Election 2015: The Labour Party manifesto pledged to force pension fund investors to disclose how they vote on remuneration, as part of a wider move to “improve the link between executive pay and performance”.
The proposals could have a significant impact on the wider landscape of shareholderengagement among institutional investors.
As asset owners, pension fund managers and trustees can be a powerful influence on companies' discussions on remuneration, with the past few years seeing pockets of activity in shareholder activism from schemes and asset managers investing on their behalf.
Pension policies from the 2015 manifestos
Conservatives:
Continue the pathway of pension freedoms, allowing pensions to be passed on tax free
A cap on the amount pensioners can be charged for residential care
Restriction on pension tax relief for high earners to fund an increase of the inheritance tax threshold to £1m
Labour:
Force pension fund managers to disclose how they vote on executive pay
Restriction on pension tax relief for high earners to fund a £3,000 cut to university tuition fees
Ensure good value in private pensions with focus on delivering "proper guidance"
Liberal Democrats:
Write into law the triple lock for state pension uprating
Crackdown on unfair changes that prevent growth of pension pots
Complete the rollout of workplace pensions and encourage higher levels of saving
The party stated in its manifesto: "We will improve the link between executive pay and performance by simplifying pay packages, and requiring investment and pension fund managers to disclose how they vote on top pay."
Arron Slocombe, partner at law firm Baker & McKenzie, said Labour’s proposal was the only real “rabbit pulled out of the hat” for the pensions industry in its manifesto.
“[It] could be part of a longer-term plan to encourage greater shareholder activism in an area often delegated by trustees,” he said.
Slocombe added that the successful implementation of such a proposal would be dependent on two key factors.
“First, the extent to which trustees themselves look at this issue or – more likely – delegate this aspect of governance to others who are charged with responsibility for managing their investments or are specialists in corporate governance,” he said.
“Second, the degree to which, over time, pension scheme members and lobbyists use this new information to probe and press trustees into a more activist stance."
Simon Howard, chief executive of the UK Sustainable Investments and Finance Association, said best practice for asset-owner engagement could be established without the need to resort to legislation.
“Legislation is complicated stuff. What we need is a system that encourages good quality engagement between owners, their agents and the companies,” said Howard.
Targeting tax relief
In their manifestos both Labour and the Conservatives revealed plans to cut tax relief on the pension contributions of higher earners in order to fund other policies.
It’s a quid pro quo, they’re taking with one hand and giving it back with the other
Malcolm McLean, Barnett Waddingham
The Conservative party plans to fund an increase of the inheritance tax threshold to £1m through a reduction in tax relief on pension contributions for people earning more than £150,000.
This follows in the wake of the coalition government’s reduction of the lifetime allowance to £1m in last month’s Budget announcement.
Labour has proposed similar tax relief cuts but will channel the savings into funding a £3,000 reduction in annual tuition fees.
The Liberal Democrats had previously mooted a single flat rate of 33 per cent tax relief across the pensions landscape but did not provide further detail in its manifesto.
Malcolm McLean, senior consultant at Barnett Waddingham, said targeting tax relief on the pensions of higher earners would not generate widespread opposition because many people will assume only the very rich will be affected.
“Pensions have become a bit of a soft target, quite frankly. It’s a quid pro quo, they’re taking with one hand and giving it back with the other,” said McLean
He added: “It sounds like it’s just the rich they’re hitting, although as we know with a £1m lifetime limit it’s people on a [defined contribution] pension above £27,000 that actually get hit.”
Pensions lawyers raised concerns over the longer-term impact of the main parties' tax relief proposals on the incentives to use pensions as a savings vehicle.
Jeanette Holland, head of pensions at law firm Baker & McKenzie, said: “It's clear now that each of the three main parties have set their sights on axing higher tax relief on pension contributions to varying extents.
“The constant changing of the tax regime applicable to pension contributions could weaken the confidence of pension savers.”
And Marcus Fink, partner at law firm Ashurst, doubted whether the proposal would result in a meaningful yield for HM Revenue & Customs.
He added: “After a period of widespread changes to UK pensions, many savers are being denied the certainty and stability needed to establish trust in the UK registered pension scheme framework."
