This summer has seen several pension issues making the news. They show how essential it is for employers and trustees to keep abreast of how developments impact on their arrangements.

Jay Doraisamy looks at five areas which have made the headlines this summer:

  • Financial Support Directions and insolvency: Pensions Regulator’s approach.
  • Transfer Incentive Exercises: Pensions Regulator’s principles-based approach.
  • Tax: How FATCA will affect UK registered pension schemes.
  • Annuities: gender-based pricing ban following Test-Achats ruling.
  • Takeover Code: involvement of trustees.

Financial Support Directions (FSD)

Since 2006, the Pensions Regulator (the Regulator) has issued two FSDs towards the Sea Containers pension schemes and three Determination Notices against Nortel, Lehmans and ITV.

The October 2011 Court of Appeal decision1 gave FSDs “super priority” status when issued against a company which is in insolvency. The FSD ranks as an expense of the administration, placing it ahead of unsecured creditors. This decision is the subject of an appeal to the Supreme Court, which will consider the issues in May 2013.

The concerns about the Court of Appeal decision, among lenders and insolvency professionals, were:

  • allowing “super priority” status to occupational pension schemes seriously threatened to stifle the rescue culture;
  • banks would be even more reluctant to lend if their debt did not have priority over any FSD in an insolvency;
  • administrators would be prevented from collecting their own fees and expenses; and
  • the Pensions Regulator would use an FSD to “scoop the pool” and leave nothing for unsecured creditors2.

The pensions industry subsequently sought reassurance about how the Regulator would approach its FSD powers. In response, the Regulator published a statement in July 2012 explaining its approach to FSDs in insolvency situations3. Confirming that it will continue to act proportionately and reasonably, the Regulator stated that it:

  • does not intend to frustrate the rescue culture or the lending market;
  • does not want to obstruct administrators; and
  • does not intend to delay issuing an FSD until after an insolvency event to take advantage of the priority ranking.

When considering the form and amount of financial support which is reasonable, the Regulator will consider the following:

  • where the FSD had been issued after an insolvency event arose from facts and matters which occurred before the insolvency event, a relevant factor in assessing what financial support is reasonable will normally be the position under insolvency law had the FSD been issued before the insolvency event;
  • the financial circumstances of the FSD recipient;
  • the interests of directly affected parties, which includes the FSD recipient; and
  • regard to the creditors’ claims, including the return the unsecured creditors would receive had the FSD been issued before the insolvency event. The Regulator expects this would achieve “broad equity” between the scheme and the unsecured creditors.

The Regulator says that further comfort and certainty can be obtained through due diligence, early contact with the Regulator and by using the clearance procedure. But each case depends on its unique facts and “priority on insolvency” remains a live issue until the Supreme Court makes its decision.


It is helpful that the Regulator has moved to try and allay industry concerns about how it intends to exercise its FSD powers, following the Court of Appeal decision. That decision shows just how unsatisfactory current legislation is in this already complex area. It will be some time, however, before we know the outcome of the Supreme Court decision. With the hearing scheduled for early 2013, it could take up to three months after that for the judgment to be issued. Even then, we could find the situation has moved no further, with the need for legislative intervention becoming more necessary than ever.

Transfer incentive exercises

In June 2012, an Industry Working Group published a code of practice on transfer incentive exercises.4 In July, the Regulator reviewed and replaced its guidance on incentive exercises5 (to support the industry’s code) with a short principles-based statement.

As before, the Regulator says that trustees should approach these exercises with caution and assume that they will not be in most members’ interests. This will involve trustees taking advice, where necessary, and following their legal obligations to scheme members. They must also consider the funding impact of the proposals on the employer covenant.

The principles, which set the minimum standard for these exercises, are:

  • an offer should be clear, fair and not misleading;
  • the offer should be open and transparent;
  • conflicts of interest should be managed;
  • trustees should be consulted and engaged from the start of the process; and
  • independent financial advice should be made accessible to all members.


This is an area which has been crying out for clarification. The Industry Working Group Code of Practice and the Regulator’s principles-based statement are useful. However, they do impose on trustees a significant role in transfer incentive exercises, which have largely been seen as the domain of the employer. Given the need for trustees to be consulted and engaged, they will have to be actively engaged from the start of the process and must raise any concerns with the employer.

Tax: Foreign Account Tax Compliance Act (FATCA)

The US FATCA, enacted in 2010 but first taking effect from 1 January 2013, aims to prevent US taxpayers avoiding US tax by not reporting financial assets held abroad6. FATCA’s tool for enforcing this increased reporting is the threat of a 30 per cent withholding tax on the US-source income of non-US financial institutions and certain other non-financial entities. Accordingly, a foreign (i.e. non-US) financial institution (FFI) will need to enter into an agreement with the US Internal Revenue Service (IRS) or otherwise be exempted from FATCA to avoid a 30 per cent withholding on its US-source investment income. Once registered, the FFI must make annual reports to the IRS and withhold 30 per cent tax on US-source payments (and “passthru” payments considered to be US-source) to any unregistered FFI or non-compliant account holders.

Unfortunately, the exemptions in the proposed FATCA regulations issued in February intended to cover non-US schemes do not work for UK registered pension schemes. Depending on their circumstances, they may be exempt beneficial owners (and therefore not subject to FATCA) or they may be deemed compliant FFIs (and therefore have more minor responsibilities).

