July 14 2020 - The Pensions Regulator (TPR) recently published guidance setting out the new interim regime for defined benefit
(DB) consolidators and the framework for their authorisation and regulation.
In the absence of specific consolidator legislation, at least in the near future, the guidance acts as an interim measure, outlining
the basis on which schemes can be transferred to a consolidator. It defines the standards that the TPR expects will be met before specific legislation
is in place. In doing so, it clears the path for such transfers, in particular to those consolidators that are already established with transactions
awaiting the green light.
The long awaited Pension Schemes Bill, which is currently progressing through the House of Lords, had been expected to include specific
legislation for an authorisation regime for consolidators. Despite consultation on that authorisation process by the Department of Work and Pensions,
consolidators had been omitted once the Bill reached Parliament. As a result, employers have been naturally concerned that a transfer could lead to
TPR exercising its moral hazard powers.
Although existing pensions legislation does not prohibit such transfers, the interim guidance creates an approved route for employers
so that they can transfer their DB scheme to a consolidator through a successful clearance application. Accordingly, the interim guidance is the
starting point for a specific consolidator regime: employers and trustees should be aware that there is further change and clarification likely to
Notably, TPR does not consider it appropriate to clear a transaction unless the consolidator has been assessed against the criteria set
out in its guidance. Some of the key requirements of consolidators set out in TPR's guidance include the minimum technical provisions set by TPR,
triggers that need to be included in a consolidator's legal arrangements (e.g. low-risk funding and wind-up triggers) and a prohibition on value
extraction unless scheme benefits are bought out in full with an insurer.
Before transferring their DB scheme to a consolidator, as transfers will be considered a Type A event, employers are expected to apply
for clearance from TPR. Since the clearance process was first introduced, the number of applications has dropped significantly, with the process
becoming unfamiliar for most DB schemes. As TPR intends to update its clearance guidance, the process may become more streamlined and predictable.
Clearance from TPR does not constitute approval. But provided that certain conditions are met, it constitutes a legally binding
assurance that TPR will not use its anti-avoidance powers against the parties who apply for clearance in respect of that transaction. Although it
is not mandatory, employers who elect not to seek clearance take the risk that TPR may exercise its moral hazard powers.
The trustee's role in a consolidator transfer is not dealt with in any detail by the guidance. Although TPR will expect to see the
due diligence from transferring scheme trustees in a clearance application, clearance does not provide trustees with comfort. Irrespective of whether
clearance is obtained, it will be necessary for trustees to determine whether a transfer is in the interests of their members. In addition,
trustees will also have to decide whether a transfer is in accordance with their duties, as clearance does not constitute a barrier to a later
member challenge. Because TPR's guidance focuses on the assessment and regulation of consolidators, there is no guidance for trustees at present
to assist them in deciding whether to agree to a transfer.
Currently, there is also no fixed timetable in place outlining the next steps that will be taken in consolidator regulation. Although
TPR's guidance was announced with immediate effect, further guidance is expected, particularly in relation to monitoring and reporting as well as the
mandatory protections required of consolidators' legal arrangements. Additional changes to the regime may be implemented as TPR adjusts its guidance
in order to address new entrants joining the market.
While it is helpful, TPR's interim guidance is a long way from being the final settled position. Specific consolidator legislation is
unlikely to be passed until next year, at the very earliest, given the various constraints on parliamentary time. Until that happens, guidance on
consolidator transfers will continue to evolve. Trustees, employers, consolidators and their advisers will have to respond and make adjustments as
the guidance and TPR's expectations evolve.
About the authors
Rosalind Connor has spent two decades advising employers, trustees,
administrators and members in relation to the establishment, management and winding up on pension schemes. She has a particular expertise in dealing
with distressed situations, and was involved in the first appointment carried out for PPF purposes in a distressed business restructuring.
Aneliese Sweeney advises both trustees and employers on a variety of
pensions issues affecting their DB and DC pension arrangements, including those arising from corporate transactions.
Arc Pensions Law was founded in June 2015 and is the first specialist pensions law firm to
be launched in over 30 years. The award-winning firm has been shaking up the pensions law market since its inception and now has a large number of
pensions clients, including several multi-billion pound pension funds.