POINTS OF LAW Making amends

Robin Ellison, Pinsent Masons, on fixing bad drafting and a legal miscellany from cold calling to auto-enrolment

In a nutshell: 
  • rectification is now almost a standard legal procedure to cure defects in documentation, and is increasingly simple and lower cost, with further to go
  • regulators should practise holistic regulation, rather than issuing a series of unconnected rules at odd times
  • investment management fees and investment consultancy practice are not issues for regulators to be concerned about in the absence of cartels.

Rectification (that is, fixing badly drafted deeds) has kept the courts busy over the last few months. It looks now like the courts – with some exceptions where a judge feels insufficiently brave or grown-up enough about using their judgment, and the reason for the invention of the Chancery court – will broadly go with the flow to fix a mistake.

The Saga decision is merely the latest in a steady stream of decisions, including Konica Minolta; Girls’ Day School; Sterling Insurance Trustees; St Modwen Properties v Herbert; BCA Pension Trustees; and Hogg Robinson v Harvey – and that is just in the last few months alone. The trend is inexorable. We are moving to a pragmatic, low cost judicial remedy avoiding artificial contention, and it is something we should applaud the courts and the judges for. Perhaps we could have an even speedier and low cost process through the Pensions Regulator in due course.

The Saga case involved a mistake in the consolidation of documents as part of a clean up, something which is easily done, given the complexity of documents these days. As the judge said, in a paragraph which should be nailed up on laser display boards in every law firm, although he required a “representative beneficiary” to pretend to oppose the application, cost to be paid for by the fund:
“…[and] whilst the court should be careful to dispel any taint of a deal done behind closed doors, an over-zealous requirement of notification or consultation might undermine the very purpose of representation orders”. The court might at some stage need to go further and also bless “done deals” between sponsor and trustee.

Climate change and pensions

The otiose integrated risk management guidance from the Regulator suggests that trustees might want to explore whether climate change might have an impact on the value of their investments. More recently, the Law Commission (and separately the Financial Conduct Authority) has issued a call for evidence on pension schemes and social investment, following a government request. The call is driven more by a need to find infrastructure finance than by a regard for the planet, but it points the way to a gathering interest on doing and being good. For those who are worried about climate fundamentalism creeping into pensions governance, Matt Ridley in The Times pointed out that there is a CO2 fertilisation effect, and that because of carbon dioxide emissions, there has been a 14% increase in the amount of green vegetation since 1982, with particular growth in arid areas.

The much cited and widely misquoted legal opinion from senior counsel on the duties of pension scheme trustees in relation to climate change also suggests need for caution by trustees. The Canadians have been looking at this for many more years than we have and their investments in infrastructure, and in particular green infrastructure, are legion. Maybe we should just copy what they do.

Too many questions

The revised questionnaire from the Regulator for defined benefit scheme returns asks some more questions in its altered form. It wants to know whether the scheme is a “relevant executive pension scheme” – which was a new term for me. It means what has for 40 years been called a small self-administered scheme (SASS) and more recently a member-directed pension scheme (which includes SIPPs). Two points: do we need a new technical term? And is the question really necessary? It also asks whether the trustee is a professional trustee. That is tricky. Does it mean: does the trustee charge? Or if they do charge for other schemes, but act pro bono in this case, are they still professional? And is there a legal difference between the duties of lay and professional trustees? And why does a regulator need to know that? It also wants to check the s179 (Pension Protection Fund solvency) assumptions adopted by the actuary. Given that the actuary is governed by their professional obligations, that also seems a question too far. And it also wants the 17-digit Experian number. For heaven’s sake.

Fees and sales: too much of a good thing

US lawyers seem to love litigation. A complaint filed by St Louis-based law firm Schlichter Bogard & Denton sued several US universities, complaining that they had paid millions of dollars in unreasonable and excessive fees for, among other things, investment services. One of the complaints was that they had too many investment options.