On 26 July 2012 HM Treasury and the US Treasury announced a Model Agreement7 on implementing FATCA. This Model Agreement establishes a framework for reporting by FFIs to their respective tax authorities, which will be automatically shared with the other tax authorities. If the UK enters such an agreement with the U.S. without any modification then:

  • UK-based FFIs will not need to make an IRS agreement. Instead, UK FFIs will have to report certain information about their US account holders to HMRC; and
  • HMRC will then transfer the information to the IRS (and there may be a requirement on the IRS to obtain similar information from US FFIs and transfer that information to HMRC).

The Model Agreement provides for a list of entities that would not be subject to FATCA reporting because they are “exempt beneficial owners” or “deemed compliant” FFIs. In addition, based on the Model Agreement, UK FFIs would likely receive relief on “foreign passthru payments”.

We therefore expect the treatment of pension funds to become clearer at the end of the year, especially if HM Treasury and the US Treasury enter an intergovernmental agreement similar to the Model Agreement.

Meanwhile, pensions organisations are lobbying the US tax authorities to persuade them that UK occupational pension funds are not vehicles for offshore tax avoidance by US citizens and should receive an exemption from the FATCA regulations due to become US law on 1 January 2013. Any UK-specific carve-out will probably be in the intergovernmental agreement, rather than the final FATCA regulations.


This is yet another example of the US extending its jurisdictional ambit beyond territorial boundaries.

If a UK-US Agreement is not reached, pension schemes will be subject to FATCA. This will increase compliance burdens, administration costs and tax liabilities. We hope that HM Treasury, HMRC and the IRS will reach a suitable agreement soon.


In March 2011, we reported the European Court of Justice (the Court) had banned gender-based pricing for annuities8.

This ban takes effect on 21 December 2012. HM Treasury (HMT) has recently confirmed the relevant exemption in the Equality Act 2010 will also be repealed at the same time. Taking this development into account, HMRC has updated its guidance on drawdown pensions as the change will affect the maximum drawdown pension a member may take each year. Until market practice is clear, HMRC tells providers to use male rates for female drawdown.

There is, however, confusion whether annuities bought using money from an occupational scheme or GPP are affected. The ambiguity arises because the Gender Directive requires gender neutrality but applies to contracts “separate from the employment relationship”, while the Equal Treatment Directive applies to occupational schemes but does not require gender neutrality.

Guidance from the European Commission suggests that an annuity bought using funds held in a work-based scheme and bought without the employer’s or the scheme’s involvement would be subject to the gender-pricing ban. HMT says it will monitor the situation and declined to extend gender-neutral pricing to work-based schemes.


Although the principle of equal treatment between men and women is a cornerstone of the EU, the Court has previously been very clear that occupational pension schemes can use sex-based factors. Nonetheless, where factors are due for review it may be a good opportunity for scheme trustees to consider whether to switch to gender-neutral ones.

Trustees and takeover bids

Takeovers of public companies in the UK are primarily covered by the Takeover Code (the Code). Historically, the Code contained only very limited provision for employees of the offeree company, comprising merely a requirement that the offeror state in its offer document its intentions regarding the employees of the offeree company. In practice, this simply resulted in offer documents containing a bland statement that existing employment rights, including pension rights, of offeree company employees will be fully safeguarded.

Also, since public takeovers are invariably an acquisition of the company itself, rather than a sale of a business, the protections conferred by the Transfer of Undertakings (Protection of Employment) Regulations (including the duty to notify and where relevant consult with affected employees or their representatives) do not apply to public takeovers.

In September 2011, partly because of concerns raised following the highly publicised takeover of Cadburys by Kraft, certain changes were made to the Code about employees and their representatives. These included:

  • more detailed disclosure requirements on the offeror’s intentions regarding employees of the offeree company;
  • a requirement that the board of the offeree company in its circular to shareholders sets out its opinion on the views expressed by the offeror;
  • a requirement to make various documents published in connection with the offer available to employee representatives; and
  • a requirement that the board of the offeree company must attach to its circular a separate opinion from its employee representatives on the effects of the offer on employment, provided this opinion is received in good time before publication of the circular (the Relevant Provisions).

During the consultation which led up to the inclusion of the Relevant Provisions in the Code, representatives of various pension schemes expressed the view that the Relevant Provisions should be extended to apply also to the trustees of the offeree company’s pension scheme(s). On 5 July 2012, the Code Committee of the Takeover Panel (the Committee) issued a public consultation paper (the PCP) on this, in which it set out the arguments both for and against extending the Relevant Provisions to pension schemes trustees. The Committee concluded that, on balance, the Code should be amended to extend the Relevant Provisions in this way, and the PCP contains specific proposed amendments to the Code to achieve this.

These amendments include a requirement on the offeror to include in its offer document its intentions with regard to the offeree company’s pension scheme(s) and the likely repercussions of its strategic plans for the offeree company on the scheme(s). The offeree board circular would have to contain the board’s opinion on this. The various documents which now have to be made available to employee representatives would also need to be made available to the pension scheme trustees, and the pension scheme trustees would have a similar right to that of the employee representatives to have attached to an offeree board circular a separate opinion from the pension scheme trustees on the effects of the offer on the pension scheme(s).

The Committee invites comments on the PCP by 28 September 2012. The Committee will then decide whether to implement some or all the proposals contained in the PCP.


Over the years there have been several highly publicised takeovers where the pension schemes have been a major player. One area which has been in much need of consideration has been the extension of the Code to pension scheme trustees. The decision by the Committee (subject to the results of the consultation process) to extend the Code to trustees so they too are entitled to the benefit of the relevant provisions is an important step in recognising the important role of trustees in safeguarding the interest of members in the context of public takeovers. We await the outcome of the consultation and would hope the final decision will support the Committee’s recommendation.