Queries and applications can be made by email to email@example.com
On this page...
- Key points
- About this guidance
- Our approach
- The effect of a clearance statement
- Who is clearance relevant to?
- Part I type A events
- Identifying type A events
- Employer-related type A events
- Scheme-related type A events
- Events that are related to each other
- Where an event is type A
- Considering clearance
- Part II applying for a clearance statement
- Who can apply
- How to apply
- Multiple applicants
- Approved withdrawal arrangements and type A events
- Regulated apportionment arrangements and type A events
- Clearance statements requested
- What happens when an application is received?
- Timescales for clearance
- The effect of a clearance statement
- Changes to the circumstances described in an application
- Appendix A: Assessing the employer covenant
- Appendix B: Contribution notices and financial support directions
- Appendix C: Definitions
- Clearance is the voluntary process for obtaining a clearance statement from the regulator.
- A clearance statement is not approval of a transaction such as an acquisition or merger; rather it gives assurance that we will not use our anti-avoidance powers in relation to that transaction.
- Clearance is relevant for those considering corporate transactions or scheme-related events which are materially detrimental to a defined benefit pension scheme and its members (known as 'type A events').
- This guidance is primarily aimed at professional advisers, who should bring it to the attention of employers involved in schemes, as well as parties who are connected and associated with employers, and trustees.
- The Pensions Regulator (the 'regulator') is the regulatory body for work-based pension schemes in the UK. The Pensions Act 2004 (the 'Act') gives the regulator a set of specific objectives, which are:
- to protect the benefits of, or in respect of, members of occupational pension schemes;
- to reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund (the 'PPF'); and
- to promote, and to improve understanding of, the good administration of work-based pension schemes.
- 'Clearance' is the term used to describe the voluntary process of obtaining a clearance statement from the regulator. A clearance statement gives assurance that, based on the information provided, the regulator will not use its anti-avoidance powers to issue to the applicants either contribution notices or financial support directions in relation to a defined benefit occupational pension scheme and a particular event. 'Events' include transactions, agreements, decisions, other acts and failures to act.
- A clearance statement will not bind the regulator if circumstances are materially different from the contents of the application.
- Contribution notices require payment to be made into a scheme, and financial support directions require financial support to be put in place for a scheme. They were introduced by the Act in order to protect the benefits of scheme members and to ensure that pension liabilities are not avoided or unsupported. Further information about these powers can be found in Appendix B.
- These powers are only part of the regulator's approach to ensuring that schemes are properly funded, administered and supported. The regulator also has powers in relation to scheme funding, as well as other powers to protect members' benefits, such as powers to wind up schemes or to appoint an independent trustee.
About this guidance
- This guidance is primarily aimed at professional advisers, who should bring it to the attention of employers involved in schemes as well as parties who are connected and associated with employers and trustees. It has been updated in light of our experience of operating clearance and reflects the way that both the regulator and the market have developed since clearance was introduced in April 2005.
- It is clear that there are many events that could be detrimental to the ability of a scheme to meet its liabilities ('detrimental events'). However, in line with its commitment to operate in a risk-based and proportionate manner, the regulator expects a clearance statement to be sought only in relation to 'type A events'.
- Type A events are materially detrimental to the ability of the scheme to meet its pension liabilities. Type A events are either employer-related events or scheme-related events. Employer-related events are only type A events if the scheme has a relevant deficit. Scheme-related events are always type A events, regardless of whether the scheme has a relevant deficit. Trustees and employers therefore need to recognise and understand type A events.
- Part I of this guidance provides information about:
- identifying type A events - assessing the impact of the event on the scheme; and
- what action applicants and trustees should take during the clearance process, including mitigation and negotiation.
- Part II of this guidance gives further information about:
- applying to the Pensions Regulator for a clearance statement; and
- what happens during clearance.
- It is not practical to devise guidance that contains sufficient detail to cover all possible circumstances and events. This guidance does not attempt to list all possible type A events.
- Professional advisers should ensure that all parties involved in a possible type A event, including employers and trustees, are familiar with the content and spirit of this guidance.
- This guidance itself is not a clearance statement, and it does not bind the regulator's use of its powers, whether or not there is a type A event in accordance with this guidance.
