On 23 September 2010, legislation was amended to remove some of the exemptions applying to employer-related investments by pension schemes.

As a general principle, schemes cannot hold more than 5% of the current market value of the fund in employer-related investments. From 23 September 2010 this limit includes collective investment schemes, investments made from members’ additional voluntary contributions (‘AVCs’), investments held in bank accounts and certain insurance policies, all of which were previously excluded from the limit7. The DWP considered that the amendments were necessary to comply with a European Directive (although there is a view amongst the legal fraternity that the DWP has interpreted the Directive rather too strictly).  

To ascertain the full extent of a scheme’s employer-related investments, trustees would need to liaise with their fund managers to calculate the level of such investment that is attributable to their scheme via the units held in pooled funds or through member AVCs. This is very difficult to monitor in practice, especially for index-tracking funds, due to the frequent changes in holdings. For most pension schemes with a diverse investment portfolio, we think that it is highly unlikely that the level of employer-related investment could reach anywhere close to the 5% limit through collective investment vehicles or AVCs. However, the new rules could create an issue where a scheme is sponsored by a bank or insurance company and holds interests in related entities. Another impact of the removal of the exemptions may be on large schemes with listed sponsoring employers whose shares are held and traded by collective funds as a matter of course.

Breaching employer-related investment rules has serious consequences, with trustees potentially facing civil or criminal penalties but, as with all things, trustees should take a proportionate approach. We are expecting guidance from the Pensions Regulator which will hopefully cover the extent to which trustees need to routinely check self-investments.

Agenda item 1 – until such time that the Regulator issues guidance, we suggest that trustees of schemes with listed employers that already have an element of self-investment liaise with their fund managers to ascertain the likelihood of the 5% limit being breached. Financial institutions should review policies/accounts that were previously exempt. Schemes should review their statement of investment principles to check whether amendments are needed.