UK - Pension fund trustees need to be less restrictive in their interpretation of what could constitutes a 'Type A' corporate event on a pension scheme's funding, suggests ‘clearance' guidance issued by The Pensions Regulator (TPR).

A 53-page document issued by TPR presents reforms and clarification to the existing ‘clearance' regime of activity by corporate sponsors in circumstances where, for example, the company is involved in a takeover or changes are being made to the scheme's management which could potentially affect its funding levels or benefits.

More specifically, TPR has published guidance which is intended to encourage trustees and employers to work together, and employ specialist advisers if appropriate, to assess whether "corporate events" might affect the scheme's funding.

At the same time, the Pensions Regulator is trying to encourage parties to be less reliant on specific wording of rules set by the pensions regulatory authority as it wants to move away from prescriptive tests to ‘principles-based' regulation.

Clearance guidance was first issued for pension trustees in April 2005 to help them ascertain on what occasions they might need to seek the assistance of TPR to ‘clear' or show there is no detrimental affect from any changes to the scheme.

However, the market has changed since that early guidance was issued, acknowledges TPR. While it was necessary at the time to set out material tests to help trustees understand in what situations proposed changes might need to be raised with the watchdog, "some applicants and advisers are interpreting the guidance more restrictively than had been intended", said TPR.

Moreover, "the regulator cannot consider all these events, and has therefore set triggers to allow us to operate a risk-based approach to clearance", said the body.

TPR is proposing to scrap the terms ‘Type B' and ‘Type C' as they are rarely encountered but keep the label ‘Type A' because it is now part of the pensions vocabulary.

But an additional reform is also being introduced which means trustees can base its assessments on the higher of ‘section 179' basis funding level of that required on FRS17/IAS19.

Examples of ‘events' which might need be considered ‘Type A' and could therefore affect a scheme's funding include:
changes to compromise agreements, where the debt paid to the scheme will be reduced;
apportionment of a scheme's deficit;
non-payment of a ‘section 75' buyout, or
an arrangement which prevents that payment.
Since its establishment, TPR has only ever rejected the clearance of three Type A events from over 500 submitted to the regulatory authority, a TPR spokeswoman previously noted.

However, some scheme trustees are also submitting their funding positions for ‘clearance' in situations where negotiations between the scheme and the sponsor have broken down.

UK law firm Macfarlanes had earlier this summer warned TPR was being placed under increasing pressure by trustees to become "a player rather than a referee" and set tighter rules on how pension funding should be handled in relation to the ‘clearance' of corporate transactions.

Pensions consultancy Punter Southall has therefore welcomed TPR's clarification as it shifts responsibility for interpreting a scheme's position back to the trustees and employer.

"The Pensions Regulator's draft revised guidance on clearance is welcome, but does not make any substantial changes to the way in which clearance has been operating in practice," said Punter Southall Principal Richard Jones.
 
"The guidance contains no real changes in practice and is generally helpful in clarifying the framework. For example, there is an increased focus on analysing the covenant in a fuller sense rather than applying simple rules (which were never definitive anyway but were broad guidelines that some people took too far) which may make clearance more difficult for those uncomfortable with detailed covenant issues," he added.

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