- Broadly speaking, the regulator's power to issue a contribution notice is triggered by an act or a failure to act, whereas the power to issue a financial support direction arises because of the circumstances of the employer. However, it may be that consideration of an event leads us to conclude that it would be reasonable to issue a financial support direction. Therefore, applications will generally relate to an event.
- We have developed guiding principles that trustees and employers should apply when dealing with events that may impact on the scheme and when applying for a clearance statement.
Trustees and employers
- Trustees and employers should recognise and understand that a scheme in deficit on any basis should be treated in the same way as any other material creditor.
- Trustees should recognise and understand their powers and duties and act appropriately, including managing any conflicts.
- Trustees should consider taking independent professional advice where appropriate.
- Trustees and employers should work together in relation to events that may be detrimental to the ability of the scheme to meet its liabilities or to the benefits of the scheme members, communicating and sharing appropriate information.
- Trustees and employers should understand the nature and the impact of the potentially detrimental event and the appropriate mitigation for the event.
- Trustees and employers should recognise that the regulator will wish to know about all events that have a materially detrimental effect on the ability of a scheme to meet its liabilities.
- We have also developed guiding principles that govern the behaviour of the regulator in considering whether to grant a clearance statement.
The Pensions Regulator
- The regulator's preferred outcome is an appropriately funded scheme with a solvent employer.
- The regulator will deploy its resources in a risk-based manner, targeting risk in a proportionate, responsive, flexible, pragmatic, consistent, transparent and reasonable way.
- The regulator will seek to protect members' benefits and reduce the risk of calls on the PPF, while at the same time recognising commercial activity and business needs.
- In this guidance, terms shown in bold are defined in the Definitions section.
The effect of a clearance statement
- A clearance statement only relates to the applicants, the relevant scheme and the events described in the application. For further information see paragraphs 157 to 159.
- The granting of a clearance statement does not have any impact on the regulator's powers, other than the power to issue contribution notices or the power to issue financial support directions (as applicable).
Who is clearance relevant to?
- Applications may be made by those parties who could be subject to a contribution notice or financial support direction in relation to a scheme. This could include the employer and those connected or associated with the employer. Parties that may become an employer, or become connected or associated with an employer (for example a purchaser), may also wish to apply for a clearance statement.
- The parts of this guidance that relate to the 'employer', and in particular to steps that the employer should take, may apply equally to connected or associated parties or to parties that may become connected or associated.
- We expect trustees to be involved in any application relating to their scheme. As part of an application, the trustees will be asked to comment on whether or not they support the application and to explain why.
- It will not usually be appropriate for a trustee to apply for a clearance statement. The reasons for this are explained in paragraph 121. Further detail on who may apply for a clearance statement is also included at paragraphs 120 to 123.
Part I type A events
- It is clear that there are many events that could be detrimental to the ability of a scheme to meet its liabilities. However, in line with its commitment to operate in a risk-based and proportionate manner, the regulator expects a clearance statement to be sought only in relation to type A events. Type A events are all events that are materially detrimental to the ability of the scheme to meet its pension liabilities. Employer-related events will only be type A events if the scheme has a relevant deficit. Scheme-related events are always type A events regardless of whether the scheme has a relevant deficit.
Identifying type A events
- Employers and trustees should assess whether any detrimental event is a type A event.
- A detrimental event, including any type A event, will have one or more of the following effects, either immediately or in the future:
- it prevents the recovery of the whole or any part of the employer's s75 debt;
- it prevents the employer's s75 debt becoming due or compromises the s75 debt;
- it reduces the amount of the employer's s75 debt which would otherwise become due; or
- it weakens the employer covenant, because:
- it has an impact on the ability of the employer to meet its ongoing funding commitments to the scheme, or an impact on those commitments; or
- it reduces the dividend that would be available to the scheme in the event of employer insolvency.
- In order to assess whether an event is a type A event, employers and trustees must determine whether the event is an employer-related event or a scheme-related event.
- An employer-related event will only be a type A event if the scheme has a relevant deficit. See paragraphs 48 to 55.
- If a scheme-related event is detrimental to the ability of a scheme to meet its liabilities, or directly detrimental to members' benefits, and if the detriment is material, then it will be a type A event whether or not the scheme has a relevant deficit.
