth Circuits related to a federal program that is a well-kept secret. Nothing as intriguing as Russian spies or hacked emails… but, I think, interesting nonetheless.

Of course, you have heard about the Social Security system. And you probably know that U.S. employers pay and withhold taxes under the Federal Insurance Contributions Act (FICA) to fund Social Security and Medicare benefits for retired workers in the U.S. But what you may not know, however, is that around the same time that the Social Security system was being put in place, the federal government established a separate program to shore up railroad companies’ pension obligations.

At that time, in the 1930s, more than 80% of U.S. railroad workers were employed by private companies with pension plans, but the plans were in shambles. According to the Social Security Administration,

“benefits were generally inadequate, liable to capricious termination, and of little assistance to disabled employees.  When the Great Depression drove the already unstable railroad pension system into a state of crisis, the railroad industry was beset by retirees who needed immediate assistance.”

Since the planned Social Security system would not cover work performed before 1937 and was not scheduled to begin paying benefits for several years, Congress enacted the Railroad Retirement Tax Act (RRTA), federalizing the retirement program for railroad workers. Employers covered by the RRTA generally are exempt from FICA.

So, that is the interesting, high-level contextual backdrop for a narrow, technical question that the Supreme Court will address. That question is whether stock received upon the exercise of stock options that railroads award to their employees as part of their compensation package is taxable compensation under the RRTA.

The RRTA is similar to FICA in that both impose a payroll tax on employers and employees to pay for employee benefits. Like FICA with respect to other employers, the RRTA requires railroads to pay an excise tax equal to a specified percentage of its employees’ compensation and to withhold a specified percentage of that compensation as the employees’ share of the tax.

But there is a key difference. The RRTA defines taxable compensation as any form of money remuneration paid to an individual for services rendered to an employer. In contrast, FICA taxes all remuneration for employment and explicitly includes the cash value of all remuneration (including benefits) paid in any medium other than cash.  Thus, income from stock options clearly is taxable under FICA.

The circuits, however, are split on whether income from stock options is covered by the term money remuneration, making it taxable under the RRTA.

The Seventh Circuit held that it is. In its view, stock should be treated the same way under the RRTA and FICA, as there is no significant economic difference between receiving $1,000 in cash and $1,000 worth of stock (see: Wisc. Cent. Ltd. v. United States, 856 F.3d 490 (7th Cir. 2017)).

The Eighth Circuit, however, has recognized the language differences between FICA and the RRTA and held that money remuneration should be given its plain-language meaning: cash (or some other generally recognized medium of exchange) but not stock. The court acknowledged that stock has cash value and can be exchanged for money, but asserted that it is not a medium of exchange, noting that no one pays for groceries with stock (see: Union Pac. R.R. Co. v. United States, 865 F.3d 1045 (8th Cir. 2017)).

Until the issue is resolved, some railroads and railroad employees must pay federal taxes on stock awarded while others need not. The Supreme Court has granted cert to review the Seventh Circuit opinion in order to resolve this difference… which could have consequences that reach well beyond the little-known RRTA.

Carillion and the “failure” of clawback

The collapse of Carillion has raised many issues relating to public procurement, the actions of the board and the role of the auditors. But a press release by the Institute of Directors suggesting that in 2016 Carillion relaxed the clawback conditions that applied to bonuses has raised questions over remuneration governance. The change seems to have removed “corporate failure” as a clawback/malus event, substituting conditions so that pay could only be clawed back in the event of a mis-statement of financial results or gross misconduct of an individual (neither of which may be triggered in this case).

No doubt the reasons for the change and the extent to which it was, or wasn’t, flagged up to shareholders when they overwhelmingly approved the revised remuneration policy at the 2017 AGM will be looked at very carefully. However, this also gives a timely focus on clawback given the FRC’s current consultation on changes to the UK Corporate Governance Code (the “Code”), which we previously blogged about here.

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U.S. tax reform – retirement plan provisions finalized

The tax reform bill is done.  President Trump signed the bill on December 22, meeting his deadline for completion by Christmas.

While there is much to be said about the Tax Cuts and Jobs Act (the “Act”), the update on the retirement plan provisions is relatively unexciting.  Recall that when the tax reform process started, there was a lot of buzz about “Rothification” and other reductions to the tax advantages of retirement savings plans.  For now, that pot of potential tax savings remains untapped (perhaps to pay for tax cuts in the future).  Nonetheless, the Act that emerged from the Conference Committee reconciliation continues to include a section entitled “Simplification and Reform of Savings, Pensions, Retirement”. The provisions that remain are effective on December 31, 2017.

Recharacterization of Roth IRA Contributions.

Current law allows contributions to a Roth or Traditional IRA (individual retirement account) to be recharacterized as a contribution to the other type of IRA using a trust-to-trust transfer prior to the IRA-owner’s income tax deadline for the year.

Under the Act, taxpayers can no longer unwind Roth IRA contributions that had previously been converted from a Traditional IRA.  In other words, if a taxpayer converts a Traditional IRA contribution to a Roth contribution, it cannot later be recharacterized back to a Traditional IRA.  Other types of recharacterizations between Roth and Traditional IRAs are still permitted.

Plan Loans. 

The Act gives qualified plan participants with outstanding plan loans more time to repay the loans when they terminate employment or the plan terminates.  In these situations, current law generally deems a taxable distribution of the outstanding loan amount to have occurred unless the loan is repaid within 60 days.  The Act gives plan participants until their deadline for filing their Federal income tax returns to repay their loans.

Length of Service Awards for Public Safety Volunteers. 

Under current law these awards are not treated as deferred compensation (and, thus, are not subject to the rules under Section 409A of the Internal Revenue Code) if the amount of the award does not exceed $3,000.  The Act increases that limit to $6,000 in 2018 and allows for cost-of-living adjustments in the future.

That’s all folks!  Happy Holidays!

New UK Public Register names and shames corporate governance offenders

Over one in five companies in the FTSE All Share index received at least 20% shareholder votes against a resolution at their 2017 AGM, or chose to withdraw a resolution. And executive pay remains a key issue for investors, with 38% of resolutions that in 2017 received significant votes against or were withdrawn related to annual remuneration reports, remuneration policies or other remuneration related resolutions.

This information comes from the Investment Association’s newly published Public Register of listed companies who have faced significant shareholder rebellions or withdrawn resolutions. As part of its response to the 2017 consultation on corporate governance reform, the government asked the IA to proceed with putting together the Public Register. The aim is to highlight companies which have received significant votes against a resolution, or withdrawn a resolution, and how they have responded to shareholder concerns.

The requirement to explain how a company intends to respond to votes against a resolution has been part of the corporate governance landscape since 2013. Substantial reforms to the directors’ remuneration reporting (DRR) regime introduced then included a requirement for companies who received a significant vote against a remuneration resolution to publish the reasons for that vote and the actions the company intended to take to respond to shareholder concerns. The DRR regime did not specify what “substantial” meant, but guidance published by the GC100 stated that it should mean at least 20% of votes cast against. This figure is proposed to be formally adopted as part of the changes which the FRC is consulting on making to the Corporate Governance Code.

The Public Register is likely to be a useful barometer for all issues on shareholders’ radar, both in the executive remuneration sphere and beyond, as it lists all affected resolutions and not only those related to remuneration. And it will be very useful for anyone looking to write their next article on Fat Cats!