• Draft guide published on incorporating social factors into investment decisions
• Nest Corporation’s accounts reveal the impact of a failed administration contract
• VAT and pension schemes – status quo to continue despite Brexit
• Government withdraws proposed enhanced reporting for larger businesses
• Royal Assent for the Online Safety Bill

Draft guide published on incorporating social factors into investment decisions

A DWP-instigated taskforce has published a draft guide setting out more than 30 recommendations for the UK pensions sector about how it can better incorporate social factors into investment decisions.  The taskforce itself was announced in February 2023 (see Pensions Bulletin 2023/08) as the main action arising from an earlier DWP call for evidence on the topic.

The guide is designed to be useful for all schemes as it provides practical approaches for investors to consider social issues, whatever their current level of engagement and ambition.  Also, although the intended audience for this guide is primarily UK-based pension trustees, its content has wider relevance to other investors and stakeholders.

The main body of the guide has four sections:

• An introduction to social factors: explaining why material social factors are important from an investment perspective, and why taking these into consideration aligns with pension trustees’ fiduciary duties
• Data considerations: setting out available data sources trustees can use to manage social factors in investment, along with a materiality assessment framework to help prioritise areas for action
• A framework for addressing social factors in pension schemes: covering baseline, good and best practice indications; and using modern slavery as an illustration of how trustees can approach social factors in their investments
• Recommendations for various stakeholders: including trustees (also generally relevant to other investors) and their advisors / other service providers, asset managers, government, regulators, civil society and companies

The appendices provide further detail, including how trustees can oversee data use and stewardship in their portfolios and questions to ask their investment managers and consultants on their approach, as well as case studies.

The taskforce is consulting on the draft guide until 1 December 2023 and roundtables are being organised as part of the process.  If you are interested in taking part in one of the roundtables, you can use the contact details provided on the website.

Comment

The draft guide provides a deep dive into the pillar of ESG which is arguably least well-addressed by the industry.  While it provides more detail than many schemes will need, page 11 usefully sets out what the taskforce considers to be baseline, good and leading practice, to help schemes identify an appropriate approach for them.

As the draft guide is not currently endorsed by the DWP or the Pensions Regulator, and is still at consultation stage, no action is required.  However, some trustees will want to use it to start reviewing their approach to social factors and may wish to provide feedback by attending one of the taskforce’s roundtables later in the year.

Back to the top

Nest Corporation’s accounts reveal the impact of a failed administration contract

Following on from the unheralded publication of the Nest pension scheme’s annual report and accounts for 2022/23 (see Pensions Bulletin 2023/39), the Nest Corporation annual report and accounts for the same period have now been published.

They show the financial impact of the decision in June 2023 for Nest to return to its original third party administrator, Tata Consulting Services, following what appears to have been a failed handover to Atos BPS, who had been awarded the contract in 2021.  Reports earlier this year cited disagreements that had arisen over proposed design changes and delivery deadlines.  Nest has incurred substantial costs, with nearly £60m being written off in 2022/23.  Overall operating expenditure jumped by more than £100m in the same year, with much of it attributable to the administration contract.

As a result, in 2022/23 Nest continued to spend more than it received and so continued to draw down on an open loan facility from the DWP, which is now expected to peak at £1,195m in 2024 and then start to fall, with hopefully all of it paid back by 2038.

On a more positive note, Nest is already one of the largest pension schemes in the UK and is forecast to have £96bn of assets under management by 2030 and a membership of 18 million people.  As it grows from its £29.6bn as at 31 March 2023, income raised from its 1.8% contribution charge plus 0.3% annual management charge, should enable it to start to pay back the DWP loan.

Comment

The Atos BP contract was promoted at the time by Nest as enabling it to make “the most of advances in technology and data analytics to deliver personalised and tailored services to each of its members”, with the contract to last for a minimum of ten years.  Nest says that it has now adjusted its risk appetite “requiring any future partner to have experience in operating within the UK defined contribution pensions market”.