- When assessing any event, employers and trustees should also refer to the guidance on the Abandonment of defined benefit pension schemes.
Employer-related type A events
- To assess whether an employer-related event is a type A event, employers and trustees should:
- compare and contrast the pre- and post-event employer covenant;
- assess whether any weakening of the employer covenant is to such a degree that the event could be considered to be materially detrimental to the ability of the scheme to meet its liabilities; and then
- identify whether the scheme has a relevant deficit.
- In general, it is important to carry out these three steps in the above order because the outcome of the first two steps may determine what basis should be used for the relevant deficit. However, depending on the circumstances, it may be possible to form an initial view of the appropriate basis for the relevant deficit at the outset.
The employer covenant
- The employer plays a vital role as the scheme sponsor. It effectively underwrites the risks that the scheme is exposed to, including existing underfunding, longevity, investment and inflation.
- The employer covenant and its strength is determined by:
- the employer's legal obligations to the scheme; and
- its financial position (both current and prospective).
- Appendix A discusses how to assess employer covenant.
Assessing whether there has been a weakening of the employer covenant
- When assessing the pre- and post-event employer covenant, employers and trustees should analyse both the employer's legal obligations to the scheme (to ascertain any change that might occur to the employer's legal obligation to support the scheme) and the employer's financial position (to ascertain any change in the financial strength of the employer and the wider employer group).
- Appendix A discusses how to do this in more detail.
- Employers and trustees should consider whether the event has any of the effects listed in paragraph 26.
- In order to assess whether a particular event weakens the employer covenant, it is often necessary to consider where the pension creditor sits in the allocation of proceeds in the event of the insolvency of the employer, and then consider the impact of that event on the potential allocation.
- The scheme is usually an unsecured creditor of the employer. The priority of an unsecured creditor, with regard to the realisation of the assets of a company in the event of insolvency and when compared to other creditors, is broadly summarised below:
- creditors with fixed charges;
- preferential creditors;
- creditors with floating charges;
- unsecured creditors (usually including the pension creditor);
- subordinated creditors;
- When considering potentially detrimental events, it is therefore helpful to assess the effect on creditors, including the pension creditor.
- Trustees and employers should also keep in mind the long-term nature of the employer's pension obligation, and should therefore consider the employer's long-term future.
- An event may also be detrimental because of its impact on the ability of the employer to meet its ongoing funding commitments to the scheme. This could be because of an event's effect on the employer's cash flow or balance sheet, for example, because of an employer's dividend policy, intra-group arrangements or debt repayments.
- Assessing the impact of a possible type A event may be a complex process. Where trustees feel they may not have the necessary financial or legal skills to allow them to assess an event, they should consider obtaining independent professional advice. If trustees decide not to take independent professional advice, they should document the reasons for this decision (for example, because the cost of advice would be disproportionate to the possible detriment), as well as their views on the particular event.
- If a type A event is due to occur, the regulator expects that responsible employers will wish to pay for the trustees to obtain independent financial advice in relation to the event where appropriate. Where trustees obtain such advice, applications are likely to progress more efficiently.
Assessing whether a weakening of the employer covenant is material
- Where a weakening of the employer covenant has been identified by comparing the employer covenant pre- and post-event, the trustees and employers need to assess whether that weakening is materially detrimental to the ability of the scheme to meet its liabilities. The judgement as to whether an event is materially detrimental can be made by reference to and comparison of a number of factors, which may include:
- the amount by which the employer covenant is weakened;
- the size of the employer after the event; for example, the net assets of the employer or wider employer group;
- the size of the scheme; for example, the value of the assets or number of members;
- the amount of the scheme's relevant deficit.
- This judgement will often be a complex matter, for which both employers and trustees may need independent professional advice.
Identifying the relevant deficit
- An employer-related event will not be a type A event unless the scheme has a relevant deficit.
- The regulator's duty to protect pension benefits must be balanced with the choice of a sensible deficit trigger for operating a risk-based approach to clearance.
Relevant deficit for employer-related events
The general rule
The relevant deficit for an employer-related event will usually be the highest of the scheme's deficits according to the following bases:
- FRS17/IAS19 (current accounting standards);
- s179 (PPF levy basis);
- technical provisions (scheme funding basis, where available);
- ongoing (following scheme valuation, where technical provisions are not yet available).
