Clearance - Consultation by Pensions Regulator

CLEARANCE – REVISED DRAFT GUIDANCE ISSUED BY PENSIONS REGULATOR

Having run the existing clearance regime for two years, the Pensions Regulator has now published revised clearance guidance in draft form.  The Regulator put the revised draft guidance out to consultation and this consultation process was brought to an end on 2nd November 2007.  The Regulator is currently considering the responses received during the consultation exercise and, whilst no definite timescale has been given for the introduction of this revised guidance, we understand that the Regulator hopes to formally issue the revised guidance early next year (most likely during the first quarter of 2008).

This bulletin explores briefly the key differences between the existing clearance guidance and the revised draft clearance guidance.  The revised clearance guidance is, of course, still subject to change depending on the outcome of the consultation process.

Having monitored behaviour in the marketplace, the Regulator has become aware that many applicants and advisers are interpreting the existing guidance more restrictively than had been intended.  Instead of relying on prescriptive tests, the Regulator wishes to encourage trustees, employers and professional advisers to adopt a more principle-based approach when assessing the impact of events on a pension scheme.  Other developments which have impacted on the need to revise the guidance include the increasing tendency to view pension schemes as creditors and an increasing awareness of the significance of pension scheme deficits due to FRS17.

If implemented, the revised draft guidance sets out a number of points for trustees and employers (and their advisers) to be aware of.  Amongst other things, they are expected to have systems in place to identify at an early stage when an event which could be detrimental to the scheme or the ability to fund the scheme is occurring and should take appropriate action to minimise or eliminate the detriment to the scheme by agreeing appropriate mitigation.  A key ongoing duty of trustees is to monitor the employer's financial covenant (and the covenant of the wider employer group).  Both employers and trustees are expected to put in place procedures to allow information, for example relating to the employer's financial position, to be shared.

Key Differences

· Although the term "Type A" event is still to be used for events for which clearance applications are appropriate, these are to be split into scheme-related and employer-related events.  The intention behind the change is to distinguish between events involving corporate activity and those relating more directly to the scheme.  The Regulator does acknowledge that some events may comprise aspects which are both employer and scheme related.

· The Regulator sets out fuller examples of scheme-related events, which may be Type A events, but does not go so far as to provide an exhaustive list due to the principle-based approach.  Examples include compromise agreements, apportionment of a scheme's deficit and non-payment of a section 75 debt for an unreasonable period.  When assessing the potential detrimental impact of such scheme-related events, it is not simply the ability of the scheme to meet its pension liabilities that is relevant.  In certain circumstances, detriment to members' benefits may mean the event is deemed a Type A event.

· Examples of employer-related events that could be Type A events have also been extended in the revised guidance.  For brevity, however, these have not been set out in this bulletin.  An employer-related event will not be deemed to be a Type A event unless the scheme has a "relevant deficit" and the relevant basis has been revised from the previous guidance.  Subject to certain exceptions, the basis in the majority of cases will still be the higher of a scheme's ongoing funding level, its technical provisions, FRS17/IAS19 and now also the Pensions Act 2004 section 179 basis where higher (pension protection fund risk-based levy basis).

The changes to the clearance guidance will have a significant impact on trustees with particular emphasis being placed in the guidance on the duty of trustees to monitor the employer's financial position.  The revised guidance contains extremely detailed criteria for trustees to consider when assessing whether an employer's covenant has weakened and if so, whether it is materially detrimental to the ability of the scheme to meets its liabilities.  The Regulator highlights that this assessment may often be a complex matter on which the trustees will need to take independent professional advice.

The other key change for trustees is the requirement to negotiate the most appropriate mitigation with the employer to minimise or eliminate detriment to the scheme.  Many examples of mitigation are given in the guidance but they include additional contributions, letters of credit and parental and intra-group guarantees.

The revised draft guidance places a heavier burden on trustees and employers who will need to work closely with their professional advisers in any potential Type A situation.

If you wish advice on the draft clearance guidance, please contact one of the following Partners:-

30/11/2007