UK pension fund trustees with liability driven investment strategies may be alarmed to learn that a new banking directive will give supervisory authorities powers to suspend their contractual rights against counterparty banks. We examine in an alert the issues and actions that trustees need to take now to manage this new regulatory development.
ERISA Fiduciaries Have Ongoing Duty to Monitor Plan Investments
The U.S. Supreme Court recently held that a fiduciary of an ERISA covered retirement plan has an ongoing duty to monitor the prudence of the plan’s investments. The decision is Tibble v. Edison International, 2015 U.S. LEXIS 3171 (May 18, 2015).
In the case, Edison International had selected three “retail class” mutual funds for its 401(k) plan in 1999. Three more retail class funds were selected in 2003. The plaintiffs alleged a violation of fiduciary duty because institutional class funds, with less expensive fees, were available to the plan.
ERISA has a six year statute of limitations and Edison International argued that the selection of the funds in 1999 was outside of the statute of limitations. However, the Supreme Court decided in favor of the plaintiffs. The basic holding is that a fiduciary has an ongoing duty to monitor the prudence of the plan’s investments. Thus, the plaintiffs could allege a viable claim based on the company failing to remove those retail class funds from the lineup in later years.
It is important to note that the Supreme Court did not attempt to address the mechanics of how an employer satisfies its ongoing duty of monitoring plan investments. Thus, the case has been remanded to determine if Edison International did actually violate its fiduciary duties.
Experienced legal practitioners and investment advisors have long believed that fiduciaries do have an ongoing duty to monitor the prudence of plan investments. Thus, many employers do periodically review plan investment performance and fees.
Quite often, employers also hire outside investment advisors and consultants to assist in that process. Note that it is permissible to use plan assets to pay for reasonable expenses of obtaining outside investment advice.
In summary:
- This case is no real cause for concern for an employer that currently reviews plan investments and plan fees pursuant to an ongoing, structured practice. However, the employer still might want consider how often the reviews are being conducted, and how thorough they are.
- On the other hand, if an employer does not currently review plan investments and plan fees pursuant to an ongoing, structured practice, the employer should seriously consider implementing one.
In addition, all employers should consider whether it is advisable to hire an outside investment advisor or consultant to assist in the review process.
The best laid plans …. Problems with registering share schemes with HMRC online
Following on from our earlier blog post predicting that companies might have issues when using the new online service for registering employee share plans with HMRC, it appears that problems are indeed emerging.
Despite the looming deadline of 6 July, we hear anecdotal reports that so far only about 25% of plans have been registered. In addition, HMRC has identified particular issues with:
- companies registering the same plan more than once, perhaps in the mistaken belief that each launch of a plan constitutes a new plan, rather than simply another grant/award under the same plan;
- the same plan being registered numerous times, once for each subsidiary that operates it; and
- companies registering tax-advantaged plans in the wrong category (for example, an SAYE scheme as a CSOP).
Unfortunately, at the moment there is no way to correct an entry made by mistake. A plan that has been registered incorrectly will be on the system and therefore an end-of-year return for that plan will have to be made, in which the plan should be reported as having ceased. In addition to which, of course, you will have to register the plan correctly under a separate number.
The full chapter and verse is set out in a letter sent by HMRC to company secretaries. If you are yet to register your share plans, it’s well worth a read, along with the relevant HMRC webpages.
Automatic re-enrolment: seconds out… round two!
Whilst some smaller UK employers and new companies are yet to reach their pensions automatic enrolment staging date, the largest companies are in the process of planning for the first cycle of automatic re-enrolment. Companies can choose to re-enrol three months before the third anniversary of their staging date. For those that went first in October 2012, that means that they can go live with re-enrolment from July 2015.
As a minimum, eligible job holders who opted out of automatic enrolment will need to be automatically re-enrolled. The employer may choose their re-enrolment date from any date that falls within a six month window, starting three months before the third anniversary of their original staging date and ending three months after that anniversary.