- The relevant deficit will sometimes be measured by a higher basis, reflecting the impact of an event identified by trustees and employers where the employer-related event is significantly materially detrimental to the scheme's ability to meet its liabilities (including where there is a significant weakening of the employer covenant).
- The relevant deficit will be measured by the S75 basis where there are 'going concern' issues, the scheme is in wind-up, or there is scheme abandonment.
The general rule
- In most cases the appropriate relevant deficit will be measured on the higher of FRS17/IAS19, s179, technical provisions or ongoing bases.
- There are certain circumstances where the appropriate measure for the relevant deficit will differ from the higher of the FRS17/IAS19, s179, technical provisions or ongoing deficits.
- Where the event is significantly detrimental to the scheme's ability to meet its liabilities, including where there is a significant weakening of the employer covenant, then trustees and employers may judge that using the highest of FRS17/IAS19, s179, technical provisions or ongoing deficits as the basis for the relevant deficit does not properly reflect the impact of the event. In such cases, a higher basis would be appropriate.
- Where there are reasonable doubts that the employer will continue as a going concern, where the scheme is in wind-up, or the event may result in scheme abandonment, then the s75 basis applies.
- In addition, where the FRS17 deficit for the employer group cannot be allocated on a company-by-company basis, and technical provisions are not yet available, the trustees may consider that some other basis would be appropriate.
- The relevant deficit is a trigger for clearance and is not an indication that employers and trustees should only fund schemes to this level. If there is no relevant deficit, this is not an indication that the employer-related event is not detrimental to the scheme only that it is not a type A event. Any identified relevant deficit does not restrict the trustees', the employer's or the regulator's duties, powers and obligations, including in relation to scheme funding under Part 3 of the Act. The relevant deficit is designed to give clarity to the market as to when an employer-related event might be a type A event.
Examples of employer-related events
- Some examples of employer-related events that could be type A events include:
- a change in priority – a change in the level of security given to creditors; for example, the granting or extending of a fixed charge or floating charge over assets of the employer or the wider employer group;
- a return of capital – a reduction in the overall assets of the employer or the wider employer group; for example:
- dividend payments (such as special dividends);
- share buy backs;
- repayment of subordinated debt; and
- distributions in specie, including de-mergers;
- a change to group structure, including a change of control; for example, a change or partial change to the control structure of an employer or a change to the parties who could be subject to a financial support direction, which reduces the overall employer covenant. This could include, for example, a change to the parent company or the ultimate holding company of the employer. Note that a change of control may be accompanied by new or increased debt, which may be secured. A change of control may be a notifiable event;
- a change to the employer in relation to the scheme, including replacement of a participating employer or the merger of two or more employers;
- sale and leaseback transactions in so far as these lead to a reduction of assets or adversely affect net cash available to support the scheme;
- the granting or repayment of inter-company loans, particularly where the loan is not on 'arm's-length' terms, where it is not properly documented or where there is credit risk;
- 'phoenix events' – an arrangement resulting in the employer re-emerging as substantially the same entity following an insolvency event;
- business and asset sales from the employer or the wider employer group, particularly where the transaction is not at arm's length for fair value, where the sale proceeds are not retained, or where the whole or a substantial part of the operating business is sold; or
- a corporate event that would reduce sustainable cash flow cover for the wider employer group's funding commitment to the scheme; for example, an increase in debt or a reallocation of debt.
- These are only examples, and this is not a complete list of employer-related events that could be type A events.
- To establish whether there is a type A event in a particular case, a comparison of the pre- and post-event employer covenant is needed and the scheme must have a relevant deficit. In some circumstances events listed above will not be a type A event.
- For example, a change in priority is more likely to result in a material weakening of the employer covenant if it does not relate specifically and solely to new money.
- Similarly, a return of capital may be more likely to be a type A event if any of the following apply to it:
- it is made by an employer to the wider employer group;
- it is made to an entity outside the EU;
- it is made to a party who could not be subject to a financial support direction; or
- it is a large or unusual return.
- Measuring the effect of a change in control structure is difficult, but some guidance can be found in existing market practice, and in particular by looking at commonly applied financial ratios or banking covenants.
