Pensions Regulator Revises Clearance Guidance

Introduction

In April 2005 the Pensions Act 2004 came into force. The Act gave the newly formed Pensions Regulator (the Regulator) so-called "Moral Hazard Powers" - powers to impose financial sanctions on employer companies and, potentially, connected or associated individuals, a defined benefit or hybrid occupational pension scheme in deficit: Contribution Notices and Financial Support Directions.

There was concern that the spectre of these sanctions could stifle corporate activity. To minimise this problem, parties were given the option of applying to the Regulator for clearance in respect of an event that could affect funding of the pension scheme. In return for the granting of clearance in respect of events considered to be materially detrimental to the scheme, there would generally have to be financial mitigation, for example, a lump sum payment, a schedule of additional contributions, a guarantee, a letter of credit or some other support.

At the same time as the Regulator came into being, so did the Pension Protection Fund (PPF). The Regulator was given the objective of protecting member benefits, in conjunction with the protection afforded by scheme trustees and the task of minimising the risk of claims on the PPF following the insolvency of an employer.

The clearance procedure was not prescribed by legislation and so the Regulator's clearance guidance was written at a time when the clearance procedure was new and untested. With the benefit of two years' practical experience under its belt the Regulator set about rewriting the clearance guidance. The 2007 draft revised guidance was issued for consultation on 10 September 2007.

2007 Changes: Re-Categorising Triggering Events

The 2005 guidance referred to three types of events, Types A, B and C. A Type A event was an event that was materially detrimental to the funding of the scheme. This has been retained. Type B was an event that was not materially detrimental to the scheme. This definition has been of limited use and has essentially been used to confirm that an event is not Type A. The Type C label was designed for an event that was detrimental to the scheme but was not within the control of the employer, for example, the loss of a major customer. Type C has been rarely used in practice. Therefore references to Type B and C events have been removed from the latest guidance.

Materially detrimental events have now been divided into two categories, employer-related events and...

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