Today (Monday 10 September 2007), the Pensions Regulator published for consultation draft revisions to its guidance on clearance statements in respect of the potential use of its 'moral hazard' powers. The guidance was originally published back in April 2005 and the proposed revisions reflect the Regulator's experience to date and clarify various issues raised over the last couple of years.
The main changes contained in the draft clearance guidance are:
- to encourage a move away from a reliance on prescriptive tests in deciding which events should be considered for clearance, to a more principles-based approach;
- greater clarity in respect to the level of financial mitigation that trustees should be looking for;
- simplification of the classification of corporate events, with removal of Type B and Type C events;
- a fuller description of scheme-related events (such as compromises and apportionment) that could be Type A events;
- extension of the list of employer-related events which could be Type A events.
Whether to seek clearance in a corporate transaction or other restructuring depends on whether the circumstances are financially detrimental to the ability of the scheme to meet its liabilities. The Regulator previously classified events affecting a company into three categories in order to determine whether they would have a detrimental effect on the pension scheme: Type A1 (events that would affect the pension creditor); Type B (events that would not affect the pension creditor); and Type C (events which might affect the pension creditor). However, clearance was only available in relation to Type A events, so the removal of Type B and C events from the guidance should provide greater clarity and simplify the clearance process for companies.
It is evident the Regulator expects companies to be in regular communication with trustees on funding issues and recovery plans, and that trustees should take a firm stance on funding whilst actively monitoring both the employer's financial strength and its willingness to support the scheme. In spite of the proposed revisions to the guidance, the decision whether to apply for clearance may still not be an easy one to make, but where a transaction ticks many of the "moral hazard" boxes, it may seem odd if clearance were not sought, particularly on a high profile transaction which would come to the attention of the Regulator in any event. As previously, it remains crucial for employers and trustees to seek advice early on in the process.
The consultation period runs until 2 November 2007, and once final guidance is published later in the year, we will produce an updated Alert highlighting the key changes from the current guidance and any last-minute changes to the Regulator's proposed amendments.
In the meantime, if you would like to discuss any aspect of the Regulator's revised guidance or clearance in general, please speak to your usual contact in the Hammonds pensions team.
The Regulator's announcement and draft revised clearance guidance can be found at: http://www.thepensionsregulator.gov.uk/mediaCentre/pressReleases/pn07/pn07-13.aspx
Footnotes
1. Type A events are events which are financially detrimental to the scheme ('specified events'): events which adversely affect the priority of the scheme as creditor, or which result in a return of capital (including the payment of dividends), or which alter the control structure of the employer. Any attempt to compromise an employer debt will be a Type A event as well as a 'notifiable event' which must be notified to the Regulator.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.