Pensions Bulletin 2017/27

Our viewpoint

FCA confirms its initial findings on the asset management industry and finalises its remedies

In what is a landmark report for the asset management industry, the Financial Conduct Authority has published the final findings of its asset management market study and announced a package of remedies it will take forward to address the concerns identified in its interim report published last November (see Pensions Bulletin 2016/47).

The final report confirms the findings set out in the interim report – that price competition is weak in a number of areas, investors are not always clear what the objectives of funds are, that fund performance is not always reported against an appropriate benchmark and that there are concerns about the way that the investment consulting market operates.

The remedies the FCA is taking forward fall into three areas.

Providing protection for investors not well placed to find better value for money through:

  • Strengthening the duty on fund managers to act in the best interests of investors and using the Senior Managers Regime to bring individual focus and accountability to this
  • Requiring fund managers to appoint a minimum of two independent directors to their boards; and
  • Introducing technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds

Driving competitive pressure on asset managers through:

  • Supporting the disclosure of a single, all-in-fee to investors
  • Supporting the consistent and standardised disclosure of costs and charges to institutional investors
  • Recommending that the DWP continues to explore the possibility of removing barriers to pension scheme consolidation and pooling; and
  • The FCA chairing a working group to focus on how to make fund objectives more useful and consulting on how benchmarks are used and performance reported

Improve the effectiveness of intermediaries by:

  • Launching a market study into investment platforms
  • Seeking views on the FCA rejecting undertakings given by Aon Hewitt, Mercer and Willis Towers Watson to amend their practices in lieu of the FCA referring institutional investment advice to the Competition and Markets Authority; and
  • Recommending that HM Treasury considers making asset allocation advice an FCA-regulated activity

The implementation of the remedies will take place in a number of stages.  Some do not require consultation and are now being taken forward.  The FCA has published a consultation paper, focussing on the remedies related to governance and technical changes to promote fairness for investors (closing date 28 September 2017).  It has also published a consultation paper on rejecting the undertakings in lieu (closing date 26 July 2017) and intends to take a final decision in September as to whether to refer institutional investment advice to the Competition and Markets Authority.


There are no great surprises in this report as the direction of travel, which we support, was clear in the interim report.  Over the coming years, many players in the asset management market may see significant changes to the way they operate and, for some, fundamental changes to their business models may be required.  But if the result is a better and more transparent service to investors (both institutional and retail) this has to be for the good.

BHS – now the Regulator has its say

11 months after the Work and Pensions Committee delivered its damning verdict on the BHS affair (see our News Alert) it is now the turn of the Pensions Regulator to set out in more measured tones what it did and the lessons it has learned.

Much of the content of this lengthy regulatory intervention report is already known, but what comes through is the gargantuan effort the Regulator had to put in as the case went from one of run of the mill scheme funding compliance to a fully blown anti-avoidance investigation conducted in the full glare of publicity.

The report has had to await the settlement reached with Sir Philip Green and the Taveta companies announced on 28 February 2017 (see Pensions Bulletin 2017/09).  There may yet be a further report in relation to Dominic Chappell and the shortly to be defunct Retail Acquisitions Limited.

The report addresses the subject matter in chronological fashion, stopping along the way to remind readers of the legislative background and the powers available to the Regulator.

The Regulator acknowledges that it could have been quicker and more proactive with the BHS trustees in relation to the 2012 valuations and the now infamous 23-year recovery plan.  The report recounts how the agenda chopped and changed, from scheme funding compliance to solvent restructuring to sale without warning, with the trustees and Regulator struggling to keep up and not being given sufficient information along the way.  But where the report comes alive is when it deals with the anti-avoidance investigation that followed in the wake of the sale.  Here the statistics become mind-numbing.  During the course of its investigation, the Regulator issued 123 formal notices requiring information, received almost 100,000 documents and when it issued its Warning Notice to Sir Philip and the Taveta companies, not only was each notice over 300 pages long, they were accompanied by a bundle of supporting evidence and expert reports amounting to approximately 1,300 documents!

For the first time we see an outline of the Regulator’s case (albeit many of the allegations would appear to be no more than statements of fact), but because the case was settled on the basis of no admission of liability and the targets never responded formally to the Warning Notices, it is hard to judge how it might all have panned out had it gone to the Determinations Panel and beyond.