- There are some employer-related events that may weaken the employer covenant but that result from normal commercial activity and may not be within the employer's control, such as losing a key supplier or customer contract. By themselves these are not generally type A events but trustees and employers should still consider the impact on the scheme, and the regulator may wish to monitor or investigate if there is possible employer insolvency or the scheme appears to be at risk.
Scheme-related type A events
Assessing a scheme-related event
- Although a scheme-related event may have a direct impact on the employer's legal obligations to a scheme, the detriment resulting from a scheme-related event cannot usually be assessed solely by reference to the employer covenant. The method for assessing whether a scheme-related event is a type A event will vary, depending on the specific event. In addition, some scheme-related events will be directly detrimental to members' benefits rather than to the ability of the scheme to meet its pension liabilities, and these may also be type A events, depending on the particular circumstances.
- Employers and trustees should always consider an event both in terms of its immediate impact on the scheme and members' benefits and in terms of the event's possible impact into the future. Assessing the impact of a scheme-related event can be very complex and independent professional advice will often be appropriate.
- Examples of scheme-related events that could be type A events include:
- compromise agreements – an agreement entered into by the trustees to compromise the employer's s75 debt and reduce the amount that will be paid to the scheme;
- apportionment of a scheme's deficit – the rules of some multi-employer schemes, and any scheme apportionment arrangement, may determine how the total scheme's deficit will be apportioned between employers, for example when an employer exits the scheme or when the scheme winds up. The effect of the apportionment is to modify the amount of the employer's s75 debt that would otherwise become due. A regulated apportionment arrangement may also be a type A event;
- non-payment of all or any part of a s75 debt for an unreasonable period (for example, more than 12 months); or
- an arrangement that has the result of preventing a s75 debt from triggering.
- These are only examples, and this is not a complete list of scheme-related events that could be type A events.
- There are some limited circumstances in which trustees may agree to the compromise of a s75 debt due to the scheme. Any such attempt to compromise will always be a type A event, irrespective of the level of the scheme's deficit before or after the compromise. The regulator will wish to understand the reasons for and effect of the compromise.
- Schemes for which a compromise agreement has been reached may be ineligible for entry to the PPF. For more information on eligibility, see the PPF website (www.pensionprotectionfund.org.uk).
- Trustees and employers should note that any decision to compromise the s75 debt is also a notifiable event.
Apportionment of a scheme's deficit
- The use, amendment or insertion of an apportionment rule or the use or agreement of a scheme apportionment arrangement is a type A event, except where:
- it increases the s75 debt that is immediately payable by an employer, who can afford the increased s75 debt; or
- it is a practical option because the cost and complexity of the other alternatives (including calculation of the unmodified s75 debt or an approved withdrawal arrangement or a withdrawal arrangement) are far greater or disproportionate, the apportionment results in a s75 debt that is the scheme actuary's best estimate of the unmodified s75 debt and it is immediately payable by the departing employer; or
- the s75 debt arises in circumstances in which there is no net reduction of employer covenant – for example on the consolidation of several employers within the employer group in certain circumstances, provided that all employer assets and their pension liabilities transfer.
- Apportionment that does not have any of the above features is a type A event, irrespective of the level of the scheme's deficit before or after the apportionment. Such an apportionment will also be a type A event irrespective of whether the power to apportion under the scheme's rules is only exercisable at a party's discretion or is automatic.
- Trustees and employers should note that any retrospective apportionment (taking place after the event which has triggered the s75 debt) is similar to compromise and is always a type A event. This is regardless of whether or not the apportionment is under a scheme apportionment arrangement. The decision to enter into a scheme apportionment arrangement retrospectively is also a notifiable event. Unless the apportionment is a scheme apportionment arrangement or a regulated apportionment arrangement the trustees should consider any impact on eligibility for entry to the PPF.
- When considering any apportionment, trustees should seek to understand the purpose of the apportionment and all of the circumstances, including any related disposals of employers, substitution of employers, or changes to the wider employer group. Trustees should be cautious about agreeing to the use, amendment, insertion or agreement of any apportionment rule or scheme apportionment agreement and should consider their fiduciary duties and the likely impact on scheme members in addition to the statutory tests that determine whether a scheme apportionment arrangement is possible.