It does seem weird, but maybe no more weird than the Financial Conduct Authority’s (FCA’s) latest conclusion that asset management fees are too high. How they decide what are the right fees is one of the mysteries of the universe. Command economies have been tried before and found wanting, and the current regulatory fad of criticising the imperfect market for overcharging when they themselves operate a largely uncontrolled monopoly is profoundly hypocritical. Investment consultants, commentators, competition and the internet now make the market much less imperfect than before. Plenty of offerings compete on price, such as Vanguard.

It is for the consumer to decide whether they wish to pay more for a brand. Where are the car regulators complaining that Aston Martins offer poor value? Regulators should keep well away from muttering about fees unless they smell a cartel.

And while we are on about regulation, the Chancellor announced a ban on cold calling about pensions on 23 November 2016. That will stop it then. What we actually need is more enforcement against fraud. Since the National Crimes Agency and the Serious Fraud Office will not touch frauds under £20m and the regulators do not have prosecution powers or skills, Mr Plod will need to get up to speed. Don’t hold your breath.

Meanwhile, millions are being stolen, the regulators wash their hands like Mr Pilate and everyone apart from the FCA knows that trying to shave a few basis points off asset management costs is of no more benefit than micturating in the ocean. Nor is fining little old ladies for auto-enrolment breaches adding to the general good, as the latest Regulator report on compliance and enforcement narrates and even celebrates. You now even get fined for not telling the Regulator you are not subject to auto-enrolment.

There have been over 34,000 examples of regulatory powers being used so far, including around 7,000 penalty notices. In the immortal words of Donald Trump – Stop it!

Good advice on auto-enrolment

More helpful would be for regulators to republish Aviva’s guidance on pensions, which sets out ten principles and encourages government policy to follow suit. It suggests that government should:

  1. Phase towards 12.5% contributions by 2028.
  2. Adopt a flat rate of tax relief – “save 2 get 1 free” – and rename it as a “savers’ bonus”.
  3. Capture multiple jobholders.
  4. Explore options to capture the self-employed.
  5. Remove the upper enrolment ceiling of the state pension age to encourage longer working life.
  6. Officially encourage the consolidation of small pension pots of £10,000 or less.
  7. Permit “without consent” transfers of contract based workplace pensions, so long as savers are no worse off.
  8. Increase the eligibility threshold to £10,400 and the lower contribution threshold to £5,200, so that individuals can easily understand when they will be enrolled (once they earn more than £200 a week) and how much they will pay (contributions due on earnings over £100 a week).
  9. Adopt three rules of thumb:
  • 40-year rule: aim to begin saving at least 40 years before target retirement date.
  • 12.5% rule: aim to save at least 12.5% of monthly salary towards retirement.
  • Ten times rule: aim to save at least ten times annual salary by retirement age.
  1. 10. Encourage digitisation of pensions through government policy and regulation and a minimum level of digital functionality.

What’s not to like? Apart from “arrest more fraudsters”. Or “reintroduce compulsory annuitisation so that bad guys can’t get the money”.

FCA again

There should be a form of giving something up for Lent for regulators. The Treasury announced some irritating changes to tax reliefs on pensions in its Autumn Statement, which may not raise much money, but will add a great deal to the paperwork of pension schemes. HM Revenue & Customs and HM Treasury should only be allowed to change the rules every five years, and at one go.

Now the FCA has been taking speed again. In a steady stream of separate documents, it thinks there should be changes to early exit charges from occupational schemes. It wasn’t so sure about second-hand annuities. It reflected on retirement income data. And on PensionsWise data. And on information prompts for annuity purchase.

We are blessed, therefore, that the FCA has decided that it will not look at whether investment consultants are running a cartel (which they are not). We are less blessed that it has referred the issue to the Competition and Markets Authority, from where no doubt we will get further consultation.

It is now time that the FCA organised itself to decide just what it thinks is wrong with the pensions system and sort it out holistically, rather than organising a series of smash and grab raids. Its approach is inefficient. And the costs to the rest of us are huge.


