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Investments may need clearance under 'vague' TPR code

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  • Investments may need clearance under 'vague' TPR code

UK - The Pension Regulator's (TPR) draft code of practice on the 'material detriment' test is "too vague" and could lead to pension schemes requiring clearance on normal business activity such as changes in investment strategy, Mercer has warned.

Following the government's decision to extend TPR's 'moral hazard powers' in the Pensions Act 2008 - in response to concerns employers could abandon their defined benefit (DB) schemes - the draft code details the circumstances in which TPR expects to issue a contribution notice under the new rules. (See earlier IPE article: TPR outlines protection against new powers)

But Mercer said the code, which focuses on the impact of the new 'material detriment' test, outlines "an extremely wide range" of situations where TPR could act including corporate transactions and transfers of pension liabilities between employers, and even "legitimate changes" to the level of employer funding or investment strategy.

The consulting firm added the code of practice "is too vague in scope, and unless clarified will have a detrimental impact on the industry", as it seems to allow TPR the option of applying a Contribution Notice to "almost any form of normal business activity where there is a DB pension scheme".

Stuart Benson, worldwide partner at Mercer, said: "In its present form, this will prevent many employers contemplating a corporate transaction or restructuring, a transfer of pension liabilities, a contribution holiday or reduction in contributions, or even a change of funding or investment strategy, without seeking clearance.

"In principle companies with schemes which decide to increase investment risk, for example put more of the fund into equities or alternatives in the hope of generating extra returns, but at the risk of generating lower funding levels, might want to seek clearance to protect themselves from accusations that they are trying to profit at the expense of members' security," he added.

As a result, Mercer claimed TPR should ensure the code - which closed to consultation on 6 February - only impacts on a small number of schemes where pension liabilities are being actively avoided or put at unacceptable risk, by narrowing the focus and providing "clearer guidance as to how it is to be interpreted".

In particular, the firm called for the regulator to specifically rule out scenarios which it does not consider a risk, to allow employers and schemes to make normal business decisions "without the fear of subsequent regulatory intervention".

Benson said: "This lack of certainty will increase still further the costs and risks falling on the vast majority of good employers trying to run a pension scheme. It is the last thing the pensions industry needs in the present financial climate."

In response to the comments, TPR stated: "We are in the process of finalising the code of practice which will then need to be signed off by the Secretary of State for Work and Pensions. We will endeavour to provide as much certainty as we can in the Material Detriment Code of Practice."

But it added: "We must also ensure that we have scope to act in situations where the use of our powers is appropriate. We are currently considering all responses to the consultation and will take industry opinions and concerns into consideration as we finalise of the code of practice and any additional guidance that is needed in this area."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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