The Pensions Regulator

AbandonmentAbandonment of defined benefit pension schemes

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Security or other mitigation provided to the pension scheme

46. The result of any abandonment arrangement is usually to leave the pension scheme supported by a nominal employer. It is therefore reasonable for the trustees to seek mitigation of equivalent or better value than the protection provided by the current employer.
47. If no sum referable to the potential or actual s75 debt of the scheme (or affected section of the scheme) is being paid immediately, or if it is less than the pro-rata share of potential s75 liability attributable to the affected membership, trustees should consider other forms of mitigation which may be available. These may take the form of additional funds provided to the pension scheme, contingent assets and covenants or guarantees provided by non-participating companies in the new employer group, or by the ultimate owners. Our clearance guidance sets out ways in which pension scheme security may be improved, and trustees are encouraged to refer to these examples.
48. In deciding on a package to mitigate the impact of any potential abandonment arrangement on the scheme, trustees should take account of:
    • the covenant of the existing employer;
    • the covenant of the new employer;
    • the covenant of the new employer group;
    • any security provided through the ownership structure of the new employer group;
    • the potential gain to the current employer and the owners of the new employer group;
    • the potential impact on the appropriate level of technical provisions; and
    • the level of new money, if any, that is being provided to the scheme.
49. New money’ is defined as additional funding to the scheme that can only be made available as a result of the proposed arrangement. The current employer may propose increasing or making an early payment of agreed employer contributions. Whether this represents new money depends on how the current employer is now able to make additional funding available to the scheme. If the additional funding is promised out of the employer’s existing resources, then it can be argued that the scheme is not gaining if it subsequently breaks the link with the employer. In such cases the employer will be crystallising only a part of the covenant that it already provides to the scheme. Trustees may be able to treat new contributions as new money if the resource to provide these only became available as a result of the arrangement (for example, by using a loan facility that would not otherwise have been granted), but this in itself does not justify breaking the link with that employer. Trustees should also bear this in mind when considering any mitigation or security provided as part of the arrangement.
50. The ideal starting point is that mitigation should be payment of the amount necessary to buy out the scheme benefits with a regulated insurance company, as in our clearance guidance.

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