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Buyout 'confederation' attacked by Pensions Regulator

UK - The Pensions Regulator has criticised officials of a new defined benefit pensions buyout operation for suggesting the occupational pensions watchdog endorses its new operation and for making misleading statements about the regulatory status of schemes using its offering.

A new service called the Occupational Pensions Trust (OPT) has been launched in the UK, which is designed to give corporate sponsors an alternative to insurance company buyouts which are cheaper than insurance firm-led buyouts and maintain a closed defined benefit pension scheme be run as a defined benefit occupational arrangement.

However, the new project has already run into trouble with the authorities, despite being officially unveiled only this week, as The Pensions Regulator (TPR) has published an letter to OPT refuting claims the body endorses this proposition.

TPR sent a letter to Ben Shaw, business development director at OPT, yesterday asking the organisation to withdraw "misleading claims" suggesting the firm has been endorsed by the regulatory and for further suggesting it is unlikely any pension fund using the vehicle would need to go through TPR clearance, even though the pension fund was essentially going through a change of ownership.

Under current regulatory guidelines, pension funds can apply for ‘clearance' by TPR to change the management of a pension scheme in circumstances where there is a ‘Type A' event, such as a change of ownership of the pension scheme.

According to the letter from Tony Hobman, chief executive of TPR, OPT had earlier suggested "requesting a clearance is unlikely to be unnecessary as this would constitute a type A event". It further argues it was "misleading" for OPT to suggest TPR had "indicated that we wish to review each individual case, or that we would review investment management strategy", and instead pointed out TPR will "look at any scheme that comes to our attention where there are risks to members benefits or to the Pension Protection Fund".

OPT has been created to operate as "a national pension scheme confederation" which allows its member schemes to continue to be run under existing arrangements, but is overseen by a team of professional independent trustees at OPT.

One of those trustees is Robin Ellison, partner at law firm Pinsent Masons and now chairman of Occupational Pensions Trust (OPT).

Speaking to IPE, Ellison said the new proposition is designed to give corporate sponsors a more cost-effective route to pensions buyout and one which would perhaps more to the liking of pension trustees because it allows the scheme to maintain its occupational pension trustee governance regime.

"The idea is to allow companies to remove closed pension schemes from their balance sheets," said Ellison.

"They can go the Paternoster [insurance firm buyout] route. But there are two reasons why this may be less attractive: We think we're a lot cheaper with the same security, and we allow trustee governance to continue. We run it as a pension scheme, not as an insurance policy so we don't have the pressures of solvency margins [insurance companies] have. They have to buy bonds, which are more expensive. And this is still an occupational pension scheme," he continued.

Launch of what Ellison describes as a "collaboration of occupational pension schemes"  has taken almost three years while the firm ironed out the complexities of offering a buyout scheme which is not required to be run under insurance company solvency rules and which continues to be run as a defined benefit occupational scheme.

It has been in discussions with TPR throughout that time to try and establish whether the regulatory framework would recognise this new thinking in the management of pension schemes.

Any scheme considering using its service would probably need to go through TPR clearance, Ellison was keen to stress, because of the change of ownership.

However, Ellison said feedback from discussions with employers and pension schemes about its propositions has been "encouraging".

Under the existing insurance company buyout regime, funds are seen as being more restricted in their investment options because of solvency rules, suggesting schemes would have to hold substantial weightings of bonds to protect its funding levels.

OPT's offering, however, is said to offer a range of asset classes to match liabilities which are not "inappropriately restricted to gilts and bonds" and schemes are not required to meet high capital adequacy requirements, an aspect which could also be beneficial in relation to the scheme's Pension Protection Fund (PPF) levy, as higher funding levels would minimise the risk-related element of the levy.

Likewise, the scheme's funding position is likely to be boosted by any shift to OPT as the incumbent sponsoring company would be required to give a cash injection to the scheme in return for removing its employer covenant.

At the same time, OPT claims its buyout price to ‘member schemes' would be around 10-20% cheaper than a full buyout, depending on the funding level of the scheme.

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