DWP scraps exemption on 5% sponsor investment limit

Investment regulations already impose this restriction in most circumstances, but they provided an exception for investments by the operator of a collective investment scheme.

The DWP announced the exception will be removed from September 23 in compliance with the 2003 Institutions for Occupational Retirement Provision (IORP) European directive.

A transitional provision which allows certain schemes to retain employer-related investments in excess of the 5% limit required by the IORP directive has also been scrapped.

Andrew Bradshaw, a partner at Sackers, said the decision was disappointing but not unexpected.

“This will give some pension funds a real headache as they try to work out how to ensure that they do not inadvertently breach the employer related investment rules. It's particularly worrying for trustees because a breach of these regulations could lead to fines or even imprisonment,” he said.

Schemes might also be subject to extra costs in order to bring their investment portfolio in line with the new regulations.

Däna Burstow, partner at Allen & Overy, said investment managers need to take quite specific actions to make sure this limit is respected.

“This involves them doing additional work which might increase their fees. This check has got to be funded somehow,” she added. 

And Robert Tellwright, associate at Allen & Overy, wrote in the law firm’s pension blog: “While fund managers may be willing to report to trustees if their holdings in securities issued by the employer’s group exceeds a certain threshold, it is very difficult for managers and custodians to monitor and report on this information on a day-to-day basis (let alone in real time as securities are traded).”