When carrying out the re-enrolment process, employers must follow the same processes that were required for time round. This includes:
- selecting a re-enrolment date that falls within the six month window;
- identifying eligible job holders and re-enrolling them;
- writing to them within six weeks of the chosen re-enrolment date; and
- completing a re-declaration of compliance by no later than two months after the re-enrolment date.
Some employers who had to rush through the process first time round may take the opportunity to review their approach and make system improvements. There has been a lot of change in UK pensions over the last three years and so a fresh look at automatic enrolment compliance may be very sensible.
Upcoming Guidance from IRS on Management Fees and Partner-Employees
The Internal Revenue Service (IRS) is considering two matters that are likely to be of considerable interest to managers of private equity funds, hedge funds and real estate funds – the tax treatment of management fee waivers and whether individuals can be employees and partners of the same partnership entity at the same time for tax purposes. For more detail, please see our recent alert.
Granting of Restricted Stock Units is Compensation for Future Work Performance
The Fiscal Court of Cologne has ruled that, for German tax purposes, Restricted Stock Units (“RSU’s”) should be regarded as compensation which is intended to be an incentive for the future work performance of the employee. This compensation may therefore be subject to tax in Germany even if the employee has ceased to be resident in Germany by the time the award vests.
The case involved a German resident employee who was offered shares within an RSU plan of the parent company of the German employer. Before the award vested, the employee changed jobs to a sister company of the employer based in Poland. The employee relocated to Poland and became tax resident there. By the time the award vested and the shares were issued to him, he was no longer resident in Germany.
The Court confirmed that the granting of RSU’s is to be understood, in a similar way to stock options, as compensation for future work performance and as an incentive for employee loyalty and is therefore oriented towards the future. The intent and purpose of the RSU agreement is to give the employee a special performance incentive for the future in addition to his or her normal remuneration.
The Court therefore decided that, despite the entry of the RSU’s in the employee’s share deposit account at a time when the employee was no longer resident in Germany, the monetary benefit was nevertheless subject to income tax in Germany on a prorated basis, i.e. from the time of granting the RSU’s until relocating outside of Germany.
An appeal to the Federal Fiscal Court has now been filed. We shall therefore have to wait for the outcome of the appeal for a definitive ruling. In the meantime, companies operating RSU plans that include internationally mobile employees who may have been granted rights while they were resident in Germany but who have since moved to another country should take note of the potential German tax charge.
High Pay Centre: “No Routine Riches”
The High Pay Centre, well known in the UK for its opposition to the trend for higher executive pay, published its latest report on Wednesday. The catchy title “No Routine Riches” reflects the inevitable conclusions that the current approach to executive pay is misconceived. The main headline-catching recommendation is that companies should drop their LTIPs on the basis that reforming LTIPs has not worked, so that the only way forward is to ditch them. The Centre advocates its approach “as one that could be realistically implemented in the short to medium term”, which is perhaps less than realistic on its part!
The other main recommendations are:
- Pay in cash only, not shares;
- Use a broader range of company-specific targets, with an emphasis on productivity;
- Broaden the diversity of remuneration committees;
- No “golden hello” payments for unadvertised positions.
It is easy to think of the High Pay Centre as outside of the corporate governance mainstream, given some of the radical reforms that it advocates. However, the report is worth a read if you have the time.
Interestingly, Simon Walker, the Director-General of the Institute of Directors, used the High Pay Centre event this week to reopen the debate on employee representation on remuneration committees and boards. This subject was briefly brought into the limelight by the manifesto policies of Labour, the Liberal Democrats and the SNP before the General Election, which all advocated direct employee representation in one form or another. However, the issue has been shelved (for the moment at least) by the Conservative election victory. Mr Walker used this breathing space to propose a compromise, suggesting that companies might, on a voluntary basis, invite an employee representative as an observer at board and remuneration committee meetings.
It is difficult to see FTSE100 companies rushing to put this into practice. However, the suggestion certainly avoids many of the practical and theoretical issues that would have to be addressed before having employee representatives as full members of company boards and/or committees (some of which would bring into question the whole “unitary board” corporate governance model currently used in the UK). Mr Walker’s approach may warrant closer consideration before we get to the next General Election – currently scheduled for May 2020.
