The Pensions Regulator

Clearance

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Where an event is type A

83. Where the employers and trustees have identified a possible type A event, they should consider and agree the most appropriate mitigation.
    
    

    Considering mitigation

84. The level and type of appropriate mitigation will vary, depending on the nature, circumstances and impact of the event and the funding level of the scheme, taking into account the relevant deficit (see paragraphs 80 to 88).
85. The appropriate mitigation should be identified for each type A event.
86. Any mitigation agreed does not restrict in any way the trustees’, the employer’s or the regulator’s duties, powers and obligations in relation to scheme funding under Part 3 of the Act. Further information on these powers, duties and obligations can be found in the scheme funding section on our website: Regulatory guidance / Subject listing / Scheme specific funding.
87. Trustees should seek appropriate independent professional advice to enable them to assess their powers and duties in relation to a type A event and ascertain what mitigation may be appropriate. This will allow any application to proceed more efficiently.

    Types of mitigation

88. There are different types of possible mitigation, for example:
    
    • additional contributions of cash or other assets;
    • an improvement in priority; for example, granting a fixed charge or floating charge to the pension creditor, alongside, or in priority to, a lender;
    • escrow accounts: an escrow account is an arrangement (not available in Scotland) whereby the employer pays funds into an account that will pass to the scheme under certain conditions, otherwise being returned to the employer;
    • standby letters of credit, guarantees or insurance: employers may obtain these from banks or financial institutions to cover, for example, contributions to the scheme and/or the s75 debt;
    • negative pledges: a negative pledge is a commitment by the company that something will not be done – for example, that no new security will be granted without the agreement of the trustees;
    • parental and intra-group guarantees: where there is a wider employer group, the parent company or another company within the group can guarantee, for example, the payment of contributions and/or the payment of the full s75 debt in certain circumstances;
    • joint and several liability: the employers or the wider employer group can be made jointly and severally liable for the funding of, or debts due to, the scheme;
    • performance thresholds: trustees and employers may agree financial thresholds for the employer that, if breached, would have to be reported to the trustees. These are unlikely to be sufficient mitigation alone for any detrimental event, but in combination with other forms of mitigation would act as an early warning for trustees of any deterioration or change in the employer’s financial circumstances and provide an early opportunity for dialogue; or
    • scheme rule changes: making an amendment to the scheme’s trust deed and rules to change the balance of powers.
89. There may be other forms of mitigation. Which type, or which combinations of types, is appropriate will depend on the relevant circumstances. Please note that some forms of mitigation will reduce future PPF levy bills. For more information on PPF rules on contingent assets, see the PPF website (www.pensionprotectionfund.gov.uk).

    Additional considerations for scheme-related events

90. For scheme-related events, employers and trustees may be able to agree mitigation that changes the event itself. For example, appropriate mitigation for apportionment not subject to a scheme apportionment arrangement could (alongside other forms of mitigation) include an amendment to the rule so that:
    • it is only exercisable at the trustees’ discretion;
    • it is specific to a particular event, employer, time period or set of circumstances.
91. For any apportionment, employers and trustees should also consider what amount should be payable to the scheme in the particular circumstances in place of the s75 debt that would otherwise become due.
92. Trustees should be cautious about agreeing to any apportionment (including a scheme apportionment arrangement) that is far in advance of the time a s75 debt will trigger, because it would be less likely that both the full effect of the apportionment can be properly considered and that the statutory tests that determine whether a scheme apportionment arrangement is possible could be met.  Similar considerations apply to withdrawal arrangements. 
93. When considering a compromise of a s75 debt, trustees should also seek to understand the purpose of the compromise, the history of the scheme and the employer and what the dividend would be for the scheme in the event of employer insolvency. Trustees should also consider and compare the outcome for other creditors, as well as the employer’s situation following the compromise, in particular whether the scheme could receive further support in the future whether or not there is any compromise.
94. When considering withdrawal arrangements or approved withdrawal arrangements, trustees should consider whether the guarantee provides sufficient mitigation in all the circumstances. Relevant factors may include the payment events for the guaranteed debt (Amount B), or any payment on account of this, and the choice of guarantor.   A guarantee from an existing employer may provide less mitigation than a guarantee from another party who does not already have an obligation to the scheme.  Trustees should consider their fiduciary duties and the likely impact on scheme members to determine whether a withdrawal arrangement would be appropriate.  These are in addition to the statutory tests that determine whether a withdrawal arrangement is possible. The parties should also take care to ensure that the contents of the agreement comply with statutory requirements.
95. When considering mitigation, employers and trustees should always consider both the immediate and the possible future impacts of a scheme-related event.
    
