Pensions Bulletin 2018/25

Our viewpoint

Consultation launched on amendments to SIP regime

The DWP has launched its long-awaited consultation on changes to the operation of the Statement of Investment Principles (SIP) and separately has issued the Government’s final response to the Law Commission’s report on pension funds and social investment (see Pensions Bulletin 2017/53).

The consultation package comprises the consultation document itself, the draft regulations and consequential changes to DWP’s statutory guidance on cost charge reporting by DC schemes (see Pensions Bulletin 2018/09).

In the consultation document the DWP says that confusion and misapprehension over trustees’ investment responsibilities persists, with evidence of trustees incorrectly thinking that environmental, social and governance (ESG) risks are irrelevant to, or run counter to, financially material concerns.  The proposed regulations are, therefore, intended to reassure trustees that they can (and should):

  • Take account of financially material risks, whether these stem from investee firms’ traditional financial reporting, or from broader risks covered in non-financial reporting or elsewhere
  • Fulfil the responsibilities associated with holding the investments in members’ best interests – whether directly or by others on their behalf – not just through voting, but the full range of stewardship activities, such as monitoring and engaging with investee companies
  • Have an agreed approach on the extent, if at all, to which they will take account of members’ concerns, not only about financially material risks such as ESG, including climate change, but the scheme’s investment strategy as a whole; and
  • Use the SIP as a real, effective and regularly-reviewed guide to investment strategy and not as a generic “box-ticking” document

The proposals, which are in part a response to the Law Commission’s earlier proposals, but go further than had been expected, are set out below.  The timings assume that the draft regulations are laid before Parliament this autumn.

All schemes

By 1 October 2019, all trustees (where they are required to produce a SIP), must update or prepare their SIP to set out:

  • How they take account of financially material considerations, including (but not limited to) those arising from ESG considerations, including climate change; and
  • Their policies in relation to the stewardship of the investments, including engagement with investee firms and the exercise of voting rights associated with the investment

From the same date, trustees of such schemes will also, when they next prepare or update their SIP, need to prepare a separate “statement on members’ views” setting out how they will take account of the views which, in their opinion, members hold, in relation to the matters covered in the SIP.

Money purchase schemes

From 1 October 2019, trustees of “relevant schemes” (broadly schemes offering money purchase benefits, subject to a few exceptions), will also have to:

  • Publish their SIP, and the “statement on members’ views”, on a website and inform scheme members of their availability via the annual benefit statement; and
  • Prepare or update the SIP for their default strategy to set out how they take account of financially material considerations, including (but not limited to) those arising from ESG risks, including climate change

From 1 October 2020, such trustees will also have to:

  • Produce an implementation statement, to be included in the annual report, setting out how they acted on both the SIP and on the “statement on members’ views”; and
  • Publish that implementation statement on a website and inform scheme members of its availability via the annual benefit statement

(The DWP believes that the requirement to publish will not be a significant extra burden because relevant schemes will in the future be required to publish various cost and charge information online).

The DWP is also using the consultation to ask for views on how well the other components of the SIP are working, but has no immediate plans to make any other changes to the SIP requirements.

Consultation closes on 16 July 2018.  Once the regulations are made, the Pensions Regulator will update existing codes and guidance for both DC and DB schemes and will consider what additional guidance may be helpful for trustees in understanding their duties.

In addition, the Government’s final response to the Law Commission’s report on pension funds and social investment shows some firming up in some areas that were mentioned in the initial response last December.  These include the following:

  • The FCA now intends to consult in the first half of 2019 on a package of rule changes and guidance for independent governance committees of workplace personal pension schemes to deliver reforms similar to those outlined above
  • The Pensions Regulator will: (a) consider further guidance about investments in funds with longer dealing cycles so trustees are aware they can access a wide variety of investments to generate returns and value for members; and (b) provide further guidance on how trustees’ investment strategies can include assets with long-term investment horizons in a diverse portfolio


These proposals are more than the clarifications we were promised in relation to ESG issues and stewardship.  Instead the DWP is building an expanded SIP regime, especially for DC schemes, through which it hopes that trustees will make greater use of the SIP to guide their investment decision-making.  Whilst the DWP explicitly states that none of its proposals seek to direct pension scheme investment in line with either the members’ wishes, or in line with Government policy objectives, the days of the SIP as a mere compliance document may be over.

