The Pensions Regulator

AbandonmentAbandonment of defined benefit pension schemes

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Introduction
Recognising arrangements that could result in abandonment
Obtaining independent advice
Factors trustees should take into account
The mechanism by which the link to the current employer covenant is reduced or removed
Current employer's covenant
Replacement employer's covenant
Nature and structure of new employer group and ultimate owners
Potential gain by parties to the deal other than the pension scheme
Security or other mitigation provided to the pension scheme
Technical provisions
Scheme investment strategy
Structure of trustee board
Alternatives to the proposed arrangement
Factors trustees should not treat as primary benefits of abandonment
Interacting with the Pensions Regulator

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Introduction

1. The trustees of a defined benefit pension scheme may be asked by the employer supporting the scheme to consider the following:
   • the transfer of liabilities in whole, or in part, to another employer; and/or
   • a change in control, or significant restructuring, of the employer (or group of companies associated with the employer), that results in the substantial reduction in the financial strength of the employer who will in future sponsor the scheme.
2. The above arrangements can be the result of a range of commercial activities. For example, the acquisition of the whole or part of the current employer by another company not associated with the current employer, for an obvious business reason with fair consideration having been given. These arrangements can be materially financially detrimental to the pension scheme and trustees are expected to negotiate robustly and seek adequate mitigation.
3. Some arrangements may result in the current employer severing its links with the pension scheme (or a section of the scheme or membership) without meeting its obligations to the scheme, or that portion of its membership. In such a case, the scheme, or a portion of it, may be transferred to a nominal employer, without being funded to a level sufficient to insure members' benefits with an insurer regulated by the Financial Services Authority. In other words, the scheme would not be able to meet the cost of buying out the full level of benefits with a regulated insurer. Alternatively the existing employer may be restructured so that it becomes a nominal employer.
4. Trustees need to be able to recognise such arrangements that may result in abandonment. These arrangements may not be in the members' best interests in terms of improving the chances of securing members' benefits in the short or long term and they may expose members to an increased risk that their benefits will not be provided in full. The weakened employer covenant may also mean there is an increased risk of entry to the Pension Protection Fund, with the consequent possibility of some members receiving less benefit than they would in an ongoing scheme.
5. The Pensions Regulator ('the regulator') expects trustees' starting point to be that any arrangement that breaks the link with the existing employer may not be in members' interests, unless the full section 75 debt (the full amount necessary to insure members' benefits with a regulated insurer) is paid, or unless the scheme remains supported by an employer of substance and is suitably compensated for any change in the employer's covenant. Trustees must consider the situation with great care.
6. The regulator recognises that this is a difficult area. Any proposal or arrangement that will result in breaking the link between the scheme (or a significant proportion of scheme members) and the current employer must be considered on its individual merits. This guidance does not, therefore, set out fixed rules on when a proposed arrangement will or will not result in abandonment. It simply provides guidance to help trustees identify potential abandonment and sets out what trustees should take into account when reviewing the merits of such arrangements.
7. The guidance is applicable to all cases where an arrangement could result in the employer breaking the link with the scheme (or a significant proportion of the members of the scheme), without payment of an appropriate proportion of the scheme's potential section 75 debt or, where a debt has actually fallen due, without obtaining approval for a withdrawal arrangement. It is also applicable where there will be a restructuring of the employer, or group of companies associated with the employer, such that the scheme is no longer supported by an employer of substance.
8. In all such cases trustees are expected to consider the guidance on recognising potential abandonment of the pension scheme. If trustees believe that any proposed arrangement may result in abandonment then they are expected to consider the remainder of the guidance included here.
9. The guidance is intended to operate together with our clearance guidance.

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