- When considering any apportionment proposals, trustees should also consider the alternative of a withdrawal arrangement or an approved withdrawal arrangement, which would result in a guarantee to the scheme of the remainder of the full amount of the departing employer's s75 debt. The regulator has produced separate material on withdrawal arrangements.
- Employers and trustees should also consider whether there is any employer-related event linked with any apportionment, or the prospect of such an event in the near future. If there is a linked employer-related event, employers and trustees should consider what is appropriate mitigation for any apportionment and employer-related event taken together.
Regulated apportionment arrangements
- A regulated apportionment arrangement may be a type A event. If an application is made the regulator will consider it together with the applications for a regulated apportionment arrangement.
Withdrawal arrangements and approved withdrawal arrangements
- An approved withdrawal arrangement may have a related type A event, particularly where the guarantee under the approved withdrawal arrangement does not provide sufficient mitigation for the event in the circumstances. For example, if a departing employer is financially strong but employed a small proportion of members of the scheme and the debt (Amount B) to be guaranteed under the arrangement is relatively small then the guarantee will not sufficiently mitigate the reduction in the strength of overall employer covenant. A withdrawal arrangement can equally relate to a type A event.
- Approved withdrawal arrangements are required under legislation to be approved by the regulator. Other withdrawal arrangements do not require the regulator's approval, and we would not expect all withdrawal arrangements to come to the regulator for a clearance statement. However, there are some circumstances in which a withdrawal arrangement could itself be detrimental to the ability of a scheme to meet its pension liabilities, particularly if the guarantee does not sufficiently mitigate the fact that the s75 debt is not being paid in full. This may for a number of reasons, for example the choice of guarantor, the agreed payment events for the guaranteed debt (Amount B), or because the agreement does not comply with statutory requirements and the non-compliance results in material detriment to the scheme.
Any other scheme-related event
- Any other scheme-related event which prevents the recovery of the whole or any part of the employer's s75 debt, prevents the s75 debt becoming due, compromises or settles the s75 debt, or reduces the amount of the s75 debt which would otherwise become due, may be a type A event, irrespective of the level of the scheme's deficit before or after the event.
Events that are related to each other
- Trustees and employers should note that sometimes an event can be composed of several distinct events, or several events may be related to each other. If this is the case, then, as well as assessing the overall effect of the events, trustees and employers should assess each component event separately to establish whether it could be a type A event.
- There may be both employer-related and scheme-related components to the event, for example, on the sale of a business and any apportionment. If so, it is possible that the employer-related component will not be a type A event, because there is no relevant deficit in the scheme, whereas the scheme-related component is a type A event.
- Where there are component or related type A events, trustees and employers should consider what the appropriate mitigation is for each event. Where applicants are applying for a clearance statement for more than one type A event in relation to the same scheme, these should usually be described in one application.
Where an event is type A
- Where the employers and trustees have identified a possible type A event, they should consider and agree the most appropriate mitigation.
- The level and type of appropriate mitigation will vary, depending on the nature, circumstances and impact of the event and the funding level of the scheme, taking into account the relevant deficit (see paragraphs 80 to 88).
- The appropriate mitigation should be identified for each type A event.
- Any mitigation agreed does not restrict in any way the trustees', the employer's or the regulator's duties, powers and obligations in relation to scheme funding under Part 3 of the Act. Further information on these powers, duties and obligations can be found in the scheme funding section on our website: Regulatory guidance / Subject listing / Scheme specific funding.
- Trustees should seek appropriate independent professional advice to enable them to assess their powers and duties in relation to a type A event and ascertain what mitigation may be appropriate. This will allow any application to proceed more efficiently.