Corporate Governance Code published for large private companies

The next step in improving corporate governance in private companies has been taken by the publication of a proposed “apply and explain” code along with the laying of draft regulations before Parliament.  This follows a Green Paper on Corporate Governance Reform published in 2016, a report from a House of Commons Select Committee published in 2017 and the Government’s response to the Green Paper published in 2017.

Companies will be able to voluntarily adopt the Wates Corporate Governance Principles for Large Private Companies, which was published by the Financial Reporting Council on 13 June and sets out six principles (with accompanying guidance):

  • Purpose – an effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose
  • Composition – effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company
  • Responsibilities – a board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge
  • Opportunity and risk – a board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks
  • Remuneration – a board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company
  • Stakeholders – a board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good stakeholder relationships based on the company’s purpose

Consultation closes on 7 September with the aim of finalising the principles for publication in December 2018.  This will then tie in with the draft Companies (Miscellaneous Reporting) Regulations 2018 which require, for financial years starting on or after 1 January 2019, all companies of a significant size that are not currently required to provide a corporate governance statement to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal corporate governance code (and if not, why not).


This initiative is as a result of concerns being expressed in recent years as to how private companies can be run with potentially adverse implications for the workforce and its pension entitlements should things go wrong.  It is hoped that these principles will improve transparency and accountability for such companies.

House of Lords Committee looks into the use of the RPI as a measure of inflation

Following comments to the House of Lords Economic Affairs Committee by the Governor of the Bank of England in January 2018 that it may be time to transition away from using the Retail Prices Index, the same Committee has now launched a short inquiry into the use of the RPI.

At two witness sessions held on 12 June, the Committee asked for an explanation of the issues with the calculation of RPI and CPI (especially as compared with CPIH), whether the RPI should stop being used as a measure of inflation, what reasons are there for keeping the RPI, what impact would changing RPI have on the people and organisations who use it and the process for making changes to the RPI.  They also asked the witnesses to explain why they thought it was more important for a statistic to be consistent than correct and what they, personally, would like to see happen to the RPI.

The witnesses in the first session were Chris Giles, Economics Editor of the Financial Times and Paul Johnson CBE, Director of the Institute for Fiscal Studies.  In the second session those giving evidence were Jonathan Athow, Deputy National Statistician and Director-General for Economic Statistics, Office for National Statistics and Sir David Norgrove, Chair of the UK Statistics Authority.

An interesting point brought out in the first session was that the overwhelming majority of index-linked gilts could in theory not be affected by switching the underlying link away from the RPI – apparently there are only three issues of index-linked gilts where clauses stipulate a process that must be followed to do this; it seems the prospectuses for all the more recently issued gilts just say that they would be linked to an index that the Chancellor considers “continues the function of being an officially recognised index measuring changes in the level of UK retail prices”.  In the second session, however, the point was made that even where this is so, for any change to be made to the actual RPI, the legislation requires a two stage process with firstly the Bank of England deciding whether the change is fundamental and, if so, whether it is detrimental to the holders of index-linked gilts and secondly the Chancellor deciding whether the change can be made, which could give him the right of veto.

There were mixed responses to the question of what the witnesses personally would like to see happen to the RPI, with Chris Giles intimating he would like to see CPIH replace RPI, Paul Johnson asking that the Committee recommends to Government that they stop using RPI wherever possible, but also asking that the index be corrected for those who must still use it, with Sir David Norgrove and Jonathan Athow both leaning towards discontinuing the RPI over time to mitigate legacy issues.

Further witness sessions are being held and the Committee intends to report its findings before the summer recess.


This latest inquiry broadens the debate from the statisticians who for some time have been making clear that the RPI is a flawed measure of inflation (see for example Pensions Bulletin 2018/12).  It will be interesting to see what the Select Committee concludes and how the Government responds.

A pension boost for workers in the gig economy?

Pimlico Plumbers continued its losing streak in the law courts on 13 June when the Supreme Court agreed with the Court of Appeal that a plumbing and heating engineer who used to work for Pimlico, despite not being an “employee” was a “worker” who had been in Pimlico’s “employment”.