The report concludes with some lessons learned, particularly at the scheme funding compliance stage, where the Regulator says that it has taken steps to:

  • Secure additional funding from the DWP to address challenges across a number of areas including increasing its frontline resources to undertake higher volumes of casework more quickly and proactively
  • Review its internal processes and ways of working, implementing a range of internally and externally published Key Performance Indicators to ensure it continues to work more efficiently, is more outcome-focused, and that it communicates more clearly and effectively
  • Increase the number of proactive funding cases in order to influence the outcome in advance of valuations being agreed and submitted; and
  • Recruit additional staff to its case teams in support of this proactive casework approach

Interestingly, the Regulator states that it is pursuing a number of very advanced investigations to challenge imprudent technical provisions and/or inappropriate recovery plans and may exercise its long-standing powers to set the technical provisions and the contribution requirements for such schemes if the threat of so doing does not yield results.


Prevention is always better than cure and whilst there will always be cases demanding the level of activity that an anti-avoidance investigation necessitates, the Regulator must be hoping that BHS was a one-off and that by applying greater focus on funding matters, along with some new powers in relation to business sales, problems can be nipped in the bud.  We shall see.

Final settlement reached in Coats anti-avoidance case

The Pensions Regulator has announced that a final settlement has now been reached with Coats Group (formerly Guinness Peat) in this anti-avoidance case, now involving upfront payments totalling £329m in respect of over 30,000 members spread out across three DB schemes.  Its regulatory intervention report sets the background to this case, the action taken by it and the outcome that has been achieved.

At the start of the Regulator’s investigations in 2013, subsidiaries of Coats Group plc sponsored three DB schemes: the Coats Pension Plan (CPP), the Brunel Holdings Pension Scheme (BHPS), and the Staveley Industries Retirement Benefits Scheme (SIRBS).  Coats was in the process of selling off its investments in other businesses and had plans to distribute most of the proceeds to its shareholders.

With the assistance of expert evidence, the Regulator found that the statutory employers for all three schemes were “insufficiently resourced” in accordance with the Financial Support Direction regulations.  It issued warning notices on the basis that the schemes had been left with a weak employer covenant and were running inappropriately high levels of risk relative to the strength of the employer covenants.  Years of further investigations, representations, and negotiations followed, and settlement agreements were finally made in December 2016 in respect of CPP and BHPS (see Pensions Bulletin 2016/51) and in June 2017 in respect of SIRBS.  The main features of the agreements are:

  • Upfront payments totalling £329.5m into the scheme (compared to a combined deficit of around £580m on a funding basis in the schemes’ 2015 funding valuations)
  • A change in the statutory employer to Coats Limited, which provides a stronger covenant; and
  • A guarantee from Coats of the full buyout liabilities of the schemes


Following the high-profile deal with Sir Philip Green over the BHS pension schemes with a headline contribution figure of £363m, the Regulator’s much less publicised deal with Coats involves a similar amount and substantially more members.  These two successes are likely to strengthen the Regulator’s resolve to get involved with schemes early in the actuarial valuation process and intervene where avoidance is suspected, made clear in its 2017-18 corporate plan.  In this instance it appears that Coats co-operated with the Regulator from the start, resulting in a positive and negotiated outcome for scheme members.

What’s stopping pension schemes engaging in social investment?

Barriers are structural and behavioural, rather than legal or regulatory, according to a report published by the Law Commission on pension funds and social investment last Thursday.

The report considers investments which incorporate some non-financial element into the decision-making, alongside a desire for good risk-adjusted returns.  It highlights that trustees must consider the financial risks to an investment, which could include risks arising from unsustainable business practices and unsound corporate governance.  It says that trustees need to consider two tests before making investment decisions that are based on non-financial factors – that they have good reason to think that scheme members would share the concern, and that there is no risk of significant financial detriment to the fund.

