investor agenda sept 2015
TRANSCRIPT
Contents
Pension scheme investment – getting it right (from a legal perspective)
Securities Financing Transactions - The 4 R’s: Reporting, Record-keeping and Risk warnings for Repos
Marketing of alternative investments – delay to extension of passporting
Longevity market update
Linklaters Pensions Investment Practice – Question Time seminar 1 October 2015
AUTUMN | 2015
Welcome to our Autumn edition of Investor Agenda
As the pensions industry starts to find its feet with the implementation of the new pensions freedoms, the Government throws another curveball, with its summer budget and consultation on the taxation of pension contributions and income. Whilst we wait with bated breath for the latest seismic shift in the pensions market, in this edition of Investor Agenda we update you on developments in a couple of areas of European pensions investment. We also remind you of the legal issues to bear in mind when investing scheme assets and best practice to follow to minimise legal risk.
You should by now have received an invite to our Pensions Investment Practice ‘Question Time’ panel session, which we are hosting on 1 October. A reminder of the details is included here. Please do submit your questions in advance.
As always, we hope you will find Investor Agenda informative and useful and we welcome your feedback on what you would like to see in it. If you want to discuss further anything raised, please do give us a call.
Rosalind KnowlesPartner
Pensions Investment Practice:
Investor Agenda
Pension scheme investment – getting it right (from a legal perspective)
Pension scheme legislation imposes a number of requirements on trustees in relation to scheme investments and it is important, as a matter of good governance, compliance and limiting trustee liability, to get it right. We have set out below some of the main issues to think about to ensure compliance.
1 Has your investment adviser given you appropriate written advice?A trustee will generally decide to make an investment only when it has been advised that the investment is a good idea, and this advice will often come in the form of a written report. But the Pensions Act 1995 is quite prescriptive and says that the trustee must have received written advice that: (i) the investment is suitable having regard to the requirements of the Occupational Pension Schemes (Investment) Regulations 2005 (which cover a range of requirements including those relating to the nature and appropriateness of the investments); and (ii) the investment is compliant with the scheme’s statement of investment principles. Trustees should make sure that the investment advice they have been given meets these requirements.
As, very often, giving this advice will amount to a regulated activity, the trustee’s investment adviser will usually need to be an authorised person for the purposes of the Financial Services and Markets Act 2000 (“FSMA”).
2 Are you taking “day to day” investment decisions?Managing investments is an activity for which authorisation is required under FSMA. However, there are certain exceptions from this that apply to pension scheme trustees where:
(i) they are investing in a pooled fund, on the advice of an authorised person; or
(ii) the day to day decisions about the investment are being taken by an authorised person (and the trustee’s decisions are limited to strategic ones).
This means that if the proposed investment involves the trustee retaining control over any “day to day” investment decisions, the trustee (and the directors of a corporate trustee) will be committing a criminal offence unless the trustee is itself authorised by the Financial Conduct Authority. The types of decisions that might put the trustee at risk are decisions about specific investments (such as shares in a particular listed company), the timing of those investments (or disinvestments), or the counterparty, price or market on which the investment is to be undertaken. However, periodic strategy or policy decisions will not cause a problem.
We expect that in the vast majority of cases, trustees will not be taking “day to day” decisions. However, if an investment is proposed in which the trustee is to retain control over any of these “specific” decisions, we strongly recommend that the trustee takes legal advice on whether it is at risk of breaching FSMA.
3 Legal considerations with respect to choice of fund managerThe Pensions Act 1995 says that trustees may delegate their investment discretion to a fund manager who is authorised to make investment decisions without contravening the prohibition in FSMA on carrying out regulated activities – in essence, a fund manager should
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be an authorised person. If the trustee does so, they will not be liable for the acts that the fund manager takes on their behalf. Normally when a trustee delegates a power, liability for the exercise of that power remains with the trustee, so this is an important protection for the trustee.
In order to benefit from the statutory protection, the trustee must have taken reasonable steps to satisfy itself that the fund manager:
(i) has appropriate knowledge and experience for managing the scheme’s investments; and
(ii) is carrying out its work competently and complying with the statutory requirements about choosing investments.
To comply with this, the contractual terms appointing the fund manager should require the manager to report regularly to the trustee, and the trustee should ensure that it reviews the manager’s appointment at regular intervals.