The significance of this decision is that, as with the Court of Appeal, Employment Appeal Tribunal and Employment Tribunal judgments beforehand, it potentially extends employment protection to those who, despite being asked to work on a self-employed basis, have aspects of the contractual relationship with the business they work for that makes them more like employees than those who are genuinely self-employed.  These employment protections could include the right to be auto-enrolled into a qualifying pension scheme under the Pensions Act 2008.


This latest decision will add grist to the mill for those working in the gig economy and who are seeking clarity as to their status and employment rights.  The Government is also likely to take action in this area, but not for some while.

In February the Government responded to last year’s Taylor review on modern working practices (which amongst other things recommended that the “worker” definition be replaced by a new category of “dependent contractor”), by calling for more evidence.

So it seems that it will be some time before the Government delivers on the clarity that many seek.  In the meantime the court cases are likely to keep coming.

Multi-employer Pension Schemes Bill available

The text of a private member’s Bill is now available ahead of its second reading in the House of Commons on 6 July.  Sponsored by Alan Brown, a Scottish National Party MP, but with support from backbenchers in all the major parties, it seeks to bring relief to those in unincorporated businesses (such as plumbing businesses) who participate in multi-employer DB pension schemes and might as a result become exposed to substantial pension liabilities that they can ill afford and from which they cannot escape.

The Bill seeks to amend the employer debt regulations so that in relation to multi-employer schemes only:

  • The scheme’s liabilities for section 75 employer debt purposes is calculated by reference to the scheme’s technical provisions used for scheme funding purposes (possibly with margins for prudence removed), rather than the current buyout measure
  • In any allocation of the section 75 debt to an employer, no account is taken of liabilities attributable to previously departed employers (ie orphan liabilities); and
  • An employment-cessation event does not occur where a participating employer who is not a limited liability company becomes a limited liability company

It also seeks to amend the Pensions Act 2004 so that if a scheme is running a deficit on a PPF entry basis, any orphan liabilities are replaced by PPF compensation.


This Bill is technically unsound in its current form and runs against Government policy.  We would be very surprised if it finds its way onto the statute book.  Nevertheless, it will provide a useful basis for Parliamentary discussion in relation to the woes of those participating in certain industry-wide DB schemes, such as the Plumbing and Mechanical Services (UK) Industry Pension Scheme.

Equitable Life to be sold for £1.8bn

On 15 June 2018 Equitable Life announced that it had signed an agreement with Reliance Life Limited (Reliance Life) under which it is proposed that Equitable Life and all of its business transfer to Reliance Life.

The proposal is to:

  • Convert Equitable Life’s “with-profits” policies to “unit-linked” funds which is expected to enable an increase in the current 35% capital distribution to a level between 60% and 70%
  • Close the “with-profits” fund, which means the guaranteed interest rate applying to most polices would end; and
  • Transfer Equitable Life’s policies to Reliance Life

This is expected to complete towards the end of 2019, subject to the majority of with-profits policyholders agreeing in a vote and subsequent approval by a High Court judge.

Reliance Life is a newly formed and authorised UK Life Company established as a specialist UK run-off manager.  It recently completed the acquisition of Reliance Mutual Insurance Society Limited and has approximately 200,000 policies and manages assets of £1.9bn from its offices in Tunbridge Wells.  It is part of Life Company Consolidation Group (“LCCG”), a specialist European life assurance group.


We see this is a positive development for Equitable Life’s policyholders.  If approved, the proposed uplift to the capital distribution for most with-profits policies will represent a significant enhancement for with-profits policyholders.  Policyholders can also expect to benefit from enhanced security of Reliance Life’s capital policy and the economies of scale from being part of the wider LCCG group.

As far as occupational pension schemes are concerned, it is generally the trustees who are the policyholder of, for example, any AVC investment held with Equitable Life by members of their scheme.  In such cases, the trustees will be asked to vote on the proposal acting on behalf of all their members with AVC contracts.

Whilst some might be sad to see the end of the world’s oldest mutual insurer, many more will be pleased to see an end to the Equitable Life saga that began nearly 20 years ago when the House of Lords ruled that it was not legal for it to cut bonus rates to pay for guarantees.  Equitable Life has been limping on (eg see Pensions Bulletin 2016/47) since then but with increasing uncertainty for with-profits policyholders as the residual policies run-off.  If approved, this proposal would remove the dilemma as to whether to hold out in the hope of an improvement in the current 35% capital distribution or to “get out” while the 35% uplift is still available.

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.

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