Types of mitigation
- There are different types of possible mitigation, for example:
- additional contributions of cash or other assets;
- an improvement in priority; for example, granting a fixed charge or floating charge to the pension creditor, alongside, or in priority to, a lender;
- escrow accounts: an escrow account is an arrangement (not available in Scotland) whereby the employer pays funds into an account that will pass to the scheme under certain conditions, otherwise being returned to the employer;
- standby letters of credit, guarantees or insurance: employers may obtain these from banks or financial institutions to cover, for example, contributions to the scheme and/or the s75 debt;
- negative pledges: a negative pledge is a commitment by the company that something will not be done – for example, that no new security will be granted without the agreement of the trustees;
- parental and intra-group guarantees: where there is a wider employer group, the parent company or another company within the group can guarantee, for example, the payment of contributions and/or the payment of the full s75 debt in certain circumstances;
- joint and several liability: the employers or the wider employer group can be made jointly and severally liable for the funding of, or debts due to, the scheme;
- performance thresholds: trustees and employers may agree financial thresholds for the employer that, if breached, would have to be reported to the trustees. These are unlikely to be sufficient mitigation alone for any detrimental event, but in combination with other forms of mitigation would act as an early warning for trustees of any deterioration or change in the employer's financial circumstances and provide an early opportunity for dialogue; or
- scheme rule changes: making an amendment to the scheme's trust deed and rules to change the balance of powers.
- There may be other forms of mitigation. Which type, or which combinations of types, is appropriate will depend on the relevant circumstances. Please note that some forms of mitigation will reduce future PPF levy bills. For more information on PPF rules on contingent assets, see the PPF website(www.pensionprotectionfund.org.uk).
Additional considerations for scheme-related events
- For scheme-related events, employers and trustees may be able to agree mitigation that changes the event itself. For example, appropriate mitigation for apportionment not subject to a scheme apportionment arrangement could (alongside other forms of mitigation) include an amendment to the rule so that:
- it is only exercisable at the trustees' discretion;
- it is specific to a particular event, employer, time period or set of circumstances.
- For any apportionment, employers and trustees should also consider what amount should be payable to the scheme in the particular circumstances in place of the s75 debt that would otherwise become due.
- Trustees should be cautious about agreeing to any apportionment (including a scheme apportionment arrangement) that is far in advance of the time a s75 debt will trigger, because it would be less likely that both the full effect of the apportionment can be properly considered and that the statutory tests that determine whether a scheme apportionment arrangement is possible could be met. Similar considerations apply to withdrawal arrangements.
- When considering a compromise of a s75 debt, trustees should also seek to understand the purpose of the compromise, the history of the scheme and the employer and what the dividend would be for the scheme in the event of employer insolvency. Trustees should also consider and compare the outcome for other creditors, as well as the employer's situation following the compromise, in particular whether the scheme could receive further support in the future whether or not there is any compromise.
- When considering withdrawal arrangements or approved withdrawal arrangements, trustees should consider whether the guarantee provides sufficient mitigation in all the circumstances. Relevant factors may include the payment events for the guaranteed debt (Amount B), or any payment on account of this, and the choice of guarantor. A guarantee from an existing employer may provide less mitigation than a guarantee from another party who does not already have an obligation to the scheme. Trustees should consider their fiduciary duties and the likely impact on scheme members to determine whether a withdrawal arrangement would be appropriate. These are in addition to the statutory tests that determine whether a withdrawal arrangement is possible. The parties should also take care to ensure that the contents of the agreement comply with statutory requirements.
- When considering mitigation, employers and trustees should always consider both the immediate and the possible future impacts of a scheme-related event.
The role of the trustees
- The regulator expects trustees to, as soon as reasonably practicable, be involved in any application relating to their scheme and as part of an application, the trustees will be asked to comment on whether or not they support the application and explain why. For an application to proceed efficiently, the regulator will expect trustees to have had the opportunity to assess the impact of a type A event, to consider appropriate mitigation, and to negotiate where appropriate, taking independent professional advice where needed. The regulator will consider the trustees' views when deciding whether to grant a clearance statement, but trustee support does not ensure it will be granted and lack of support does not ensure it will not be granted.
- Trustees have the prime responsibility for safeguarding members' interests. Their powers and duties are set out in statute, trust and pensions law as well as in the scheme's governing documents, mostly the trust deed and rules. They must always, and in particular during the course of an application, be familiar with those powers and duties and should act in accordance with them. For example, trustees may have powers that are relevant to the type A event, such as setting contributions and/or winding up the scheme in certain circumstances.
- If it is in deficit on any basis, the scheme is a creditor of the employer. Usually, because of the size of the deficit, it is a material creditor. Although a scheme is not identical to a large unsecured bank loan, it does (particularly because of the long-term nature of the pensions obligation) have many similarities in the form of:
- its size relative to other unsecured creditors; and
- its importance to the company.
