Torsten Bell: We consult in due course on whether and how existing FAA regulations could be strengthened
The government is set to review the rules around flexible apportionment arrangements (FAAs) to ensure regulatory standards and safeguards are keeping pace with market innovation.
In a ministerial statement today (16 June), pensions minister Torsten Bell said the review comes after the deal between Stagecoach Group and Aberdeen Group in December last year – a deal that saw Aberdeen replace Stagecoach as sponsoring employer of the £1.2bn Stagecoach Group Pension Scheme.
Bell said the deal's "novel" use of existing FAA legislation led to Aberdeen Group assuming responsibility for the liabilities and the assets of another employer's defined benefit (DB) pension scheme.
The minister said that FAAs were first introduced in 2012 to ensure that corporate restructurings, mergers, and sales do not cause employer insolvency events when there is an appropriate sponsor who can support the scheme.
Bell said: "Whilst this transaction complied with the existing FAA mechanism it did so in a way not anticipated when the mechanism was introduced.
"We therefore intend to review this area of legislation to ensure the regulatory standards and safeguards evolve and keep pace with the innovation we are seeing in the pension market. This is to protect members and the Pension Protection Fund, which is there to protect people's pensions in the event of an employer insolvency."
Bell said the government wanted to encourage innovation with the potential to benefit scheme members throughout the pension system but needed to ensure the right legislative guardrails are in place for this to happen safely.
Bell pointed towards the DB superfunds framework set out in the Pension Schemes Act – a framework he said reflected the fact that superfunds operated schemes on a commercial basis and was designed to ensure that the interests of commercial providers are appropriately aligned with those of scheme members.
He said this framework highlighted the importance of considering whether additional safeguards are required where other mechanisms, such as FAAs, are used in ways that similarly involve the commercial operation of DB pension schemes.
Bell explained: "We will therefore consult in due course on whether and how existing FAA regulations could be strengthened.
"Where providers are looking to run schemes for profit, this can work in scheme members' interests but regulatory standards and safeguards must evolve to match the new risks this creates."
The right safeguards
LCP advised Stagecoach on its transaction, a deal which it said was "expected to materially boost member outcomes".
The consultant said the minister's comments that innovation should both have the potential to benefit scheme members and ensure the right guardrails are in place for this to happen safely "captured the ethos" of the process that sat behind the transfer of the Stagecoach Group Pension Scheme to Aberdeen.
LCP partner Steve Hodder led the firm's advice to Stagecoach. He commented: "We are supportive of having the right pragmatic safeguards in place to support the interests of scheme members, which mirrors how the Stagecoach process was advised and run.
"We therefore welcome the DWP taking action to consider how to ‘level up' the formal requirements sitting behind FAAs – to ensure that schemes following the Stagecoach route manage the interests and potential risks as thoroughly as in this pioneering case, alongside giving members the potential to benefit from improved outcomes."
Hodder continued: "Innovation, choice and competition can be a real positive for consumers. It's great to see the pensions minister embracing that, and the potential for the UK's DB schemes to improve outcomes for all stakeholders."
