Regulator explains approach to risk transfers in changing landscape

Today the Pensions Regulator published new guidance and a code of practice for trustees, advisers and sponsors to enable responsible management of risk transfers in a changing landscape.

In line with the regulator's approach to educate and enable, and to enforce only as a last resort, a new module to the Trustee toolkit, 'Buy-ins and partial buy-outs', has been published to provide guidance to those considering transferring pensions risk to insurers. This includes:

• what is meant by buy-in and partial buy-out
• the differing roles of the employer and the trustee
• the options and schemes' objectives
• data management and administration
• the process of bulk annuity purchase

Bill Galvin, executive director for strategic development at the regulator said:

“In setting the framework for pension risk transfers, we have endeavoured to enable trustees and their sponsors to manage responsibly any transfer of this risk away from sponsor balance sheets.

“At all times, where the risk is transferred to another entity, trustees must be certain that there is no reduction in member security. Where the risk is transferred to the individual member, trustees must take all reasonable steps to ensure members understand the risk they are being asked to take on and the value of the benefit they are foregoing.”

The toolkit module is published alongside a new code of practice, 'Circumstances in relation to the material detriment test,' which comes into effect today, designed to sustain effective long-term protection of members' benefits and the PPF, including to enable the regulator to act to prevent transfers to inappropriate vehicles.

This is accompanied by high-level guidance and illustrative examples of the new material detriment test and code. The regulator's clearance and abandonment guidance have also been updated for accuracy.

Chief executive of the Pensions Regulator, Tony Hobman said:

"I hope the new code, guidance and addition to our toolkit will be helpful.

“By working in close consultation with the UK pensions industry, we can ensure the right balance between innovation and protection in the UK as the defined benefit landscape changes. This must include a fair and level playing field for all, matched by effective enforcement where necessary.

“Employers should not be unduly concerned but should undertake appropriate due diligence when considering transactions that affect the pension scheme. Employers must also remember that they can come to the regulator for clearance if they seek certainty.”

1. The Pensions Act 2008 and the Pensions (No.2) Act (Northern Ireland) 2008 amended the Pensions Regulator's anti-avoidance powers in order to ensure that they remain fit for purpose.
2. The material detriment test, introduced by the Pensions Act 2008 and the Pensions (No.2) Act (Northern Ireland) 2008, is a new alternative ground for contribution notices, based on whether a sponsor's actions or failures have a materially detrimental effect on the likelihood of members receiving their benefits. The new ground has an associated statutory defence. This new ground commenced on 29 June 2009 and applies retrospectively to acts since 14 April 2008. 
3. The Pension Act 2008 requires the DWP Secretary of State to review the material detriment test and the statutory defence within 4 years of their commencement. 
4. The Pensions Regulator has a statutory duty to use its powers reasonably. In addition, legislative safeguards will ensure that these new powers will be applied only where it is appropriate to do so.
5. Codes of practice are not statements of the law; however, they do have evidential value, meaning they will be taken into account by the Determinations Panel, a court or tribunal where relevant. The regulator will take the relevant part of the code into account when considering issuing a contribution notice under the material detriment test.
6. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:

• collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
• issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
• direct pension schemes as to how to calculate their liabilities and the contributions required;
• issue a contribution notice where there is an attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.

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