The Pensions Regulator

AbandonmentAbandonment of defined benefit pension schemes

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Current employer's covenant

26. Under any arrangement resulting in abandonment, the scheme (or a part of the scheme) will lose any protection provided by the covenant of the existing employer. The existing employer underwrites the risks that the scheme is exposed to, including longevity risk, investment risk and inflation risk. It is highly unlikely that the loss of this protection will be justifiable unless there are serious doubts about its future sustainability or it is already of little value.
27. Trustees should therefore form an independent opinion of the value of the covenant of the existing employer to the pension scheme.
28. The methodology and presentation of any assessment of the value of the covenant to the scheme is expected to vary depending on the approach and adviser used. Notwithstanding this, trustees are expected to form a view on the ongoing financial strength of the employer and its future viability.
29. There are several relevant factors to consider in analysing the ongoing viability of the employer. Depending on the specific circumstances they can include:
    • the nature and prospects of the industry in which it operates;
    • the employer's competitive position and relative size within that industry;
    • management ability and track record;
    • the financial policy of the employer;
    • its profitability, capital structure, cash flow, and financial flexibility; and
    • the employer's credit rating (if any), which may have some bearing on these considerations, but the rating score on its own should not be seen as a substitute for independent review, unless the detail of the analysis behind the rating is made available and is acceptable to the trustees.
30. Trustees should be focused on the likelihood of failure of the employer. It may also be relevant to consider the consequence to the scheme of the employer's failure, but this should be analysed in context. If failure of the employer is unlikely (taking account of the employer's obligation to the scheme) then recovery analysis is expected to be less relevant to consideration of the proposed arrangement.
31. In addition, trustees are expected both to review the ability of the employer to meet any current shortfall in technical provisions and to form a view on the extent to which it could restore the position of the pension scheme if costs increased substantially. Such increased costs may result from adverse experience in relation to the main risk factors faced by the scheme. These risk factors are expected to include longevity risk, inflation risk and investment risk. There may be significant risks unique to a scheme (for example outstanding sex equalisation issues) and trustees should satisfy themselves that they take account of all significant risks against which the employer provides protection.
32. Trustees should also review the nature and structure of any group associated with the current employer if this exists. The aim should be to establish any possible additional security that may be available to the scheme from such a group which may potentially be lost as a result of the transaction.

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