Whilst the Law Commission does not consider there is any legal barrier to social investment, it recommends changes to legislative requirements in respect of the Statement of Investment Principles for trust-based schemes (and similar ones for contract-based schemes) including:

  • Trustees should be required to state their policies in relation to evaluating risks to an investment in the long term, including risks relating to sustainability arising from corporate governance or from environmental or social impact
  • Trustees should be required to state their policies in relation to considering and responding to members’ ethical and other concerns; and
  • Trustees should state their policy (if any) on stewardship, including the exercise of formal rights (such as voting) and more informal methods of engagement

The report provides two particular examples which might be considered as social investments – investment in infrastructure and property, and investment in charities and social enterprises.  It goes on to recommend options for reforms in these areas, including:

  • Further guidance from regulatory bodies on how to manage illiquid assets in the context of transaction timescales and unit prices
  • Whether social enterprises would benefit from a reorganisation of registration and regulation bodies, and the types of registers available; and
  • Engagement with pension providers and members, for example by requiring pension schemes to periodically ask for members’ views on social investment and non-financial factors


Although this 138-page report is written primarily for the Government, it is nonetheless a highly accessible read for anyone who wishes to consider more fully the benefits and pitfalls of social investment for their pension schemes.  It draws heavily on the experiences of respondents to the Law Commission’s call for evidence towards the end of last year (see Pensions Bulletin 2016/45), and as such will give trustees new to this area a good starting point for discussions.

Pensions Institute calls for a DB policy shift to assist stressed schemes

The Pensions Institute has issued a new discussion paper in which it calls on the Government to shift DB pension policy so as to provide “second best outcomes” to members of stressed private sector DB schemes.  A failure to tackle this issue could result in the steady destruction of billions of pounds in economic value, represented by the difference in the value of negotiated benefits and PPF compensation, the Pensions Institute warns.

“Greatest Good 2”, follows on from the Pensions Institute’s publication of 18 months ago (see Pensions Bulletin 2015/53) in which it suggested that there were 1,000 private sector DB schemes that were unlikely to pay pensions in full to members and their dependants.  Presented as the Pensions Institute’s response to the DWP’s Green Paper, it repeats many of the themes contained within its earlier publication.

Greatest Good 2 makes a number of findings and recommendations to improve the security and sustainability of UK DB pension schemes, including:

  • There is no evidence that deficit repair contributions are unaffordable on average or that there is a crisis that should permit schemes across the board to reduce pension increases to the statutory minimum. However, the Government should establish a statutory minimum contribution rate for all sponsors with schemes in PPF deficit, except where there is clear evidence this would make a sponsor with an otherwise realistic chance of recovery become insolvent in the near future
  • To enable second best outcomes for stressed schemes, trustees should have access to a streamlined regulated apportionment arrangement if they conclude (based on actuarial and covenant advice) that full benefits are unlikely to be paid, that insolvency is likely, and that the result is better than insolvency
  • The PPF compensation cliff-edge is unfair for younger pre-normal retirement age members and should be replaced with a phased approach based on age and length of service
  • The Pensions Regulator should collect additional funding data to create an early warning system for schemes in stress to trigger interventions in order to produce better outcomes for members, sponsors and PPF levy payers
  • The Regulator should be provided with resources and incentives to allow for these second best outcomes for stressed schemes and should produce detailed information on how its measures have been used in its annual report
  • The Regulator should have powers to compel stakeholders to attend interviews where appropriate. It should also have powers to direct trustees to reduce the benefits of active and deferred members, including preserved benefits, to help deliver fairer second best outcomes


How best to address stressed schemes is the trickiest issue thrown up by the Green Paper.  The fear amongst policymakers is that if there is explicit recognition of the issue a whole series of unintended consequences could then ensue as sponsors seek ways and means of resiling from their pension promises.  What the Government needs to decide is whether it is best on balance to stick with the current Pensions Act 2004 formulation – described by the PPI as representing a binary outcome (stick with the pension promise in full, unless insolvency drives the scheme into the PPF) – or modify it in order that second best outcomes can safely be delivered.  It will be a tough call.

New Single Financial Guidance Body outlined in Parliamentary Bill

Following from last week’s Queen’s Speech (see Pensions Bulletin 2017/26) the Bill which will establish the new Single Financial Guidance Body (SFGB) to replace the Money Advice Service, Pensions Advisory Service and Pension Wise has now been published.  It seems likely that the SFGB will be given a catchier name in due course.

As far as pensions are concerned the Financial Guidance and Claims Bill gives the SFGB the “pensions guidance function” which is to “provide, to members of the public, information and guidance on matters relating to occupational and personal pensions”.  As part of its pensions guidance function, the SFGB must provide information and guidance for the purposes of helping a member of a pension scheme, or a survivor of a member of a pension scheme, to make decisions about what to do with the flexible benefits that may be provided to the member or survivor.

