Pensions Insight: 6 February to 13 February 2023

In our latest Insight we report on ClientEarth’s climate risk litigation against Shell’s board, the latest LDI news, the PPF levy ceiling for 2023/24, the public sector McCloud remedy tax provisions and the FCA’s warning about misleading BSPS settlement offers.

ClientEarth issues climate risk litigation against Shell plc

On 9 February 2023, ClientEarth filed a ‘world-first’ claim in the High Court of England and Wales against the board of directors of Shell plc for “failing to manage the material and foreseeable risks posed to the company by climate change”. It is alleged that Shell’s energy transition strategy is not aligned with the Paris Agreement and a move to net zero. As such, the directors have breached their duties under the Companies Act 2006 including the duty to act in a way that they consider will be most likely to promote the success of the company for the benefit of members.

The claim is a derivative one – that is a claim brought by a shareholder of a company (ClientEarth) for relief on behalf of the company (Shell) against the board for wrongdoing against Shell. It is being supported (non-financially) by a group of institutional investors in Shell that hold more than 12 million shares and more than £450bn in assets under management and that include UK pension funds Nest and London CIV that manages London Local Government Pension Scheme assets, Swedish national pension fund AP3, French, Belgian and Dutch asset managers and Danish pension funds (Danica Pension and AP Pension).

The claim is a ‘world-first’ as it is the first time that action is being taken to try to hold company directors personally liable for an alleged failure to plan properly for a transition to net zero. The Hight Court will decide whether to allow ClientEarth permission to bring the claim. For further information see ClientEarth’s FAQs.

LDI – House of Lords Committee’s recommendations include changes to accounting system and the investment regulations

The House of Lords’ Industry and Regulators Committee (the Committee) has recommended several actions to ‘improve regulation’ on liability-driven investment (LDI).

Accounting system: review the pensions accounting system to identify if accounting standards for less mature defined benefit pension schemes should be based on a longer-term return on the asset split. The Committee believe that this would allow less mature schemes to invest more appropriately in equities and other real assets and not ‘overinvest’ in gilts without experiencing volatility in the reported deficit.

This first recommendation stems from the Committee’s criticism of leveraged LDI being used to counter the ‘artificial problem’ created by the “accounting requirement to measure the current value of scheme assets against a ‘present value’ of future pension liabilities discounted at a low-risk market interest rate”.

The Committee argues that LDI was used to avoid this accounting volatility but because the bond and gilt investments used to do so are sensitive to market interest rate movements, leveraged LDI was a “one way bet on falling interest rates”. Problems were created when interest rates rose as happened in Autumn 2022 – because leveraged LDI funds used the value of gilts as security for borrowing, increased collateral requirements on swaps and repos meant some schemes were forced to sell longer dated gilts at a low price to meet the call. The Committee explains that the actual ‘drivers’ of liability changes are inflation, life expectancy and the scope of benefits rather than interest rate risk – hence, the use of leveraged LDI is an artificial accounting construct which has caused issues in an environment of increasing interest rates.

Investment regulations: review the Occupational Pension Schemes (Investment) Regulations 2005 to see if the use of leverage and derivatives should be regulated more stringently. There should be tighter limits and more reporting in any case – the Pensions Regulator is already looking at increased reporting on LDI and the possibility of extending the notifiable events regime to include LDI events (see our Insight).

Investment consultants: should be regulated by the FCA.

The Pensions Regulator: give the Regulator remit to look at the effect of the pensions sector on the financial system.

The Committee’s recommendations letter asks for Government ministers to respond by 7 March 2023. It forms part of the Work and Pensions Committee’s current inquiry into LDI and the Autumn 2022 gilts market volatility. As part of this, the Work and Pensions Committee (WPC) has issued a further call for evidence and also comments on the Regulator’s draft DB funding code of practice resulting from the WPC’s concerns that the new regime would lead to ‘increased herding’ in scheme investments and the Bank of England’s Financial Policy Committee’s December 2022 recommendations regarding regulators taking action in relation to LDI resilience.

Pension Protection Fund (PPF) levy ceiling for 2023/24 set

The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) (No. 2) Order 2023 was laid before Parliament on 6 February 2023. This sets the levy ceiling for the 2023/24 financial year at £1,246,964,705.

The ceiling sets the maximum amount of pension protection levies that the PPF can impose. It increases in line with earnings increases over a relevant review period, which for the period concerned (1 August 2021 to 31 July 2022) was 5.8%.

The amount collected by the PPF has always been much less than the ceiling – the final PPF 2023/24 levy rules confirmed that the levy will be almost halved from £390m in 2022/23 to £200m in 2023/24 which is significantly lower than the ceiling.

Public sector – McCloud remedy tax regulations

On 6 February 2023, the Public Service Pension Schemes (Rectification of Unlawful Discrimination) (Tax) Regulations 2023 were laid before the House of Commons. These amend tax legislation to modify the tax treatment of individuals who are impacted by the remedy that is being implemented by the Public Service Pensions and Judicial Offices Act 2022. This Act contains measures which will address the age discrimination (the McCloud remedy) identified in the public service pension reforms that were introduced by the Government in 2014 and 2015 (see our Insights (1) and (2)).

As the explanatory memorandum to the regulations explains, tax legislation allows tax relief on an individual’s pension saving during a current tax year and generally does not permit amendments to that saving in earlier years. Because the McCloud remedy is retrospective, this leads to tax ‘anomalies’ in the remedy which need to be addressed. Therefore, the provisions “aim, as far as possible, to put individuals in the tax position they would have been in” had the McCloud discrimination not occurred. For example, they make sure that scheme pension and lump sum payments are ‘authorised’ even though they would not satisfy the relevant ‘authorised payment’ requirements.

The regulations will come into force on 6 April 2023 – many parts will have retrospective effect to cover the remedy period.

FCA second warning about misleading BSPS settlement offers

The Financial Conduct Authority’s 7 February 2023 press release explains that it has identified a further 15 firms (in addition to those already identified as noted in its 26 January 2023 news story) that are making unsolicited offers to former British Steel Pension Scheme (BSPS) members, before the redress scheme commences on 28 February 2023.

The FCA’s concern is that these offers are an attempt to prevent former BSPS members from qualifying for the redress scheme – by accepting them an individual could end up with less than their entitlement under the scheme. This means that the firms involved would have to pay out less than they might otherwise have to do if they had to make a payment under the redress scheme. The FCA expects such settlement offers to be withdrawn and for the firms to stop making such offers.