The Pensions Regulator

Scheme abandonment concerns prompt regulatory guidance

Ref: PN06-34
9 October 2006

• Regulator welcomes innovative thinking in managing pension schemes
• But raises concerns that new deals may lead to abandoned schemes
• Trustees must apply high level scrutiny to such deals
• Regulator to consult on trustee guidance stressing value of ongoing and viable employers

Concerns that new ways of managing pension funds could lead to employers abandoning their pension schemes have been voiced by the Pensions Regulator.

Speaking today (Monday) at European Pensions 2006, chief executive, Tony Hobman, warned that corporate transactions which transfer pension schemes to new vehicles could result in employers abandoning schemes without fully meeting their obligations to members.

He said: “Trustees should apply a high level of scrutiny to any such transactions which are brought to them. And they must presume from the start that it is unlikely to be in the best interests of their members to break the link with an employer of substance, except by paying the cost of buying out the benefits with a regulated insurance company.

“Once the link to any employer is removed the trustees will have lost an important backstop to protect scheme members if the pension fund runs into difficulties in the future.”

Hobman added that, while the regulator welcomes innovation in the way pension schemes are managed, it believes that the best way to deliver benefits to members is normally for schemes to have the continued support of a viable employer.

The regulator is now planning to consult on this issue by the early part of 2007. It will also consult on new guidance to help scheme trustees weigh up the proper value of the support given to a fund by an ongoing employer, when considering corporate transactions which would remove that support.

Editor's notes

1. A statement on the abandonment of pension liabilities has been issued today by chairman of the Pensions Regulator, David Norgrove. It can be viewed on the regulator's website at www.thepensionsregulator.gov.uk/pdf/
   abandonmentStatement.pdf
2. The Pensions Regulator is keen to see innovative thinking being applied to the way pension schemes manage their funds so as to reduce risks to members and the sponsoring employer. It is aware that some market participants are considering products designed to do this and looks forward to seeing these ideas being put forward.
   
   However, it is starting to see proposed corporate transactions involving pension schemes where the primary intent behind the transaction is for the employer to abandon the pension scheme without paying the s75 debt. These transactions would transfer pension schemes to new vehicles involving a nominal sponsoring employer and effectively leave the scheme without the support of a substantive ongoing employer.
3. Trustees should be able to secure innovation and improvement in the areas of administration and investment without breaking the link with the employer. Therefore, promises of access to such better services are not of themselves seen as relevant factors for trustees to consider in making decisions on transactions that break the link with the employer.
4. Employers and trustees should also bear in mind that the Pensions Regulator has a statutory duty to protect members' benefits and has been granted anti-avoidance powers. The Pensions Regulator will critically assess any such cases in light of its duties and the powers available to it.
5. Tony Hobman is speaking at European Pensions 2006: Redistributing the risk: public and private approaches to retirement provision, a conference held in London organised by Chatham House in association with the European Federation for Retirement Provision.
6. The Pensions Regulator is the UK regulator for work-based pensions. The powers of the Pensions Regulator include the ability to:
   • collect more detailed scheme information;
   • issue improvement notices and third party notices, enabling the regulator to ensure problems are put right;
   • freeze a scheme that is at risk, while the regulator investigates;
   • prohibit trustees who are judged not fit and proper to carry out their duties
   • issue a contribution notice or financial support direction and
   • The Pensions Act 2004 also imposes a statutory obligation on 'whistleblowers' to report to us suspected breaches of the legislation.