Pending specific consolidator legislation, the new guidance outlines the basis on which schemes can transfer to a consolidator. It sets the stage for such transfers, even though consolidators have already been established with a view to operating in this area, with a number of transactions waiting in the wings.
The Pensions Scheme Bill that is currently working its way through the House of Lords had been anticipated to introduce specific legislation for consolidators. Following the omission of consolidators from the bill, in light of the potential risk of a transfer leading to The Pensions Regulator (TPR) exercising its moral hazard powers, employers were somewhat reluctant to transfer their defined benefit (DB) scheme to a consolidator.
Transfers to a consolidator are not strictly prohibited by current pensions legislation. What TPR’s guidance does is to set out an approved route for employers to transfer their DB scheme through a successful clearance application.
What are the key points?
TPR will assess consolidators against the criteria in its guidance, and does not consider it appropriate to clear a consolidator transaction without a consolidator having met these criteria. Consequently, the guidance sets out specific requirements such as TPR’s minimum technical provisions for consolidators, triggers to be included in a consolidator’s legal arrangements (including low-risk funding and wind-up triggers) and a prohibition on value extraction unless scheme benefits are bought out in full with an insurer.
Employers are expected to apply for clearance before transferring their DB schemes to a consolidator (because such transfers are considered a Type A event). Clearance has become increasingly rare for most DB schemes, with the number of applications having dropped significantly since the process was first introduced. Although the process may not necessarily be familiar for DB schemes, TPR has stated that it intends to update its clearance guidance, which may result in the process becoming more streamlined and predictable.
Clearance of a transaction by TPR does not constitute approval. Rather, it is a legally binding assurance that, provided certain conditions are met, TPR will not exercise its anti-avoidance powers against the party in question in respect of the cleared transaction. While clearance is not mandatory, employers who choose not to seek clearance risk TPR exercising its moral hazard powers.
The trustee’s role in a consolidator transfer is not addressed in detail in the guidance. Although TPR expects to see the ceding trustee’s due diligence in any clearance application, clearance does not provide a trustee with much comfort. Irrespective of whether clearance is obtained, a trustee will have to consider whether the transfer is in the interests of its members and in accordance with its duties (as clearance does not act as a barrier to any later member challenge). Because TPR’s guidance focuses on the assessment and regulation of consolidators, there is no additional guidance for trustees to assist them in deciding whether to agree to a transfer.
Nor is there any fixed timetable in place for the next steps in consolidator regulation. While TPR’s guidance took immediate effect, further guidance from TPR is expected, particularly in relation to monitoring and reporting and the mandatory requirements of consolidators’ legal arrangements. Further changes to the regime may be implemented as TPR calibrates its expectations and guidance in order to address new entrants joining the market.
In anticipation of specific legislation being passed, TPR’s interim guidance is a long way from being the final position. Specific consolidator legislation is unlikely to be introduced until next year, at the earliest, given the various constraints on parliamentary time. Until that happens, employers, trustees and consolidators will have to continue to respond to evolving guidance.
Rosalind Connor is a partner and Aneliese Sweeney an associate at Arc Pensions Law