Trustees of occupational pension schemes should be aware of a practical issue that many schemes will need to attend to before 3 January 2018 to ensure that their investment managers can continue to provide them with investment services after that date.
Where applicable, a pension scheme will need to have a Legal Entity Identifier (LEI) number. We expect a scheme's investment advisers or managers to be raising this with trustees and also helping them obtain one if their scheme trades in bonds, shares and certain other financial instruments. We explain more here.
Key points
1. Unique identifier
An LEI is a unique 20 character reference number used to identify a legal entity that is a party to a financial transaction.
2. New reporting requirements under MiFID II
New reporting obligations imposed on financial institutions and investment managers from 3 January 2018 under the Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) require all relevant financial transactions to be reported. In order to be able to report, financial institutions and investment managers will need an LEI for each party to a financial transaction.
3. Affects the provision of investment services
If there is no LEI for a pension scheme (and that scheme should have one) then in practice the scheme's investment managers will not be able to provide investment services to the scheme or execute trades on the scheme's behalf.
4. Next steps for trustees
Trustees should speak to their investment consultants and managers to establish if they already have an LEI and if not, whether they need an LEI. If they do, they should ask for help to obtain one before 3 January 2018.
What is an LEI?
An LEI is a unique 20 character reference used to identify a legal entity that is a party to a financial transaction. Once issued, it remains with that entity for the duration of its existence.
LEIs are included in a global data system and allow a party to a relevant financial transaction to be identified in any jurisdiction. It helps regulatory authorities monitor trading activities and identify market abuse or manipulation (amongst other things).
Why might an occupational pension scheme need an LEI?
From 3 January 2018, financial institutions and investment managers are required under the Markets in Financial Instruments Directive II (MiFID II) to report on all relevant trades and in order to do that they will need the LEI for each party to that trade. If there is no LEI for a pension scheme, that scheme's investment managers will not be able to execute trades on the scheme's behalf. In short, a scheme will need an LEI so that its investment manager can continue to provide it with investment services which relate to the execution of financial transactions in shares, bonds, collective investment schemes and derivatives.
How does a pension scheme obtain an LEI?
If an occupational pension scheme needs an LEI, one of the scheme's investment managers should be able to obtain one. The current fee is £115 (plus VAT) and there is an annual charge of £70 (plus VAT). We understand that it is possible for investment managers to make bulk requests for LEIs at a discounted rate. We suggest trustees speak to their investment manager about this.
Alternatively, applications can be made to the LSE direct.
If a pension scheme trades in derivatives, it should already have an LEI.
What should trustees do next?
We would suggest trustees speak to their investment consultant and managers about this first as they should be able to assist in:
- confirming whether or not the scheme already has an LEI;
- if not, deciding whether the scheme needs an LEI; and
- obtaining an LEI. We are aware that some investment managers are starting to contact their pension scheme clients about this.
We are aware that some investment managers are starting to contact their pension scheme clients about this.
Note that not all occupational pension schemes will need an LEI - it will depend on what the scheme invests and trades in, but it is important that trustees check with their investment consultants or managers as to whether they need one or not to ensure the continuity of investment services after 3 January 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
