Guiding light

The Pensions Regulator has recently published draft revisions to its clearance guidance. The original clearance guidance, published in 2005, has quickly become out of date as employers, trustees and the regulator have become more used to the regulatory framework introduced by the Pensions Act 2004.

The draft revised guidance aims to provide increased clarity as to the regulator’s approach to the clearance process. It provides greater detail on the expectations placed on employers, trustees and advisers. What are the key changes outlined by the draft guidance and what impact will this have for trustees and employers?

Principle-based approach
The draft guidance refers only to Type A events – which can be either “scheme related” or “employer related”. It has dispensed with the terminology of Type B and Type C events which were rarely used in practice. Type A events are “all events that are materially detrimental to the ability of the scheme to meet its pension liabilities”. Whereas the 2005 guidance divides Type A events into three, suggesting prescriptive tests, the draft guidance simply includes an extended (but non-exhaustive) list of examples. Employers and trustees are then expected to assess whether the event is Type A by adopting a “principle-based” approach.

The prescriptive tests included in the 2005 guidance had been read by many as a definitive checklist of events which could be Type A. The move to a principle based approach will leave matters less certain. The draft guidance makes it clear the regulator only expects clearance applications in relation to Type A events. The principles sets for assessing the need for clearance include:
• appropriate sharing of information with trustees;
• assessment of the employer covenant pre and post-event;
• materiality of any weakening in covenant;
• the relevant deficit for the circumstances – the draft guidance focuses much less on accounting deficits.

Relevant deficit
Employer-related events are not considered as Type A, unless the scheme has a “relevant deficit”. The draft guidance requires consideration of a broader range of valuation bases including PPF, FRS17/IAS19, technical provisions and in exceptional circumstances the buy out position – the accounting basis may not be sufficient going forward. Scheme related events – which, under the draft guidance, include “apportioning” liabilities for statutory debt purposes – do not involve the consideration of a relevant deficit. Any scheme related event is capable of being Type A regardless of the funding position of the scheme.

Minimising a detrimental effect on the pension scheme
The draft guidance also encourages negotiation to minimise or eliminate any detriment to a scheme. This is referred to in the guidance as “mitigation”. Examples of mitigation given by the draft include additional cash payments, escrow arrangements, letters of credit and other contingent asset arrangements. The list extends to other methods like improvements to trustee powers and performance thresholds to trigger more discussions. The wide range of options indicated as acceptable is helpful.

Impact
A clearance statement will only be given if the parties to a potential Type A event apply for it. An application is never mandatory and there is always a decision to be made as to the benefit that clearance would provide.

The move to the more flexible principle based approach, with greater detail and discussion provided by the draft guidance, may make this decision more difficult. The suggestion in the guidance for trustees to be actively involved and approach the regulator, if they feel this necessary, may make employers reluctant to approach trustees at an early stage.

Lorna Buckland is managing associate at Linklaters’ Pensions Group