Clearance & Change to Regulator's Powers

Clearance & Change to Regulator's Powers
In this May edition of Pensions Bulletin we consider the revised clearance guidance which has now been issued by the Regulator and also look at the proposed amendments to the Regulator's powers which have been announced recently.

Clearance
Following the consultation process last year, the Pensions Regulator has now published updated clearance guidance. According to a statement issued by the Regulator, the guidance has been updated to take into account the Regulator's experience of operating clearance and also to reflect the way in which both the Regulator and the market have developed in the three years since clearance was originally introduced.

As you may recall, we considered the draft clearance guidance that was issued for consultation in our November 2007 edition of Pensions Bulletin - further copies are available if required by clicking here. The final version of the clearance guidance is, in fact, very similar to the version originally issued for consultation. For this reason, only high level comments on the new clearance guidance are included in this Bulletin for your information:

• The changes introduced by the revised clearance guidance mark a move away from using prescriptive tests to assess the impact of events on a pension scheme to a principles based approach.
• The term "Type A" event is still to be used for events for which clearance applications are appropriate (i.e. all events that are materially detrimental to the ability of the scheme to meet its pension liabilities), but these are separated into scheme-related and employer-related events. Scheme-related events are always Type A events, regardless of whether the scheme has a relevant deficit. Employer-related events will only be Type A events if the scheme has a relevant deficit.
• "relevant deficit" for an employer-related event will, subject to certain exemptions, be the highest of the scheme's deficits according to the following bases: FRS 17/IAS 19; PPF levy basis; scheme funding basis (where available); ongoing basis following scheme valuation where scheme funding basis not yet available.
• Particular emphasis is placed in the new guidance on trustees and employers having to assess whether an employer covenant has weakened and whether that weakening is materially detrimental to the ability of the scheme to meet its liabilities. The Regulator acknowledges in the guidance that this judgement will often be a complex matter, for which both the employers and trustees may need independent professional advice.
• The Regulator acknowledges that there are certain employer-related events which may weaken the employer covenant but which result from normal commercial activity and may not be within the employer's control (e.g. losing a key contract) – these events alone are not generally considered Type A events. The Regulator does indicate, however, that trustees and the employers should still consider the impact on the scheme. 
• Where a Type A event has been identified, the trustees should negotiate appropriate mitigation for each event with the employer to minimise or eliminate detriment to the scheme.
  

The new clearance guidance places a greater emphasis on a joint approach by trustees and employers in assessing the impact of particular events on pension schemes. The role of trustees is likely to increase, with reliance being placed on professional advisers to assist them throughout this process.

Change to Regulator's Powers
Changes in the market, particularly new business models which sever the link between employers and pension schemes are also behind a Department of Work and Pensions consultation exercise (due to end on 20 June 2008) which has been launched to address whether the Regulator's anti avoidance powers (i.e. issuing Financial Support Directions and Contribution Notices) are still adequate to protect members' benefits and the PPF.

The proposed amendments increase the circumstances in which these anti avoidance powers can be exercised by the Regulator. Amongst other things, these proposals remove the provision that required the Regulator to show that parties had not acted in good faith in order to issue a Contribution Notice.

The intention is that these proposed amendments will have retrospective effect, mostly dating back to 14 April 2008, to address the Government's concern that if the powers had not been announced as being retrospective, there could have been a flurry of undesirable activity in the pensions market prior to the powers being introduced. The Regulator has issued a statement detailing how it will act in the interim period to reassure parties involved in transactions and we can provide further advice on this if required.

21/05/2008