Spell things out

Once upon a time there was confusion. The government had just published its new Pensions Act and companies did not know what it meant. The Act had built a new lifeboat fund called the Pensions Protection Fund which gave a measure of insurance to members of schemes if their employers became insolvent.

But the government was worried companies might take actions to put liabilities on the PPF or avoid paying for their pension obligations completely. So the Act said if a company took an action with the purpose of avoiding a pension obligation the new regulator could impose a contribution notice on the company or its directors at any time in the following six years.

Businesses were naturally concerned. They were concerned The Pensions Regulator’s powers might be used in a broad range of ordinary business transactions where there was no hidden agenda related to pensions. Businesses decided they had to have clarity on whether their actions were considered avoidance of a pension obligation. So The Pensions Regulator introduced “clearance” enabling companies to go to TPR and ask whether their action was OK and, if not, agree some mitigation. They would then have their transaction officially cleared.

The Pensions Regulator then went on to publish some helpful guidance. The guidance spelled out clearly what types of transactions were affected (called Type A events) and critically when a company had one. Companies knew, for example, if they paid an unusually large special dividend and had an accounting deficit under FRS17 they might have an issue. Of course, the guidance could not cover every eventuality. However, the concept of when a company had a Type A event was clear. And the regulator’s reaction to Type A events became well known.

But then life became rather complicated again. Companies were routinely carrying out transactions that were not covered by the guidance and trustees were contending some of these transactions were material and should be Type A events.

Examples were inter-company loans where cash was swapped for an IOU from a less than healthy parent. The clearance guidance was beginning to appear less than complete so The Pensions Regulator took action. It issued draft new guidance to bring in a much broader range of transactions. It also changed the trigger point on what deficit would need to be funded to obtain clearance.

At first sight this all makes perfect sense. However, the new guidance is long on principles but short on detail. Some parts of the guidance are open to wide interpretation. For example, it says: “Where the event is significantly detrimental to the scheme’s liabilities... a higher basis [than FRS17, section 179 or technical provisions] would be appropriate” without defining what is “significant” or what the “higher basis” is.

This poses the question: “Does this meet the original intent of the legislation?” If the legislation was introduced to focus on stopping companies acting inappropriately this appears to go too far.

The existing guidance should therefore be updated to reflect a broader range of corporate transactions and certain transactions such as leveraged buy-outs should also be covered.

This would then provide clear direction enabling companies and trustees to have a better understanding and means of working together.

Brian Peters is a partner at PricewaterhouseCoopers