4 April 2019
MPs demand tightening of dividend payment regime
In a report notable for its suggestion that the audit practices of the “Big Four” be separated from their consultancy services, the House of Commons’ Business, Energy and Industrial Strategy Select Committee is calling for a tightening of the UK’s dividend payment regime.
The Committee’s report recommends that the Financial Reporting Council urgently reminds directors and auditors of their duties relating to the accounts and imposes severe sanctions for breaches, and it criticises what it sees as FRC inactivity in this area. It demands that auditors be prepared to challenge management on their accounting of realised profits and distributable reserves.
The report goes on to ask that the Government and the FRC work together to produce a clear, simple and prudent definition of what counts as realised profits for the purpose of distributions.
It also asks that the Government urgently takes steps to address concerns that the valuation of goodwill can overstate what is available for distribution, makes explicit the principle of prudence in the law and its interpretation, requires companies to disclose the balance of distributable reserves in the annual accounts and break down profits between realised and unrealised, and adopts a solvency-based system (to complement the revised capital maintenance regime) in which directors must state that dividend payments will not make the company insolvent or create cashflow problems.
Other recommendations include the following:
- Some measures to improve both competition and professional scepticism in the audit market, such as increasing the frequency of audit rotations to seven-year non-renewable terms that can only be terminated in exceptional circumstances (currently auditors must be changed every 20 years and audits must be re-tendered every 10 years)
- A requirement that audits should state how they have investigated potential fraud; and
- A range of improvements to the audit product – such as providing a better picture of a company’s overall corporate governance, including assessments on areas such as pay policy, the gender pay gap, payment practices to suppliers, and on environmental sustainability
The report also welcomes initiatives currently being undertaken in the audit field such as Sir John Kingman’s recommendations on the reform of the Financial Reporting Council (see Pensions Bulletin 2018/51) and the Government’s intention to implement them.
Last August the Department for Business, Energy and Industrial Strategy announced that it intended to strengthen the UK’s framework relating to the payment of dividends (see Pensions Bulletin 2018/34), but since then there appears to have been silence. The MPs’ report will surely put pressure on the Government to act and that in turn may have a bearing on how the Pensions Regulator lands with its upcoming Code for DB funding.
EIOPA blows starting whistle for pension scheme stress tests (subject to Brexit)
Every other year EIOPA, the EU pensions regulator, carries out pension scheme stress tests – both for DB and DC occupational provision. This year is one of those years and on 2 April 2019 EIOPA published a suite of documents in connection with this exercise.
As previously, the stress tests will assess the vulnerability of schemes and their members to adverse scenarios, including (for DB schemes) on the “common balance sheet” basis (similar to how insurance companies are required to reserve).
The stress tests will also assess the “second round” effects on the real economy and systemic financial stability, including the impact of market shocks on sponsors of DB schemes. The scope of the tests now includes an assessment of the potential systemic risk drivers on financial markets such as search for yield, flight to quality and herding behaviour. Especially notable is that, for the first time, schemes’ exposure to environmental, social and governance (ESG) risks will form part of the tests.
EIOPA wants to achieve a coverage rate of at least 60% of assets of the DB/hybrid sector and at least 50% of assets in the DC sector per participating member state. It is leaving it up to national regulators to select representative samples.
EIOPA intends that those schemes that are selected will have to provide detailed and extensive data in a prescribed electronic format (in the UK’s case to the Pensions Regulator as the body responsible for managing the process in the UK). The data must be submitted by 19 June 2019.
We have yet to hear from the Pensions Regulator on how it expects UK schemes to comply with this requirement, but presumably if the UK leaves the EU shortly without ratifying a withdrawal agreement, then none of the above will apply.
In previous years the Regulator has supplied data to EIOPA based on that in scheme returns. If the UK does have to participate in the 2019 stress tests it is unclear whether it will be tenable for this approach to be repeated. If it is not then participation may be quite an onerous exercise for those who are approached.
The stress test results can make for interesting reading – follow the links in Pensions Bulletin 2017/53 to see them.
