Media Briefing Note: Employer-related investments – what does the Pensions Regulator say?

LONDON, 10 November 2010 -

1.                  What’s new?

New restrictions on investment by pension schemes in “employer-related” investments (ERI) came into force on 23 September 2010.  As a result, indirect employer-related investment through a collective investment scheme (such as a unit trust or managed fund) will now be subject to the same 5% asset value limit as other investments.  Breach of the employer-related investment rules is a criminal offence.

The Pensions Regulator has today issued a statement setting out its views on two areas of investment that might potentially breach the ERI restrictions.

2.                  What does the Regulator say?

The Regulator considers two main areas:

2.1              Use of innovative funding mechanisms to support scheme funding

In recent years, sponsoring employers of a number of larger schemes have entered arrangements with trustees to provide financial support for the schemes in alternative ways.   An example would be an investment structure allowing the trustees to enjoy a rental income stream of property occupied by the employer and also have recourse to that property should the employer failOther reported arrangements have involved assets as varied as intellectual property rights, maturing whisky and most recently an airport landing slot. 

While the Regulator is clear that the best form of support for a scheme is direct, unconditional cash contributions, it recognises that new funding structures can, in appropriate circumstances, provide valuable additional support to the scheme.  The Regulator’s statement acknowledges that these structures are complex and sets out some issues trustees should consider before agreeing to participate.  The statement also makes it clear that trustees should take specialist legal advice and inform the Regulator of the arrangement.

2.2              Investing through collective investment schemes (CIS)

The Regulator recognises that for some schemes it will not be easy to find out details of underlying holdings they may have invested in through a CIS.  Nevertheless, it expects trustees to put in place adequate internal controls to satisfy themselves that the scheme is being managed in accordance with the law.  The Statement gives some examples of how schemes may ensure compliance with the 5% rule – unfortunately, however, the examples are simplified and are unlikely to reflect the real position for many trustees.

Duncan Buchanan, a partner in the Hogan Lovells pension team said:

“We have worked with a number of clients to implement innovative funding structures and concerns about employer-related investments have always been addressed, as well as a whole range of other technical issues.  The Regulator’s statement is confirmation that these structures are now becoming more widely used.  Provided that the arrangement is appropriately designed and implemented, and the trustees have taken specialist advice, such arrangements can provide schemes with a valuable addition to conventional cash contributions and can improve the security of members’ benefits.  However, poorly designed or badly implemented structures could result in trustees offending the legal requirements. 

As for the statements about collective investment schemes, it is disappointing that the Regulator has failed to address the more complex situations that many trustees may find themselves in.  In addition, it does not consider the risk of investment through a collective investment scheme in an employer-related loan – for example, because a CIS’ bond portfolio includes an unlisted bond issued by the employer. There is an absolute prohibition on employer-related loans so the trustees would technically be in breach regardless of  the size of the investment.  ” 

3.                  Background notes

Under the Pensions Act 1995 and associated regulations, there are restrictions on the extent to which the trustees of an occupational scheme are allowed to make investments that are connected with employers that sponsor or participate in the scheme (known as “employer-related investments”).  This is part of the policy of divorcing trust funds from the assets of the employer to help minimise any loss of value of employees' pensions in a situation where the sponsoring employer becomes insolvent.  Breach of the restrictions is a criminal offence, and as such can potentially lead to an unlimited fine and/or imprisonment

3.1              Limits on ERI

Broadly, no more than 5% of the current market value of the scheme's assets may be invested in employer related investments.  These include:

•           shares issued by the employer or anyone connected with, or an associate of, the employer

•           land occupied or used by the employer

•           other property used for the purposes of the employer's business

3.2              Use of common investment schemes It is common for trustees to invest scheme assets through a collective investment scheme (CIS) rather than investing direct in particular shares or bonds. From 23 September, a scheme’s underlying holdings held through a CIS must be taken into account when considering whether the ERI limits are breached.

4.                  Further information

For further information on the points raised in this note, please contact:

Duncan Buchanan


020 7296 2323


Rachael Droog

PR Coordinator

020 7296 2780


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