FCA finalises rules implementing Shareholder Rights Directive
The Financial Conduct Authority has finalised its proposed rules implementing the revised EU Shareholder Rights Directive requirements applicable to FCA-regulated financial services firms on which it consulted in January (see Pensions Bulletin 2019/05).
From a pension scheme perspective, the Conduct of Business Sourcebook (COBS) is being amended so that where an FCA-regulated financial services firm – broadly an asset manager or insurer – invests in shares traded in a regulated market on behalf of a pension scheme, the asset manager must disclose various items including:
- How it contributes to the medium to long-term performance of the scheme
- The key medium to long-term risks associated with the investments
- Turnover and turnover costs
- The use of proxy advisors for the purpose of engagement activities
- How the firm makes investment decisions based on evaluation of medium to long-term performance of an investee company, including non-financial performance; and
- Whether any conflicts of interest have arisen in connection with engagement activities and how the firm has dealt with those conflicts
The asset manager must also develop and publicly disclose (on a comply or explain basis) an engagement policy, and disclose annually how this policy has been implemented.
The FCA consultation also set out proposals which have now been finalised, relating to issuers in respect of certain transactions they enter into with a related party (Related Party Transactions or RPTs).
All these requirements come into force on 10 June 2019. However, although engagement policies need to be published (or explanations why not) by this date, for an initial period it is acceptable to explain what is being done to develop an engagement policy. By contrast, annual disclosures will need to begin for the first full period after the rules come into effect and the extended RPT requirements must be met from the start of the first financial year after the new rules come into force.
Comment
The wheels of Brexit haven’t turned quickly enough for the FCA to consider the alternative proposals that were mooted in the event of a no-deal Brexit, so pension schemes can look forward to additional disclosures from their asset managers shortly.
Supreme Court to decide on Staveley case
We understand that the ruling in favour of HMRC in the Court of Appeal (see Pensions Bulletin 2018/42) is to be appealed to the Supreme Court.
This case concerned a transfer from an occupational ”section 32 policy” (where death benefits would be directed to the member’s estate) to a personal pension plan (where death benefits are paid under discretionary trust outside the member’s estate) that took place whilst Mrs Staveley was terminally ill.
Although inheritance tax avoidance was not the apparent motivation for the transfer, HMRC took the view that following her death soon after, the fact of the transfer resulted in IHT becoming due.
Comment
Clearly, we need to wait for the Supreme Court’s ruling on this issue to see whether firstly it takes the appellant’s side and secondly whether what it has to say is of importance beyond the case in question.
What we will be hoping for is a ruling to close off an extra but uncertain risk members have to think about when deciding whether to transfer (whether DB to DC, DC to DC, or DB to DB, and from/to trust and contract-based schemes) – that it might compromise the usual expectation that death benefits from a pension scheme using discretion are free of IHT. The ruling hoped for is one that ends HMRC’s contention that transfers between pension schemes could give rise to a transfer of value for IHT purposes, on which HMRC may seek IHT, if the individual was knowingly not in good health at the point of transfer and dies within two years of the transfer taking place.
HMRC decides not to appeal in Fixed Protection reinstatement case
HMRC has confirmed that it has decided not to contest the First-tier Tribunal’s ruling last year that an individual’s Lifetime Allowance Fixed Protection be reinstated (see Pensions Bulletin 2018/48).
In the case of Hymanson vs HMRC, the First-tier Tribunal focussed on the consequences of Mr Hymanson continuing to pay contributions to his DC scheme, arguing that the loss of Fixed Protection resulting from his mistake (based on genuine confusion) was so severe that not only would the remedy of rescission be appropriate, but also that the High Court would agree.
The First-tier Tribunal further took the view that when HMRC decided to revoke Mr Hymanson’s Fixed Protection certificate it had not taken into account all the factors that were relevant in this situation – in particular that the payments in question could be rescinded because of Mr Hymanson’s mistake. And so, on this basis HMRC’s decision was struck down as being unreasonable.
Comment
The case suggests that, even when the absolute facts imply that an individual has lost Fixed Protection (or indeed Enhanced Protection), the individual may be able to advance arguments that HMRC has to consider before it decides whether to revoke the certificate.
