CMA publishes fees and quality paper

The Competition and Markets Authority has published the first working paper in its investigation into the investment consultancy market (see Pensions Bulletin 2017/40).  It contains the CMA’s analysis and emerging findings on the information available to pension scheme trustees on the fees and quality of investment consultants and fiduciary managers.  The paper focuses primarily on whether trustees have access to the necessary information to assess (and subsequently monitor) their current and potential providers.

The CMA says that the evidence reviewed so far indicates that competitive processes are not providing trustees with the necessary information to judge the value for money of investment consultants and fiduciary managers.  It goes on to say that the potential competition concern with this is that trustees are not well-equipped to choose, and subsequently monitor the performance of, their provider and in turn to drive competition between investment consultants, and between fiduciary managers.

This then leads the CMA to sketch out some potential remedies.  These include:

• Empowering trustees to request better information, via guidance and off-the-shelf materials for running better tenders
• Requiring firms to provide better, comparable information, such as standardised information for prospective clients in response to tenders, better fee information and standardised performance metrics

The CMA has also asked for comments on a number of other areas, including the proportionality and potential unintended consequences of each proposed remedy and also invited suggestions of any alternative potential remedies that it may not have included.

The deadline for responses to this working paper is 22 March 2018 and the CMA’s intention is to publish its provisional decision report in July 2018.

Comment

As the CMA says, given that its inquiry is ongoing, no provisional or final decisions have been made at this stage on any potential adverse effects on competition or on potential remedies.  But this first paper is an indication of the sort of conclusions that the CMA may reach.

Latest research shows that mortality improvements continue to ease off

The actuarial profession has released its latest mortality projections model, CMI_2017, the accompanying analysis for which shows that average mortality improvements over the six years since 2011 have been 0.5% per year for males and 0.1% per year for females.  These are both significantly lower than for any other recent six-year period.

The profession says that this provides further evidence in favour of a change in trend, and suggests that the lower level of recent improvements is likely to be due to more persistent influences, rather than very short term events such as the early 2015 influenza outbreak.

A Briefing Note on CMI_2017 has also been issued, which is aimed at those receiving advice based on the model, such as pension scheme trustees.

Comment

So the blip becomes a trend.  Mortality has improved over the last six years, but at a much lower rate than a number of years ago (although the causes of the slowdown remain up for debate).  This is important because mortality assumptions allow for a certain level of improvement to continue in the future, so users may now ask themselves if their assumptions for the future remain compatible with the recent experience.  

MPs grill regulators on climate risks

The House of Commons Environmental Audit Committee has been hearing evidence from financial regulators and other relevant parties as part of its Green Finance inquiry.  The inquiry is examining how the UK can mobilise the investment necessary to meet its climate change targets and factor sustainability into financial decision-making.

The Committee has announced that it has written to the 25 largest pension schemes to find out how they are responding to known environmental risks such as climate change. This follows statements from the Department for Work and Pensions and the Pensions Regulator that climate change is a financially material risk that trustees have a duty to take into account.

In its evidence, the DWP committed to remove barriers which might constrain trustees in appropriately considering and taking account of environmental, social and corporate governance factors, including climate change.  It also gave further information about its forthcoming consultation on changes to the Investment Regulations that govern schemes’ Statements of Investment Principles (see Pensions Bulletin 2017/53) now expected in May or June 2018, with a view to bringing forward legislation “at the earliest reasonable opportunity”.  The changes, which will go beyond minor technical amendments, are intended to address trustee confusion about their fiduciary duties in relation to environmental and social issues and clarify the requirements in relation to engaging with investee companies with a view to maximising long-term member returns.

Comment

Previous statements from the DWP and the Pensions Regulator have made it clear that trustees can take account of climate-related risks if they are financially material, but left trustees to judge whether the materiality test is met.  Now, prompted by MPs, they have given a strong steer that such risks are financially material and so trustees should take them into account.  Trustees who have not yet considered the implications of climate risks and possible mitigating actions should put it on their agenda.

LCP’s survey finds there is still plenty of room for improvement on responsible investment

There is a wide variation between investment managers in terms of their approach to responsible investment, suggesting plenty of room for improvement, according to LCP’s latest responsible investment survey report.

The survey asked investment managers in-depth questions about how they integrate environmental, social and governance (ESG) considerations into their investment processes and exercise ownership rights such as voting at AGMs and engaging with company management.  There were 120 respondents, including nearly all the major institutional investment managers in the UK.

Overall, 8% of respondents achieved the top score and 20% received the bottom score (on a four-point scale).

The proportion of managers who have committed to the UN-backed Principles for Responsible Investment (PRI) has increased to 78%, from 66% in LCP’s 2015 survey. All of the highest scoring managers were PRI signatories, but it was found not to be a sufficient condition for a high score – there are some signatories who are often not following best practices on responsible investment and were awarded the lowest score.

The survey found that most managers performed well on public commitment to responsible investment and voting practices.  Areas for improvement included board level accountability for responsible investment implementation, actions to address climate-related risks, and engagement with investee companies on ESG topics.

Comment

The survey results show that trustees can’t just assume that their investment managers are doing a good job for them in the area of responsible investment behind the scenes.  For trustees to fulfil their duties in this area, they need to find out how their managers are addressing ESG issues and exercising ownership rights, and challenge them on any areas of weakness. 

An Annual Allowance warning in bonus season (also relevant in other situations)

We are approaching bonus and pay review time for many.  Now might therefore be timely for a reminder that employers and pensions managers need to take care of the potential Annual Allowance implications of pay discussions – including bonuses and taxable redundancy.

Here is a hypothetical suggestion from an employer:

“We are due to pay bonuses to everyone in March.  We plan to contact some high earning members to ask each if they would like it in April instead, because the bonus might reduce their Annual Allowance under the taper.  If their Annual Allowance usage was big in 2017/18, arranging a bonus move to 2018/19 could mean less of a reduction in their 2017/18 Annual Allowance due to the taper and so less 2017/18 Annual Allowance charge.

On the face of it, this might seem like it could be a good plan.  But this has a big pitfall as a result of anti-abuse provisions in tax law:  

• If a deliberate “arrangement” is entered into to reduce “income” in tax year A for an increase in tax year B
• And if one of the main purposes is to lessen the tapering of the Annual Allowance for tax year A that would otherwise apply

then the calculation of the tapered Annual Allowance must ignore the reduction in income for tax year A.

As a result, the tapered Annual Allowance calculations would have to add back in the income moved; so the individual’s tax year 2017/18 position would not be improved; while the 2018/19 position may also have been worsened. 

Any consideration on bonus re- timing (or indeed other lump sums such as taxable redundancy payment) should therefore be careful to manage this point appropriately.  Legal advice is recommended. 

Having said that….

There is just enough time left for individuals who are worried about the impact of the taper for 2017/18 to lessen their taxable income by paying charitable contributions via payroll; or unintuitively by making a personal pension contribution (care is required as this would also increase their Annual Allowance usage).  The impact of such contributions on the taper position could be particularly positive in some cases if it takes “Threshold Income” from above £110,000 to below. 

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.