4 Does the pension scheme’s SIP permit the investment?Every pension scheme is required to have a statement of investment principles (a “SIP”), which sets out the high level principles overarching all of the more specific investment decisions that the trustee may make. Although the SIP is a high level document, it may be that from time to time an investment is proposed that falls outside of the principle it sets out. If this happens, the trustee will need to amend the SIP before making the investment. The legislation requires the trustee to consult with the employer on any changes to the SIP, and this means that there needs to be genuine engagement with the employer on the changes before they are made. However, it is important to remember that the trustee is responsible for investment decisions (the Pensions Act 1995 even says that the scheme rules cannot contain any rule requiring employer consent to investments), and so ultimately responsibility for investment decisions rests with the trustee.
5 Do you understand the investment, the potential costs of investing and any risks?Investments are complicated, and not all pension scheme trustees have a background in finance. But they are, however, required to have “knowledge and understanding” of the key contracts entered into by the scheme, including those relating to investments. Some investments expose trustees to risks other than the potential loss of the investment – for example, an investment may require the trustee to make future payments at the manager’s discretion or to support particular transactions. It is also important to understand the scope of the manager’s mandate. Many schemes have an investment sub-committee tasked with making investment decisions on behalf of the trustee. Whether or not your scheme has an investment sub-committee, every member of the trustee board who is involved in making the decision to invest should be satisfied that they understand the scope and risks of the proposal before approving it (as they will also remain responsible).
Anna TaylorManaging Associate
Periodic strategy or policy decisions will not cause a problem.
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Securities Financing Transactions - The 4 R’s: Reporting, Record-keeping and Risk warnings for Repos
The final compromise text of the proposed regulation on reporting and transparency of securities financing transactions (“SFTR”) was published on 26 June 2015. It is expected to come into force before the end of this year. The legislation relates to “securities financing transactions” (“SFTs”) which are, in essence, transactions such as repos, buy-sell backs, stock loans or other margin lending transactions in connection with the purchase of securities.
Under SFTR, a pension fund trustee will be required to:
> report details of SFTs to a registered trade repository. As with derivatives reporting under EMIR, this obligation can be delegated to third parties (albeit the trustee would remain ultimately responsible) and we would expect the investment managers of pension fund trustees to report SFTs on behalf of their trustee clients as they do with derivatives. Such arrangements should be documented by way of a simple amendment to their investment management agreement (“IMA”). The reporting obligation will apply to pension fund trustees 18 months following the date regulatory technical standards (still to be developed) come into force;
> keep records of SFTs for at least five years following the termination of any transaction. This is similar to the record-keeping requirement for derivatives under EMIR, and we expect that the investment managers of pension fund trustees will retain SFT records on behalf of the pension fund trustees. An amendment to the IMA documenting such arrangements is advisable; and
> give risk warnings to their counterparty where they are the collateral-taker where there is a right to reuse collateral (including where collateral has been provided by way of title transfer, for example, under a GMRA). At a minimum, the information must explain the risks and consequences of the default of the collateral-taker. The collateral provider must also have given their prior express signed consent in writing to the reuse of collateral. We would expect there will be a market-wide solution for this repapering exercise (by way of protocol, or otherwise) in respect of SFTs documented under standard agreements such as GMRA and GMSLA. This obligation will come into effect six months after the SFTR comes into force.
No action needs to be taken by trustees in relation to SFTR at this stage. Trustees should note that when SFTR comes into force, amendments to their IMAs may be necessary. We will update you on any developments in relation to this as they happen.
Ursula WilliamsonCounsel
Trustees should note that when SFTR comes into force, amendments to their IMAs may be necessary.
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Marketing of alternative investments – delay to extension of passporting
Fund managers of UK alternative investment funds must be authorised by the Financial Conduct Authority (or registered if assets under management are below certain thresholds). The Alternative Investment Fund Managers’ Directive (“AIFMD”) provides for a cross-European passport system which allows European fund managers to market EU funds to EU investors (including UK investors) and/or manage EU funds.
Where non-EU fund managers market or manage funds within the EU, or EU fund managers market or manage non-EU funds within the EU, the existing national private placement regimes of each country where the fund is managed or marketed continue to apply.