Will this lead to a flood of successful claims to have “accidentally lost” certificates? Perhaps, but we assume HMRC will have thought not, in its decision that “due to the particular circumstances of this case, it is not now appropriate to continue with the appeal to the Upper Tribunal”. In particular, HMRC says in relation to this case that a decision in a First-tier Tribunal “does not set a legal precedent”, and that questions of mistake are for the administrative courts, not the Tribunal.
Inevitably, the particular facts of each case will matter (the Hymanson case had some unique features causing his confusion) and getting a case across the line - if it involves Tribunal or administrative courts will not be a trivial matter – but perhaps worth a go if the amount of tax at stake is large.
Extension to directors’ remuneration requirements finalised
The regulations concerning shareholders’ voting rights on directors’ remuneration, that were laid in draft in April (see Pensions Bulletin 2019/16), have now completed their passage through Parliament and have been re-issued in final form. They come into force on 10 June 2019.
The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (SI 2019/970) implement Article 9a (the right to vote on a company’s remuneration policy) and Article 9b (information to be provided in and right to vote on the remuneration report) of the revised EU Shareholder Rights Directive.
The scope of the existing UK legal framework for quoted companies with regards to the approval of and voting on directors’ remuneration has been extended by bringing unquoted traded companies within scope. The regulations also bring the Chief Executive Officer and any deputy Chief Executive Officer within the disclosure framework whether or not either are directors.
The current requirements have also been changed so that, among other matters:
- If the company wishes to make a remuneration payment to a director that is not consistent with the approved policy, shareholders are required to approve an amendment to the policy so that the company can make the payment. Previously shareholders were required to approve the actual payment
- A five-year history of annual percentage change in remuneration of each director and an average for all employees is built up from 10 June 2019. Previously only a one-year comparison of the CEO’s and employees’ remuneration needed to be disclosed
Comment
These changes to UK law required by the Directive are quite modest and as such we do not expect them to have much of an impact. However, they will give shareholders new information and modified powers in relation to directors’ remuneration which may assist shareholder engagement in years to come.
Pension fund assets in the UK still the second highest in the OECD
There are nearly $3 trillion of assets in UK pension funds according to the latest study by the OECD, the second highest in any OECD country (behind the USA’s more than $15 trillion). That equates to nearly 105% of the UK’s GDP, the fifth highest of the 36 OECD countries surveyed (and higher than any of the non-OECD countries included).
The figures exclude retirement vehicles that are not pension funds, such as pension rights included in employers’ books (used in countries such as Austria, Germany and Sweden) and other vehicles offered and managed by banks, investment companies or other entities, but they still show the UK in a relatively favourable light.
In terms of asset allocation, the UK has one of the lowest percentages of investment in equities (around 10%) and one of the highest allocations to “other” types of asset (around 30%).
Comment
Whilst concerns remain about the funding of UK pension schemes it is worth remembering that UK scheme assets still make up over 10% of the pension fund assets across the OECD, albeit that some other countries rely on slightly different types of provision.
NHS Pension Scheme to change to tackle pensions tax issue
The NHS Pension Scheme is to be modified, as signalled last month, to tackle the issue of senior staff cutting their hours or even retiring early because taking on extra shifts, and in some cases continuing to work, can expose them to substantial pension tax bills given the direct linkage between pay and pension provided by the NHS Pension Scheme and the operation of the tapered annual allowance.
The announcement headlines the launch of a “People Plan” for the NHS, although according to a ministerial statement the consultation on the pension changes is only “planned” at this stage.
The main issue seems to be that many senior doctors earn enough money from their core hours plus additional shifts to be potentially affected by the tapered annual allowance. In addition, because of the relative generosity of the NHS pension scheme, pension rights can be built up quite quickly, especially for those who experience a step-up in pension rights because of a promotion.
Under the proposals, senior clinicians will be offered a 50:50 option in which they can halve their pension contributions in exchange for “halving the rate of pension growth”.
Comment
We will need to wait for the actual consultation to see the extent to which the Government’s proposals can address the concerns being expressed by doctors. However, it seems that what is being proposed is only a partial solution to the doctors’ dilemma. And, of course, there is no comfort for higher earners generally for whom the impact of pensions tax can be perverse.