Back to the top

VAT and pension schemes – status quo to continue despite Brexit

A draft clause for a future Finance Bill, relating to VAT and excise law, lays the path for both not to be unduly disturbed by Brexit.  For pension schemes this means that, for example, VAT incurred on investment management services, where alternative approaches became possible as a result of EU case law a number of years back, is likely to carry on without change for now.

In July 2023 (see Pensions Bulletin 2023/26) we reported on the Retained EU Law (Revocation and Reform) Act 2023 containing a mechanism under which (amongst other things) a number of important pensions court decisions would lose their efficacy unless action was taken before the end of the year.

European case law has been hugely influential in the interpretation of the UK’s approach to VAT, including that paid by pension schemes, but this was at risk thanks to the countdown set off by the 2023 Act.  Now the Government has announced the publication of a draft clause for a future Finance Bill, which amongst other things, largely cancels out the 2023 Act’s revocation of much of EU retained law relating to VAT and excise law and provides for its continued relevance.

This draft clause should mean that the PPG case, relating to the circumstances where employers may be able to deduct VAT incurred on investment management services provided to pension schemes, should continue to have relevance beyond the end of this year.

Consultation closes on 17 November 2023.

Comment

The continuation of much of the EU’s VAT and excise law is hinted at in the ministerial written statement’s wonderful language of “taking a bespoke approach in relation to UK VAT and excise law so that it continues to be interpreted as Parliament intended”, but you need to drill down to the draft clause to see what is being proposed.  Once more, we have an illustration of the difficulty being experienced by the UK Government as it seeks to sever ties with EU law.

Back to the top

Government withdraws proposed enhanced reporting for larger businesses

The Government has withdrawn draft regulations, shortly before they were due to be debated in Parliament, that would have introduced new corporate reporting requirements on risk and dividend affordability.

The draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, laid before Parliament in July 2023, would have implemented a White Paper Government decision two years ago by adding certain additional corporate and company reporting requirements to large UK listed and private companies (those with a turnover of more than £750m and over 750 employees).  These include an annual resilience statement, distributable profits figure, material fraud statement and triennial audit and assurance policy statement.  Some of these proposed disclosures would have been of interest to those analysing covenant strength where the company sponsored a DB pension scheme.

The withdrawal of these regulations follows concerns being raised about the additional burden they would create.  The Government now promises options to reform the wider framework shortly with the aim of reducing the burden of red tape on businesses.

Comment

The regulations were part of the Government’s planned reforms of audit and corporate governance, as set out in its response to its March 2021 White Paper (see Pensions Bulletin 2022/21).  These reforms in turn followed a number of corporate collapses, including Carillion and BHS, which raised questions about the UK’s audit and corporate governance framework.

Although the Government says that it remains committed to wider audit and corporate governance reform, including establishing ARGA to replace the FRC, these regulations were a key part of the White Paper reforms.  It is now far from clear what the Government intends to take forward.  Given the changed focus to red tape cutting we would not be at all surprised if the promised Audit Reform Bill is gently put out to grass.

Back to the top

Royal Assent for the Online Safety Bill

The Government’s Online Safety Bill received Royal Assent this week bringing to a close a lengthy passage through Parliament under no less than three Prime Ministers.

Amongst other things the Act imposes a new legal duty requiring the largest and most popular social media platforms and search engines to prevent paid-for fraudulent adverts appearing on their platforms (see Pensions Bulletin 2022/10).

Comment

This new duty is of significance for pension scams that increasingly use the internet to ensnare unsuspecting pension savers.  It will be up to Ofcom to police these new powers and we trust that the Pensions Regulator, in particular, as the lead organisation in the multi-agency Pension Scams Action Group, will be bringing cases of concern to Ofcom’s attention.

Back to the top

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.

If you would like to receive the weekly pensions bulletin automatically by email please fill in this form.