The European Securities and Markets Authority (“ESMA”) has been considering the application of the AIFMD passporting procedures to non-EU countries. On 30 July 2015 ESMA issued its advice and opinion on the passport regime, in particular considering the possibility of extending the passport to six non-EU countries: Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States.
The advice indicates that the widespread introduction of the passport still looks some way off. However, ESMA considered that there are no significant obstacles to extending the passport to Jersey and Guernsey and also (subject to certain (in progress) amendments to relevant Swiss legislation) to Switzerland. ESMA advised that the extension of the passport to the US, Singapore and Hong Kong be delayed, and has not at this stage provided advice on the extension of the passport to other jurisdictions, notably the Cayman Islands. Nor has it confirmed timings for further assessments.
We will keep you updated of further developments in later issues.
Charmaine YeohAssociate
The advice indicates that the widespread introduction of the passport still looks some way off.
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Longevity market update
Whilst the longevity market is still relatively young, with the first longevity swap being the JP Morgan/Canada Life swap in 2008 and the first pension scheme facing longevity swap being between Credit Suisse and Babcock in 2009, it is growing each year. Last year was the busiest year yet, including the £5bn bespoke longevity swap for the Aviva Staff Pension Scheme where Linklaters advised the trustee.
The longevity market is still expanding with trustees and corporates working together to find a solution to manage their longevity risk. Different structures are being used which allow wider access to the reinsurance market. This includes using an insurer owned by the sponsor (as in the Aviva swap), a trustee owned insurer (as used by the BT Pension Scheme) or a cell company insurer owned by a third party (as in the case of the Merchant Navy Officers Pension Fund).
One of the most recent high profile transactions was the AXA longevity swap. Linklaters advised AXA and the trustee of the AXA UK Group Pension Scheme in respect of a longevity swap with Reinsurance Group of America. The swap which closed in July 2015 manages the longevity risk relating to £2.8 billion of pension liabilities held in the scheme’s defined benefit (DB) section. The arrangement covers 11,000 DB scheme pensioners and provides long term protection to the scheme against costs resulting from pensioners living longer than initially expected.
Sarah ParkinManaging Associate
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Linklaters Pensions Investment Practice – Question Time seminar 1 October 2015
Please join our panel of expert lawyers for ‘Question Time’ to be chaired by John Plender, senior editorial writer and columnist at the Financial Times.
Linklaters lawyers – with expertise in pensions, financial regulation, derivatives, funds and insurance products – will be answering your questions (which we welcome you to submit in advance) on pensions investment issues.
Registration and afternoon tea from 17.00, finishing at 18.30.
Venue: Linklaters, One Silk Street, London. (For enquiries, click here).
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Rosalind KnowlesPartnerTel: (+44) 20 7456 [email protected]
Geoff EgertonAssociateTel: (+44) 20 7456 [email protected]
Philip GossManaging AssociateTel: (+44) 20 7456 [email protected]
Anna TaylorManaging AssociateTel: (+44) 20 7456 [email protected]
ContactsIf you would like to discuss anything further, please contact:
What is the Pensions Investment Practice?
Linklaters Pensions Investment Practice is your one-stop shop for pensions investment-related legal advice. Investment for pension schemes requires more than just pensions advice. Through the Pensions Investment Practice, you will have access to experts in all the areas of law relevant to pension scheme investment.
DERIvATIvES & STRUCTURED
PRoDUCTS PRACTICE
> ISDAs > GMRAs > SLA
YoUR PEnSIonS ConTACT
InSURAnCE PRACTICE
> Buy-ins > Buy-outs > Insurance wrappers
FUnDS PRACTICE
> Hedge/PE Fund > Real Estate Funds > Alternatives
TAX PRACTICE
> Tax structuring > Reviews > Integrated advice with your tax adviser
FInAnCIAL REGULATIon PRACTICE
> Regulatory advice
CoRPoRATE PRACTICE
> SPVsPRoJECTS PRACTICE
> Infrastructure
YoUIntegrated advice
tailored to the needs of your scheme
For trustees, this means:
> Cost-effective advice leveraging off class-leading experience;
> The most rigorous legal advice to protect you and your members;
> Pragmatic advice that is solution-focused;
> Advice that meets your deadlines;
> Seamless access to the broader firm’s expertise through your usual pensions contact.
Please get in touch with your usual pensions contact to find out how the Pensions Investment Practice can work for you.
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