The Pensions Regulator’s (TPR) director of supervision Mike Birch urged trustees considering a capital backed journey plan (CBJP) to engage with the regulator at the earliest opportunity, setting out expectations for trustees.
In a blog published yesterday, Birch set out principles of CBJP and what TPR’s expectations are for those considering them.
Birch said that arrangements such as CBJPs vary significantly in nature. In general, he said they involve a third party providing additional capital to support the risks in the scheme with the scheme’s assets being invested in a portfolio with higher expected returns. This is done on terms agreed between the trustees and the third-party funder.
But more recently, Birch said that TPR is seeing CBJPs considered when a sponsoring employer is financially distressed, including the imminent insolvency of the employer. He said the Pension Protection Fund (PPF) would normally be the safety net for members in those schemes.
“However, if a CBJP can help members get benefits above PPF levels on appropriate terms, then clearly that would have our support. But we would need to scrutinise the CBJP to make sure that it was appropriately set up and being run well,” he said.
Birch added that TPR set out in its defined benefit (DB) superfund guidance that where CBJPs are considered in these types of circumstances, elements of the superfund guidance would be applicable.
“We expect to assess CBJP proposals against the guidance. We have retained flexibility to enable us to ‘turn on or off’ various aspects of our guidance and expectations to suit the circumstances of each CBJP,” he noted.
Birch added that the regulator wants to support innovation in savers’ interest and CBJPs may be a good option for some schemes when customised to their specific circumstances.
“We are keen to continue to engage with the market”
“We are keen to continue to engage with the market on these arrangements and to see them develop alongside other options that offer trustees greater choice without compromising on the security of members’ benefits,” he continued.
He said that TPR plans to publish new guidance to help trustees, and employers, navigate alternative arrangements and highlight factors that may be relevant to trustees’ consideration of these offerings.
“Ultimately, we expect schemes to have trustee boards with independent decision-making authority on the way their schemes are run, including investment strategies,” he said, adding that for now, there are some issues TPR expects trustees to consider.
This includes proactively engaging as early as possible with the employer, TPR and PPF as appropriate. Birch said that, depending on the complexity of the arrangements, TPR’s assessment will take two to six months.
He added that any additional investment risk taken needs to be balanced against the level of capital put in place and the trustee should have ultimate say over the appropriate level of risk taken.
Finally, he said, trustee boards need to have sufficient collective knowledge and skill to navigate the pros and cons facing the scheme as a result of the arrangement and not be conflicted in the proposed arrangements. He added that they should consult their advisers where appropriate.
“We are committed to enabling innovation in the DB space. We can see a useful role for CBJPs in this market where they have saver protection as their focus. You can expect to hear more from us on this and other innovations in the new year.
“In the meantime, our message to trustees is simple: engage with us at the earliest opportunity if you are considering a CBJP to ensure you are meeting our expectations to protect savers.”
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