Brexit – Article 50 trigger and Great Repeal Bill announced
We had some very significant announcements about the Government’s Brexit strategy last weekend, obviously with more detail to come.
First, the Prime Minister announced that she will trigger Article 50 of the Treaty on European Union by the end of next March. This will set the two year clock on UK exit from the European Union running.
Secondly, the Prime Minister announced a “Great Repeal Bill” to be introduced to Parliament in the next Queen’s Speech (probably around next May but not scheduled yet). We will not see a draft bill until next year but it seems that this will:
- Enshrine all EU legislation applicable in the UK on the date of the UK’s exit from the EU (which will be in the first quarter of 2019, absent an extension of the two year negotiation period specified in Article 50); and
- Repeal the European Communities Act 1972, which obliges the UK to adopt EU law, on the same date – this will have the consequence that the supremacy of the European Court of Justice over British courts will end from the same date
When and if the Great Repeal Bill is enacted this should mean that the UK Parliament (including the devolved assemblies in relation to matters reserved to them) may review, amend or repeal legislation, including pensions legislation, without regard to the EU.
Comment
These are the first really concrete announcements that the May government has made about Brexit and, despite the many uncertainties, we now have a clearer idea as to when the UK will leave the EU and how the UK legal system is to be disentangled from that of the EU. We await with interest to see how precisely this will affect the pension law framework, but in the meantime you may wish to look at our current thoughts on this.
FCA proposes slippage cost method for measuring DC transaction costs
In what is likely to be regarded as a significant step forward in the disclosure of transaction costs, the Financial Conduct Authority is consulting on rules and guidance that FCA-regulated asset managers will need to follow when disclosing transaction costs to those running DC workplace pension schemes. For the first time, asset managers will be required to disclose on request the transaction costs that their DC clients (such as trustees) incur in a standardised way.
This development follows the FCA and DWP’s joint call for evidence on this topic in March 2015 (see Pensions Bulletin 2015/10).
The general principle underlying the slippage cost approach is that the difference is taken between the price at which an asset is valued immediately before an order is placed into the market and the price at which it is actually traded. This has the benefit of being able to be driven from information which should already be being recorded by the asset manager. The consultation paper touches on other ways in which transaction costs can be measured, but concludes that the slippage cost is the one that should be taken forwards.
The paper explores issues specific to asset classes (including equities, bonds, currency, derivatives and illiquid assets such as property), sets out a proposed approach to amalgamating transaction costs at arrangement level, before concluding with how the transaction costs should be disclosed. On this last point the FCA does not intend to set out detailed rules but proposes that:
- Asset managers should provide transaction costs on request, as a total cost with a breakdown into categories of identifiable costs (such as taxes, explicit fees and charges, and securities lending costs)
- Contextual information should be provided, such as about the return and risk of the fund and the administration charges involved; and
- Although a specific frequency for reporting is not to be mandated, it makes sense for asset managers to include information about transaction costs within standard reporting cycles of the provider or investment manager to the governance body
The FCA is also proposing rules requiring the disclosure of administration costs charged by FCA-regulated firms and scheme operators to DC governance bodies.
Consultation on the FCA’s proposals closes on 4 January 2017 and the FCA intends to publish the finalised rules in a policy statement in the second quarter of 2017.
Comment
Since April 2015 trustees of DC occupational pension schemes and Independent Governance Committees of workplace personal pension schemes have had a duty to request and report on transaction costs as far as they are able. But without a matching duty on asset managers to provide full disclosure in a standardised way, scheme governance bodies may not be able to perform their function of assessing whether scheme members are receiving value for money. The FCA’s proposals are therefore an important step.
In addition, now that disclosure to governance bodies is being addressed, the FCA and the DWP will be able to commence the requirement under section 44 of the Pensions Act 2014 for transaction and administration costs to be published and the former disclosed to scheme members, but first they will need to consult on rules and regulations.
DWP consults on the advice requirement for overseas transfers
Since April 2015, where a member has “safeguarded benefits” with a value above a certain threshold, the trustees must check that the member has obtained “appropriate independent advice” before transferring any of the benefits with a view to the member acquiring flexible benefits under another scheme.
Safeguarded benefits are defined as benefits which are not money purchase or cash balance benefits and the above requirement applies where the value of the safeguarded benefits is more than £30,000. The advice must be provided by an adviser regulated by the Financial Conduct Authority.
The advice requirement applies equally to those who wish to transfer their UK benefits to an overseas scheme as it does to UK to UK transfers. For the former it is not always possible for a UK-based adviser to provide complete or holistic financial advice. For this, and related reasons, the DWP has therefore published a call for evidence on changing the requirement.
Apart from retaining the current position the ideas floated are:
- Abolish the advice requirement for overseas transfers being undertaken for those who are or who plan to be resident overseas; or
- Introduce a requirement for overseas residents to take “equivalent” financial advice locally
The difficulties of defining residence or equivalence are amongst the issues that the DWP is seeking views upon by 23 December.
Comment
Given that the advice requirement has become an important safeguard against pension fraud, a lot of which involves overseas schemes , abolishing it for overseas residents seems to us to rank quite highly in any list of terrible policy ideas. As the suggested alternative is quite problematic, it is not obvious that the DWP will be able to offer any easement to overseas residents who find that they are currently somewhat stuck.
Pensions Regulator voids erroneous modification
A very small DB scheme’s acceptance into the Pension Protection Fund has been put back on track following the Pensions Regulator using its “voidable modification” powers under the Pensions Act 1995.
A few years before DCT Civil Engineering Limited went into administration, a Deed had been executed which purported to turn the benefits from DB to DC. This despite the scheme actuary informing the trustees that this was not possible without either member consent or actuarial certification (which it would seem would not be possible). Subsequently the trustees realised that what they had done was a mistake.
When the scheme was being assessed for PPF entry its true status needed to be established because if in fact it was DC its members would not be eligible for PPF compensation.
Thankfully, at the request of new trustees, the Regulator was able to step in and declare the modification void as it had clearly not been undertaken in accordance with the modification powers set out under Section 67 of the Pensions Act 1995.
This whole story has now come to light through the publication of a regulatory intervention report.
Comment
A good result, and as the Regulator notes, far better than the alternative of the new trustees applying to the High Court for a rectification order.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