FTSE100 AGMs and DRRs – the AGM season so far…
Over 70 FTSE100 companies have now released their DRRs and we are well into the 2015 AGM season. So far, most FTSE100 companies are coming through the AGM season unscathed.
In respect of the implementation report (this is the aspect of the directors’ remuneration report that describes how the remuneration committee implemented the company’s approved remuneration policy), over 80% of the FTSE100 companies that have held their AGMs so far received strong support (with votes of over 90% approval) for the remuneration committee’s implementation of the approved pay policy.
All looking positive so far, but what about the 20% of FTSE100 companies which have not fared so well in the implementation report stakes? Well, no FTSE100 company has dropped under the 50% threshold (which would mean putting the remuneration policy up for a vote next year). Most of the remaining 20% received votes of over 80% in favour, but there have been a few casualties over the past few weeks. Most notable was Centrica, where just over a third of shareholders voted against the remuneration report. Centrica has been relatively quiet in the world of executive remuneration in the last two years. It has previously received votes in favour of 98.3% and 93.2%. However, this year many shareholders were unhappy with the pay package of the new CEO, Iain Conn and made their displeasure heard.
HSBC also struggled and nearly 24% of its shareholders voted against its implementation report, an increase from 16% against last year. One can’t help but think that shareholders were reflecting some disappointment in the current executives not having their remuneration more severely affected by the problems in Switzerland even though the current team were not “in-post” when those problems arose. Perhaps the only way to have appeased shareholders while still paying the current executive for recent performance would have been to implement clawback rights against the executives who were in post when the Swiss operation was purchased some years ago. At least then shareholders would have seen sanctions for those costly actions being taken against someone and may have been less concerned about visiting the sins of the father on the current executive (so to speak). If only clawback rights had been implemented 10 years earlier…
BG also faced a pay revolt. Some would say this is unsurprising given the controversy Helge Lund’s pay attracted last year (see our previous blog post). 17.9% of shareholders voted against the remuneration report. It is thought that the reason for the negative votes is due to the new CEO’s pay. At least if the proposed sale to Royal Dutch Shell goes through BG’s remuneration committee won’t have to worry about the prospect of even more fierce opposition next year, by which time it appears that Mr Lund may have done rather well as BG’s CEO over a short space of time.
And what of those companies that have put their remuneration policy to shareholders? Readers may recall that companies are only obliged to put their policy before shareholders every three years. Nonetheless, quite a few companies have put the policy back before shareholders only a year after getting it approved. In fact, of the FTSE100 companies that have put their remuneration policy back in front of shareholders, not one has received less than 90% support.
By way of follow up on our recent blog posts (and not wanting to ignore the recent unexpected election result) Labour and the Liberal Democrats were both proposing employee representation on the remuneration committee. This would have represented a significant change to the current system and remuneration committees and possibly those poor employees who might have found themselves arguing against the CEO’s pay(!) may be pleased this does not look like a likely option with a Conservative government.
To keep up to date with all the FTSE100’s AGM results please see our single source document, which also has links to the DRRs and last year’s results.
SEC proposes new pay-for-performance rules
In its most recent action dealing with the controversial topic of executive pay, on Wednesday, April 29, 2015, the Securities and Exchange Commission (SEC) voted 3 – 2 to approve proposed rules regarding pay-for-performance in the wake of the Dodd-Frank Act. The proposed rule is intended to require companies to show, typically in their annual proxy statement, the relationship between the amount of executive compensation actually paid and the company’s fiancial performance. For more detail on this proposal, please check our alert.
Right said FRED – changes to UK accounting for share options
The Financial Reporting Council has published a consultation on amendments to accounting standard FRS102, which deals with share-based payments (such as options) with a cash alternative. The amendments are aimed at aligning FRS102, which tends to be used by smaller companies, with the international accounting standards used by listed companies. The closing date for responses is 1 June 2015.