AON, Excess fee litigation in the US hits 403(b) plans, 16 November 2016 (Aon Hewitt Retirement and Investment Blog)

Automatic enrolment: Compliance and enforcement, Quarterly bulletin 1 July – 30 September 2016, The Pensions Regulator, October 2016

Aviva, Pre-review of auto-enrolment, October 2016

BCA Pension Trustees, 2015 12 02; United Kingdom: England and Wales: High Court: Chancery Division; [2016] 008 PBLR (014); [2015] EWHC 3492 (Ch); [2016] PLR 017-028 (Indexation – Rectification – Alternative to rectification – Administration of Justice Act 1985 – Construction order)

CP 16/30: Transaction cost disclosure in workplace pensions, Consultation papers: FCA, 05/10/2016

CP16/22: Pension Wise standards: changes for secondary annuity market guidance; Consultation papers 06/09/2016 Last modified: 06/09/2016, FCA

CP16/36: Regulatory reporting: retirement income data, FCA, 25/11/2016

Feedback statement FS16/11: Call for input: regulatory barriers to social investments, Financial Conduct Authority, October 2016

Francois Parent and Guillaume Lavoie, Pension plans and their investment rules: investing in alternative investment funds and full compliance, Lavery Capital, Montreal, October 2016

FS16/11: Call for Input on regulatory barriers to social investments, Feedback statements, FCA , 31/10/2016

Girls Day School Trust v GDST Pension Trustees, 2016 05 26, United Kingdom: England and Wales: High Court: Chancery Division , [2016] 067 PBLR (014); [2016] EWHC 1254 (Ch) (Modification – Rectification – Procedure – Summary judgment – Publication for comment and response)

Hogg Robinson v HarveyHogg [2016] EWHC 129 (Ch)

Indur Goklany, Carbon dioxide – the good news, Global Warming Policy Foundation, 2016

Jonathan Cribb and Carl Emmerson, Automatic enrolment boosts pension membership to 88% and pension saving by £2.5bn in 2015, Institute for Fiscal Studies, 17 November 2016, Press release

Keith Bryant QC and James Rickards, The legal duties of pension fund trustees and relation to climate change, abridged joint opinion, 25 November 2016

Konica Minolta Business Solutions (UK) v Applegate (No 2)2013 08 15; United Kingdom: England and Wales: High Court: Chancery Division; [2016] 097 PBLR (014); [2013] EWHC 2536 (Ch)

Market Study: Asset Management Market Study: Interim report MS15/2.2, Financial Conduct Authority, November 2016

Matt Ridley, Activists may want to shut down debate, but evidence is growing that high CO2 levels boost crops and nourish the oceans, The Times, 19 October 2016

Oliver Gill, Regulator rejects claims it was too heavy-handed in dishing out fines, City AM, 18 November 2016

P16/37: Implementing information prompts in the annuity market, FCA

Pension fund and social investment: call for evidence, Law Commission, October 2016

S16/24: Capping early exit pension charges: feedback on CP16/15 and final rules, Policy statements, FCA, 15/11/2016

Saga Group v Paul [2016] 106 PBLR (017) 2016 07 28, United Kingdom: England and Wales: High Court: Chancery Division, [2016] EWHC 2344 (Ch) (Mistake – Rectification – Documentation – Pensionable salary – Final pensionable salary – Summary judgment – Procedure – Whether hearing should be in camera)

St Modwen Properties v Herbert 2016 02 04, United Kingdom: England and Wales: High Court: Chancery Division , [2016] 045 PBLR (008); [2016] EWHC 428 (Ch); [2016] PLR 113-120 (Rectification – Summary judgment – Procedure – Indexation)

Sterling Insurance Trustees v Sterling Insurance Group , 2015 07 03, United Kingdom: England and Wales: High Court: Chancery Division ; [2016] 035 PBLR (015); [2015] EWHC 2665 (Ch) (Documentation – Rectification – Modification – Deed of variation – Restrictions on power of amendment)

The hot debate on climate risk and pension investments: does practice stack up against the law, ShareAction and ClientEarth, Investor Report, September 2016

HMT, Autumn Statement 23 November 2016


Robin Ellison is a consultant at Pinsent Masons.