The Pensions Regulator

Regulator reinforces guidance for trustees on abandonment

Ref: PN07-06
3 May 2007

• Guidance on abandonment published, along with responses to the regulator’s discussion paper
• Trustees should apply a high level of scrutiny to such transactions and understand:
  • changes to the employer covenant;
  • the impact on the scheme of removing the link with an employer of substance.

The Pensions Regulator today (Thursday) published guidance for trustees on the abandonment of defined benefit pension schemes, along with the responses to its recent discussion paper.

The guidance, which takes into account the responses received, outlines how trustees should deal with a proposal involving the abandonment of a defined benefit pension scheme. It underlines the importance of understanding changes to the employer covenant and the potential impact on the pension scheme where the link with an employer of substance is removed.

Comments on the discussion paper were invited from across the industry and responses were broadly supportive of the regulator’s proposals. Some concerns were raised regarding factors to take into consideration when deciding whether abandonment would be in the members’ best interests.

Chief executive Tony Hobman said: “We have taken on board many of the comments and useful suggestions put forward and this is reflected in the guidance.

“Our position remains that, in cases where there is an employer of substance, abandonment is unlikely to be in the members’ best interests. We encourage early discussion to consider suitable alternatives.”

To view the abandonment guidance and consultation responses visit: www.thepensionsregulator.gov.uk

Editor's notes

1. The regulator published the discussion paper in December 2006 with responses received until February 2007. Twenty-one responses were received.
2. Where there is an employer of substance, abandonment, i.e. where the sponsoring employer severs its link with the scheme without providing the scheme with sufficient funds or assets to compensate for losing the ongoing support of its employer, is not likely to be in the members’ best interests.
3. The Pensions Regulator is keen to see innovative thinking being applied to the way pension schemes manage their funds so as to reduce risks to members and the sponsoring employer. It is aware that some market participants are offering products designed to do this without removing the link with the employer and welcomes such moves where security is offered to the scheme.
4. The regulator will critically assess any such abandonment arrangements that come to our attention and review such cases in light of its powers.
5. The Pensions Regulator is the regulator of work-based pensions in the UK, with wide-ranging and flexible powers under the Pensions Act 2004. The Pensions   Regulator’s powers include the ability to:
   • collect detailed scheme information;
   • issue improvement notices and third party notices, enabling the regulator to ensure problems are put right;
   • freeze a scheme that is at risk while the regulator investigates;
   • disqualify trustees who are judged not fit and proper to carry out their duties; and
   • issue a contribution notice or financial support direction

The Pensions Act 2004 also imposes a statutory obligation on 'whistleblowers' to report suspected breaches of the legislation to the regulator.