    

    The role of the trustees

96. The regulator expects trustees to, as soon as reasonably practicable, be involved in any application relating to their scheme and as part of an application, the trustees will be asked to comment on whether or not they support the application and explain why. For an application to proceed efficiently, the regulator will expect trustees to have had the opportunity to assess the impact of a type A event, to consider appropriate mitigation, and to negotiate where appropriate, taking independent professional advice where needed. The regulator will consider the trustees’ views when deciding whether to grant a clearance statement, but trustee support does not ensure it will be granted and lack of support does not ensure it will not be granted.
97. Trustees have the prime responsibility for safeguarding members’ interests. Their powers and duties are set out in statute, trust and pensions law as well as in the scheme’s governing documents, mostly the trust deed and rules. They must always, and in particular during the course of an application, be familiar with those powers and duties and should act in accordance with them.  For example, trustees may have powers that are relevant to the type A event, such as setting contributions and/or winding up the scheme in certain circumstances.
98. If it is in deficit on any basis, the scheme is a creditor of the employer. Usually, because of the size of the deficit, it is a material creditor. Although a scheme is not identical to a large unsecured bank loan, it does (particularly because of the long-term nature of the pensions obligation) have many similarities in the form of:
    
    • its size relative to other unsecured creditors; and
    • its importance to the company.
      

    Negotiation

99. When negotiating with an employer, trustees should generally adopt the approach of a bank that has advanced a large unsecured loan. Employers should view the scheme in a similar way, and employers and trustees should co-operate with each other to achieve an appropriate outcome for the scheme.
100. Trustees must ensure that they understand the nature of the employer-trustee relationship including the identity of the employers for the relevant purposes as described more fully at paragraphs 165 to 173.
101. Trustees should consider whether they have the necessary negotiation skills and whether they should instruct independent professional advisers to assist them in the negotiation process.
102. Trustees should be cautious about agreeing to fetter their powers or discretions or restrictions to their duties. For example, trustees should not generally fetter their discretions in relation to investment decisions and should not be restricted from discussing any matters with the regulator.
103. Trustees can also contact the regulator, who may be able to provide help and guidance.
104. In addition to negotiations relating to the event, employers and trustees may separately need to consider the statutory funding objective and the impact on the technical provisions and any recovery plan that is in place.

     Confidentiality

105. Most of the information trustees receive in their position as trustees will be confidential. Confidentiality will be particularly important when trustees receive sensitive information about scheme members or the employer, including price-sensitive information. Trustees should be able to pass all information to their appointed professional advisers, if appropriate.
106. One way of ensuring that all parties understand the importance of confidentiality is to enter into a confidentiality agreement. This agreement should ideally be reviewed and revised every time a new trustee joins the board, rather than waiting until there is some important issue, which the employer may be reluctant to discuss because of confidentiality issues. The lack of a confidentiality agreement may cause delay, which would be a particular problem if quick action by trustees is required.
107. Confidentiality agreements should not restrict the trustees’ duties or fetter their power or discretion or seek to prevent the trustees from contacting the regulator. If trustees feel that the terms of an agreement would affect their ability to carry out their duties as trustees, they should consult their independent legal advisers and consider raising this with the employer and with the regulator, as appropriate.

     Conflicts of interest

108. Trustees, who may include directors of the employer, will often have conflicts of interest. Other conflicted trustees may include shareholders of the employer or union representatives. Conflicts will be particularly relevant when trustees are negotiating with the employer in relation to a possible detrimental event, including a type A event.
109. We would generally expect trustees to seek legal advice in those cases where material conflict is identified to ascertain the best way to proceed. 
110. The regulator expects a trustee who has a conflict or potential conflict of interest to notify other trustees at the earliest opportunity.
111. Further information and assistance on dealing with conflict of interest can be found in our free e-learning programme, the Trustee toolkit (www.trusteetoolkit.com) and in the Conflicts of interest consultation document available on our website: Online publications / Policy documents.
     

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