The Pensions Regulator has today issued a consultation document containing its draft revised guidance on clearance for corporate transactions and restructurings that relate to defined benefit schemes.
The Regulator's powers and clearance - a quick reminder
Since April 2005, the Regulator has had sweeping powers to sanction parties involved in transactions that might prejudice the ability of employers to support their pension scheme liabilities. These powers allow the Regulator to issue contribution notices or financial support direction against employers associated with the scheme.
The legislation therefore introduced an optional mechanism for employers to seek formal Regulator clearance that a specific transaction would not, of itself, cause the Regulator to use its new moral hazard powers against them.
The original clearance guidance
The original guidance was issued in April 2005. It suggested that clearance should be sought, where there was a deficit on an FRS17 basis, in respect of "events... financially detrimental to the ability of a defined benefit scheme to meet its pension liabilities". The list of so-called "Type A events" which might require clearance was:
- a change in the level of security given to creditors;
- any reduction in the overall assets of a company which could be used to fund a pension deficit; and
- a change in group structure which reduced the overall employer covenant and could affect its ability to meet any statutory debt.
However, there has been considerable uncertainty as to what extent the existing guidance correctly reflected the Regulator's actual approach, which has developed with experience. Indeed, earlier in the year, the Regulator felt the need to issue a "reminder" that whenever there was significant weakening of an employer's covenant, such as a highly leveraged transaction, then clearance might be an appropriate consideration irrespective of the funding position of the scheme involved.
The new guidance
The new document retains the central concept of the Type A event. However, it also provides a comprehensive summary of the width of circumstances in which Type A events may arise and how the Regulator expects them to be addressed. In particular:
- events affecting a pension scheme are divided into "scheme-related" events (e.g. apportionment or compromise agreements relating to section 75 debts) and "employer-related" events;
- the list of employer-related events that could potentially be Type A events has been extended to include any change of employer, sale and leaseback, grant of inter-company loans, business and asset sales from the employer or its group and increasing or reallocating debt;
- the parties will usually have to make their own judgment, with professional advice, as to whether events are "materially detrimental". This will involve reference to the degree of weakening of the covenant, the size of the scheme and employer, and the amount of the relevant deficit;
- where a materially detrimental scheme-related event occurs, this will be a Type A event and clearance should be sought regardless of the funding position of the scheme;
- where a materially detrimental employer-related event occurs, the funding position of the scheme will continue to be relevant but the basis for identifying whether the event is a Type A event will now be the higher of the ongoing funding level, FRS 17, the PPF valuation basis and any scheme-specific funding basis. In certain circumstances a higher, or full buy-out, basis will be appropriate; and
- the guidance lists types of mitigation that trustees may wish to negotiate for in respect of a Type A event, such as improvement in priority, use of contingent assets, agreed performance thresholds or rule changes.
What now ?
The guidance is still, formally, in draft. However, in practice parties should take account of it in their current dealings with the Regulator, and so employers and trustees may need to review current strategies for planning and negotiating transactions or restructurings. Please contact your regular CMS Cameron McKenna contact should you require further advice.
The full version of the new guidance can be found here.