7 days

7 Days is a weekly round up of developments in pensions, normally published on Monday afternoons. We collate this information from key industry sources, such as the DWP, HMRC and TPR.

In this 7 Days

• The Value Added Tax (Finance) (EU Exit) (Revocation) Order 2019
• EMIR notifications and exemptions
• GMP Equalisation Working Group update
• PPI updates Pensions Primer
• TPR lifts the bonnet on default investment governance
• TPR statement: New shareholder engagement requirements for trustees

The Value Added Tax (Finance) (EU Exit) (Revocation) Order 2019

On 12 June 2019, the Value Added Tax (Finance) (EU Exit) (Revocation) Order 2019 (SI 2019/1014) (“the Order”) was made. It revokes the Value Added Tax (Finance) (EU Exit) Order 2019 (SI 2019/43) (“the Finance Order”), with effect from 8 July 2019.

A number of CJEU cases have determined that the current UK exemption for the management of special investment funds is not as wide as is required under EU law. In the absence of changes to the scope of the UK exemption, HMRC policy has been to allow businesses to choose whether to exempt their fund management services by relying on the direct effect of EU law or to continue to tax them under UK VAT legislation. This includes fund management services provided to certain types of pension funds and state regulated property funds. (See our Alert for further details.)

To ensure that businesses could continue to exempt these fund management services in the event that the UK exited the EU and could no longer rely on the direct effect of EU law, the Government laid the Finance Order to amend UK legislation.

The Finance Order would have extended the scope of the UK’s VAT exemption for the management of special investment funds to fully reflect the scope of the exemption under EU law with effect from the UK’s exit from the EU (“EU Exit Day”). This would have ensured that UK taxpayers could continue to exempt their supplies under UK law once they were no longer able to rely on the direct effect of EU law, although a small group of taxpayers would have had to exempt their supplies for the first time.

The Finance Order is now being revoked so that new legislation can be laid, at a later date, that will make the changes that the Finance Order would have made, but with effect from 1 April 2020 rather than EU Exit Day. The aim is to gives businesses certainty, and time to adjust, by giving a later and specific commencement date. If the UK leaves the EU before the replacement Order is in force, HMRC will exercise its statutory discretion to enable businesses to continue to exempt their supplies.

EMIR notifications and exemptions

On 14 June 2019, the FCA published further information on EMIR notifications and exemptions.

EMIR provides for the obligation of counterparties to clear over-the-counter (OTC) derivative contracts that have been declared subject to the clearing obligation. Under Article 89 of EMIR, some pension scheme arrangements may benefit from a temporary exemption from the clearing obligation for their OTC derivative contracts that are objectively measurable as reducing investment risks directly related to their financial solvency. The temporary exemption from the clearing obligation for pension scheme arrangements has now been extended by another two years from 17 June 2019 (and may be extended twice more by an additional year).

Pursuant to Article 89(2) of EMIR, the FCA has a list of types of pension scheme entities and arrangements which have been granted an exemption from the clearing obligation.

Before using an exemption, pension scheme arrangements and entities must carry out a self-assessment to ensure compliance with one of the approved types, as well as the relevant criteria set out in EMIR.

Such assessments should be properly documented, made available to the FCA upon request, and reviewed on an ongoing basis to ensure they are updated to reflect any changes in circumstances. Pension scheme arrangements and entities should, in addition to notifying their counterparties of the eligibility of the transaction for a clearing exemption under EMIR, also notify their counterparties of any changes to their exemption status.

GMP Equalisation Working Group update

On 17 June 2019, the cross-industry GMP Equalisation Working Group published an open letter detailing the current areas of focus and the sub-committees which are working on producing the best practice guidance.

Geraldine Brassett, PASA’s chair of the working group states that, “recognising the depth of expertise and time this project requires”, five sub-committees have been tasked with taking responsibility for one of five key components of the guidance. The five sub-committees will examine issues around methodology, impacted transactions, data, tax, and reconciliation and rectification.

Each sub-committee is to consider the needs of schemes in their respective area of responsibility with the objective of providing “practical and pragmatic help to the industry.”

Geraldine Brassett confirms that the aim is to produce a “call to action covering the early stages of GMP equalisation projects” by the end of June 2019. Guidance to help schemes decide whether to undertake GMP rectification separately or to include it in their equalisation work can be expected “over the summer”, with full best practice guidance from all five sub-committees by the end of September. Updates to the guidance will also be provided as industry thinking develops and clarity is received in certain areas.

PPI updates Pensions Primer

The PPI’s “Pensions Primer” gives a detailed description of the current pensions system and “some of the archaeology” of its various layers. It is intended for people wanting to learn about UK pensions policy.

The latest version reflects the current position of, and legislated future changes to, the UK pension system as at June 2019.

TPR lifts the bonnet on default investment governance

On 11 June 2019, TPR announced that trustees are being “scrutinised” in a new drive to ensure they are meeting their legal obligations and properly governing default arrangements.

Trustees of DC and hybrid schemes providing money purchase benefits must review their default strategy every three years, or promptly after a significant change in investment policy or the demographic profile of relevant members. The review should consider how the return on investments in the default arrangement is in line with the trustee board’s aims and objectives for the default arrangement.

TPR states that it has contacted more than 500 DC schemes with between two and 999 members as part of the pilot. Trustees have been asked to review guidance which outlines TPR’s expectations. They are then asked to confirm if the strategy and performance of their scheme’s default arrangement have recently been reviewed and remain suitable, by completing a simple online declaration form.

If a scheme’s default strategy has not been recently reviewed, TPR takes the trustees through “simple steps to comply with the law including, reviewing the current strategy, taking members’ needs into account as well as the performance of the default arrangement”. TPR states that trustees who are “struggling to meet the expected standards should consider whether value for savers would be improved by transferring them into an alternative and better run scheme”.

Walking trustees through complying with their requirements is a new approach by TPR and is intended to enable engagement with the most hard-to-reach trustees as well as drive up standards of governance.

TPR statement: New shareholder engagement requirements for trustees

TPR has issued a statement on recent regulations (the Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations) which transpose aspects of the Shareholder Rights Directive and are intended to improve transparency of information on how trustees engage with their asset managers.

It explains that the new requirements for pension schemes are that:

• DC and DB schemes must be transparent about their arrangements with their asset managers and include this in their Statement of Investment Principles (“SIP”) by 1 October 2020
• DC and DB schemes must document their investment strategy and engagement policy with investee companies in their SIP by 1 October 2020
• DB schemes must publish their SIP online by 1 October 2020
• by October 2021, DC and DB schemes must publish online how they have implemented their engagement policy, including voting behaviour by, or on behalf of, trustees (including the most significant votes cast by trustees or on their behalf) and state any use of the services of a proxy voter.

TPR advises schemes to start the compliance process now in order to meet the deadlines.

For further details, please see our Alert.