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UK Pensions Regulator warns on asset-backed funding risks

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  • UK Pensions Regulator warns on asset-backed funding risks

UK – Pension trustees must be fully aware of the risks posed by asset-backed funding arrangements, the UK regulator has warned as it published its latest corporate plan.

Setting out how it will regulate the defined benefit (DB) and defined contribution (DC) market through 2016, the Pensions Regulator (TPR) said it intended to develop its enforcement strategy for DC funds that fell short of quality standards put out to consultation in January and indicated it could take action over failure to comply with minimum cost standards.

Chairman Michael O'Higgins also once again stressed that the regulator would seek to strike a balance between the needs of DB members and sponsors "given current economic pressures".

It warned that the use of asset-backed funding arrangements – such as cheese manufacturer Dairycrest's decision to underwrite its fund with £60m (€69m) of maturing cheese – could increase risk where scheme advisers failed to anticipate "all the implications of using [the] structure".

The regulator said in its corporate plan: "It is vital trustees understand the risks they are taking and consider carefully whether a more complex approach to supporting the scheme, which may involve additional risk-taking by the scheme, is preferable to a straightforward one."

Asset-backed arrangements more commonly consist of the deeds of portfolios of property being transferred to funds but have in the past also involved ownership of maturing whisky and often take the place of additional cash contributions from sponsors.

The regulator also said it would be consulting further on its enforcement strategy for DC funds, detailing how the industry would have to comply with the quality features outlined in January's consultation.

"[The enforcement strategy] will explain how we plan to monitor the presence of our quality features in schemes across the market, and the actions that may be taken where they are found not to be present," it said.

It added that the model under development would likely follow a comply-or-explain approach, and that "proactive, thematic and targeted" reviews of DC governance would also be key to regulation.

However, it did not rule out intervention where it deemed schemes were failing.

"In relation to the value for money of schemes," it said, "we are also establishing a work programme that may result in regulatory interventions taking place where schemes are not offering value for money."

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