EIOPA provides guidance and principles on other member communications
Following on from a similar document issued last November (see Pensions Bulletin 2018/47) relating to the annual Pension Benefit Statement required by the second EU pensions directive (IORP II) EIOPA has published a report on other member communications required by this Directive – ie to prospective members and to members in the pre-retirement and pay-out phase.
The Directive’s requirements in this area are expressed at a high level. EIOPA’s report, drawing on certain national practices existing prior to the implementation of the Directive, sets out a number of principles that it thinks national regulators should apply. These include the following:
- The overall design of communications should be such that they are simple, easy to read and put in appropriate layers, using not only paper but also digital forms
- Communications to members who bear investment risk or can take investment decisions should follow eight principles in relation to past performance
- Pre-retirement information should be provided to members in five separate steps towards retirement, starting five years before retirement; and
- Information given to beneficiaries during the pay-out phase should follow three principles, including a preference for annual communication, and in a medium that is most reliable for the recipient
This is a well written report setting out some clear principles for member communication. But how this will be taken forward in the UK remains unclear, as we have yet to hear from the DWP on how it intends to implement the important disclosure aspects of IORP II.
HMRC sets up new “GMP equalisation” working group
HMRC has, in its latest pension schemes newsletter, announced the formation of a new working group to consider the pensions tax issues arising as a result of the Lloyds Bank judgment on GMP inequalities. The group will be chaired by HMRC and include selected industry representatives. Its first meeting is scheduled for April and further information will be provided in due course.
The newsletter also provides a link to the Pensions Regulator’s list of authorised Master Trusts and discusses the ongoing supervision of such schemes by the Regulator. As of 3 April 2019 the list comprises three schemes.
Other items include:
- Notification that the annual allowance calculator is being updated to include the 2019/20 tax year with effect from 6 April 2019 (including some warnings about default settings)
- Helpful tips on using the Pension Schemes Online service, including how to find the charge reference for an accounting for tax return
- Various administrative details around the notification of residency status reports and annual returns of information for schemes operating the relief at source method of tax relief, including that from 6 April 2019, schemes will only be able to access reports and submit annual returns through the secure data exchange service. HMRC has also separately updated the spreadsheet on which the annual return information should be submitted, the declaration that must accompany the submission and the guidance on how to complete the annual return
Concerns around the pensions tax complications that are likely to be generated by the Lloyds judgment continue to grow, and HMRC has no doubt received many representations on this (see, for example this from the Association of Consulting Actuaries last November). It is therefore of some reassurance that HMRC appears to be starting to test out its thoughts on the interaction of two complex pieces of legislation.
PPF provides another update on the Hampshire case
The Pension Protection Fund has announced that it has made the first increased payments to the group of PPF members it has assessed as most significantly affected by the European Court of Justice’s “50% minimum” ruling in the Hampshire case. Later in April the PPF will make the first increased payments to the most significantly affected FAS members. This is in line with the process proposed by the PPF in January (see Pensions Bulletin 2019/01).
The update also reprises the messages from February (see Pensions Bulletin 2019/08) about the court proceedings that have been brought against the PPF.
FRC issues its draft Plan and Budget for 2019/20
The Financial Reporting Council has published a consultation paper setting out its priorities and budget for the 2019/20 financial year. This is the year in which the FRC will start its transition into the new statutory regulator, the Audit Reporting and Governance Authority (ARGA).
Amongst the FRC’s plans are to:
- Introduce a revised UK Stewardship Code, following the public consultation which has just closed
- Prepare for the post-implementation review of the revised framework of Technical Actuarial Standards (TASs) which is planned for 2020/21, and which has the aim of publishing any revised standards no later than 1 July 2022; and
- Undertake the annual review of Actuarial Standard Technical Memorandum 1: Statutory Money Purchase Illustrations (ASTM1) which supports the disclosure requirements for money purchase pensions
Insofar as the pension levy is concerned, in 2019/20 the FRC wishes to raise £1.1m (down from a budgeted £1.2m in 2018/19) from those occupational pension schemes with 5,000 or more members. It will confirm the levy rate to be applied after considering data on scheme membership provided by the Pensions Regulator. The current levy rate for such schemes is £2.75 per 100 members.
Consultation closes on 8 May 2019.
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.