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Material detriment test


We have consulted on a new version of this guidance. The existing version remains current until the new code 12 completes the parliamentary process.

Code-related guidance

These examples illustrate how the material detriment test for contribution notices and the 'code of practice 12: circumstances in relation to the material detriment test' might be considered in practice.

Code in force: June 2009

Code of practice 12


These examples illustrate how the material detriment test for contribution notices and the Code of practice No. 12 'Circumstances in relation to the material detriment test' might be considered in practice.

Points to note

We've produced these examples for illustrative purposes only. They should not be considered as setting precedents – they are not exhaustive and do not illustrate all instances where the regulator may or may not act.

The decision to pursue a contribution notice in relation to material detriment is subject to a series of legislative tests and procedural safeguards. As will be clear, the examples we provide below consider facts in isolation from other potential material factors which may have a bearing on our conclusions.

It should also be noted that some of the situations below, taken together with other acts or failures to act, might constitute a series of acts which could be considered materially detrimental.

The regulator has a wide range of powers which we will exercise appropriately and proportionately. Even where we are pursuing a case in which material detriment is alleged, it will often still be possible to secure the best outcome for the scheme while avoiding the need to issue a contribution notice.

Illustrative examples

We consider that the examples below would not normally be materially detrimental to the likelihood of accrued scheme benefits being received.

Payment of dividends to parent company

Company A is trading profitably and the associated pension scheme has a deficit which is being addressed by an appropriate recovery plan.

As part of the recovery plan directors make a routine annual dividend payment to shareholders in the normal course of business.

Buy-outs and annuities

The trustees of Scheme B have chosen to buy out pensioner liabilities by annuities. The trustees discharge the scheme liabilities through the purchase of annuities from a regulated insurer, so that the insurer assumes responsibility for making payments of members' benefits.

The trustees took proper account of members' interests in deciding to insure the scheme liabilities.

They reconciled the respective interests of different classes of member to ensure all are fairly treated, and conducted due diligence when selecting a product and insurer.

General poor trading

Employer C has experienced poor trading as a result of market conditions, and consequently has lost a major customer to its competitors.

Granting of security 

Employer D grants security in the form of a first charge over some of its assets to renegotiate its borrowings with the bank.

In so doing, the employer engages with the scheme trustees and provides appropriate mitigation to the scheme for the reduction in covenant.

Investment strategy

The trustees of Scheme E and representatives of the sponsoring employer agree an investment strategy in light of the employer's ability to cover any shortfall. 

This ensures a properly chosen, compliant investment strategy with prudent assumptions taking into account the employer's ability to cope with adverse experience.

In contrast to the above examples, the following outline some differing actions which we consider to fall within the circumstances outlined in the code of practice...

Removal of covenant

Company P is moderately profitable, and is a sponsor of a scheme with a large deficit.

The parent company which has no legal link to the scheme substitutes it with Company Q, which is a shell company with a materially weaker covenant than Company P, as sponsoring employer.

Company P is sold off and the proceeds from the transfer pass directly to the parent company and its shareholders.

Risking members' benefits

Sponsoring employer R is a company with a very weak covenant and is not able to fund the scheme beyond ongoing expenses.

The employer and trustees decide to take an inappropriate investment strategy which will provide profit for the employer and shareholders if a surplus is generated.

However, if a deficit is created, any call on the employer for payments will force the company's insolvency. This will in turn cause the scheme and its members to enter the Pension Protection Fund and therefore receive reduced benefits.

Restructure and transfer – weakened covenant

Company S has transferred its employees and their respective pension liabilities to company T.

Company T is highly leveraged and offers a much weaker supporting covenant to the scheme than company S. No mitigation has been provided to the scheme or its membership for the weakening position.