Certain exemptions to the employer related investment regime will be removed with effect from 23 September 2010. These include the provision which has allowed the investments made by collective investment schemes to be excluded from calculations for employer related investment purposes. The removal of this exemption is likely to mainly affect large schemes of listed companies but it would be prudent for all schemes to now undertake a check and carry out regular monitoring for compliance with the revised employment related investment rules, particularly given that criminal sanctions can apply to trustees who invest in breach of the limits.

Collective investment schemes

The DWP has recently published a statutory instrument which provides for the removal of the exemption from the employer related investment provisions for the assets of collective investment schemes. This means that from 23 September 2010 the investments of any collective investment scheme in which a pension fund invests must be taken into account for the purposes of calculating whether a scheme meets the requirement that no more than 5% of its resources are invested in employer related investments (i.e. there will be a requirement to "look through" the collective investment scheme structure to the underlying investments).

It is likely to be the larger schemes, especially those of listed companies, who are primarily affected by the change. It is the proportion of the collective investment scheme's investments that are "attributable to" the resources of the pension fund under consideration that will be counted for the purposes of the 5% employer related investment limit. It is thought that this means that where the collective investment scheme's holding is say 1% in the sponsoring employer of the relevant pension scheme and that pension scheme has a 5% share in the collective investment scheme, its employer related investment for these purposes is 5% of the 1% holding.

The government's view is that the existing exemption for collective investment schemes is not permitted by a European directive, the IORP directive, which must be transposed into UK law by 23 September 2010. However, the Association of Pension Lawyers and others have questioned whether the directive does, in fact, require this. As a result of comments made on draft legislation issued in 2008, the government withdrew its proposals on withdrawing the exemption for collective investment schemes to allow more time to consider the comments. However, it has now included the amendments in a statutory instrument, issued just weeks before it is due to come into force.

There are likely to be practical difficulties for trustees in securing and monitoring compliance as they may have no way of controlling the investments of the collective investment scheme and are not likely to be in a position to dictate terms. This will be a particular issue where the scheme is a form of tracker fund in which exposure to any particular stock may vary on a daily basis.

Other changes coming into force on 23 September 2010

Additional existing exemptions from the employer related investment regime for investment in certain qualifying insurance policies, employer related investments derived from members' voluntary contributions and investments in authorised bank and building society accounts will also be removed with effect from 23 September 2010. These provisions were included in regulations published last year but which do not come into force until the date for transposition of the IORP directive.

Transitional rules allowing schemes to continue to hold investments which exceeded the employer related investment limits but were held by the pension fund when the Investment Regulations came into force in April 1997 will also be abolished with effect from 23 September 2010. In practice, it is mainly small schemes of private companies which had invested heavily in the employer that are likely to be affected by this change.

The removal of the additional exemptions and the transitional provisions are also to ensure compliance with the IORP directive.


Trustees and employers should review the investments of their scheme to check whether the removal of the existing exemptions will result in their scheme breaching the 5% employer related investment limit. A monitoring system should also be put in place, particularly in relation to the investments held by any collective investment schemes in which the pension fund invests.

Action should be taken before 23 September 2010 to establish areas of risk and to identify whether it is possible to take steps to ensure that investments are outside the limits. Criminal sanctions can be imposed on trustees for a breach of the employer related investment rules. Trustees who fail to take reasonable steps to secure compliance may also be liable to a fine.


We are writing to the DWP to raise our concerns on the implications of simply removing the exemption for collective investment schemes and the short timescale for implementation. There may be a case for anti-avoidance where a collective investment scheme has deliberately been used as a wrapper to make investments that would otherwise be contrary to the employer related rules (and the Association of Pension Lawyers has made this point to the government), but removing the exemption completely potentially has far reaching consequences. It also appears to be a more restrictive approach to that taken in respect of implementation of the IORP directive in other European jurisdictions.