When exercising its functions, the SFGB must have regard to its objectives, which are:

  • To improve the ability of members of the public to make informed financial decisions
  • To support the provision of information, guidance and advice in areas where it is lacking
  • To secure that information, guidance and advice is provided to members of the public in the clearest and most cost-effective way (including having regard to information provided by other organisations)
  • To ensure that information, guidance and advice is available to those most in need of it (and to allocate its resources accordingly); and
  • To work closely with the devolved authorities as regards the provision of information, guidance and advice to members of the public in Scotland, Wales and Northern Ireland

The pensions guidance function can be delegated by the SFGB to other persons (as can the SFGB’s other functions) but the SFGB must set and publish standards to be complied with by such a person.

The SFGB may be funded by a Government grant or loan, in which case that part relating to the pensions guidance function may be reclaimed by a levy on occupational or personal pension schemes.

The Bill also includes legislation about Claims Management companies but this is not particularly relevant to pensions.


The Government decided to create a combined body back in March 2016 and in December the Treasury published a consultation fleshing out some details (see Pensions Bulletin 2016/51).  The response to that consultation has yet to be published.

The SFGB (or whatever it is finally called) will have a large amount of territory to cover.  We hope that pension matters are given a high priority and that suitable resources are allocated.

Statutory LGPS investment guidance ruled unlawful

In a case which has generated considerable publicity the pressure group Palestine Solidarity Campaign has succeeded in challenging the local government minister’s statutory guidance on Local Government Pension Scheme (LGPS) investment.

The LGPS is a scheme governed by statute and new regulations made in September 2016 required local authorities to formulate an investment strategy in accordance with statutory guidance.  The regulations also set out the matters that local authorities must include in their investment strategy.  One of these is their policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments.

On finalising the regulations the local government department issued, without consultation, the statutory guidance.  Under the social, environmental and corporate governance factors heading this guidance stated that “the Government has made it clear that using pensions policies to pursue boycotts, disinvestment and sanction against foreign nations and UK defence industries are [sic] inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”.  This was summarised as “should not pursue policies that are contrary to UK foreign policy or UK defence policy”.

The Palestine Solidarity Campaign and one of its pension scheme members challenged this guidance via judicial review proceedings, on three grounds:

  • It went beyond the proper scope of the minister’s statutory powers to issue guidance for pension purposes
  • It lacked certainty and clarity to the extent as to render it unlawful; and
  • It breached EU law in the shape of the “IORP I” directive which forbids investment decisions being subject to a “prior approval” requirement

The court ruled in favour of the claimants on the first ground while rejecting the other two and granted the judicial review requested meaning that this aspect of the guidance is effectively scrapped.


As the judge stated, this case has nothing to do with the political merits of the arguments put by the campaigners or the Government.  He found against the Government on the legal point of the scope of the statutory power to issue guidance.

Whether or not some local authorities will now move to avoid Israeli or defence industry investments when setting LGPS investment strategy remains to be seen.  Authorities will still need to satisfy themselves that these are appropriate non-financial factors to take into account before changing policy.

We do not see a direct read-across to occupational trust-based schemes.  There is no guidance or code from the Pensions Regulator similar to the guidance successfully challenged here and we doubt whether there would be the will or inclination to issue any.  According to fairly well settled law trustees may take non-financial factors into account – the Regulator’s DB investment guidance sets out how this can work – but it is far from clear whether it would be appropriate for trustees to take overtly political factors such as those at issue here into account when setting investment strategy.  The case does nevertheless illustrate that trustees may come under pressure from campaigners to do just this.

DUP forces pensions concessions as the price of supporting the Government

On Monday the lengthy negotiations between the Democratic Unionist Party and the Conservatives concluded with a written “confidence and supply” agreement signed at No.10 that will run for the length of this Parliament.

In relation to pensions the State pension triple lock is to be maintained.  The Conservatives had intended to remove the 2.5% component in 2020.  The Conservatives’ plans for means-testing winter fuel payments have also been put on hold for the duration of the agreement with the DUP.


These are significant and UK-wide concessions.  Only last Friday, David Gauke, the new Secretary of State for Work and Pensions, said that the triple lock on state pensions is unsustainable and will have to be “reflected” on in 2020.  If this Parliament is still in business by then it would seem that such reflection will need to be deferred – certainly if we are to take the Pensions Minister, Guy Opperman, at his word, when on Tuesday, in response to a written question he said that the Government is committed to the triple lock for the remainder of this Parliament.

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.

Subscribe to receive our Pensions Bulletin and News Alerts