- When negotiating with an employer, trustees should generally adopt the approach of a bank that has advanced a large unsecured loan. Employers should view the scheme in a similar way, and employers and trustees should co-operate with each other to achieve an appropriate outcome for the scheme.
- Trustees must ensure that they understand the nature of the employer-trustee relationship including the identity of the employers for the relevant purposes as described more fully at paragraphs 165 to 173.
- Trustees should consider whether they have the necessary negotiation skills and whether they should instruct independent professional advisers to assist them in the negotiation process.
- Trustees should be cautious about agreeing to fetter their powers or discretions or restrictions to their duties. For example, trustees should not generally fetter their discretions in relation to investment decisions and should not be restricted from discussing any matters with the regulator.
- Trustees can also contact the regulator, who may be able to provide help and guidance.
- In addition to negotiations relating to the event, employers and trustees may separately need to consider the statutory funding objective and the impact on the technical provisions and any recovery plan that is in place.
- Most of the information trustees receive in their position as trustees will be confidential. Confidentiality will be particularly important when trustees receive sensitive information about scheme members or the employer, including price-sensitive information. Trustees should be able to pass all information to their appointed professional advisers, if appropriate.
- One way of ensuring that all parties understand the importance of confidentiality is to enter into a confidentiality agreement. This agreement should ideally be reviewed and revised every time a new trustee joins the board, rather than waiting until there is some important issue, which the employer may be reluctant to discuss because of confidentiality issues. The lack of a confidentiality agreement may cause delay, which would be a particular problem if quick action by trustees is required.
- Confidentiality agreements should not restrict the trustees' duties or fetter their power or discretion or seek to prevent the trustees from contacting the regulator. If trustees feel that the terms of an agreement would affect their ability to carry out their duties as trustees, they should consult their independent legal advisers and consider raising this with the employer and with the regulator, as appropriate.
Conflicts of interest
- Trustees, who may include directors of the employer, will often have conflicts of interest. Other conflicted trustees may include shareholders of the employer or union representatives. Conflicts will be particularly relevant when trustees are negotiating with the employer in relation to a possible detrimental event, including a type A event.
- We would generally expect trustees to seek legal advice in those cases where material conflict is identified to ascertain the best way to proceed.
- The regulator expects a trustee who has a conflict or potential conflict of interest to notify other trustees at the earliest opportunity.
- Further information and assistance on dealing with conflict of interest can be found in our free e-learning programme, the Trustee toolkit and in the Conflicts of interest consultation document (PDF, 635.9kb, 53 pages) available on our website: Online publications / Policy documents.
- Clearance is only appropriate for type A events. Clearance is a voluntary process.
When there is a type A event and a clearance statement is not sought
- If the trustees become aware of an event that they believe could be a type A event, they should raise their concerns with the employer and other relevant parties to the event, in order to ensure that appropriate mitigation is considered and to ascertain whether an application is being considered.
- Where an application is not being considered and the trustees are concerned that no mitigation is being offered, or that mitigation is inadequate, they should consider contacting the regulator.
- Certain occurrences relating to employers and schemes must be reported to us as notifiable events. For more information on notifiable events, see our separate guidance, code of practice and directions on our website: Regulatory guidance / Subject listing / Notifiable events.
- Where there has been a breach of the law, trustees (amongst others) are required to report the matter to us. For more information on reporting breaches of the law, see our code of practice and guidance on our website: Codes of practice / Reporting breaches of the law.
When a detrimental event is not a type A event
- An application will not usually be an appropriate course of action if there is no type A event. When there is uncertainty as to whether there is a type A event, parties should take appropriate advice. Employers and trustees can contact our case management team with an enquiry (see paragraph 153 for further details).
- Type A events are defined for the purpose of the clearance process. An event that is not a type A event may still be a detrimental event, or may be detrimental to the benefits of scheme members, so it may still be appropriate for employers and trustees to consider the impact of that event and any appropriate mitigation.
Part II applying for a clearance statement
- This part of the guidance provides more information on the process of applying for a clearance statement from the regulator, including the type of information applicants will need to supply and the timescales involved.
Who can apply
- Applications may be made by those parties who could be subject to a contribution notice or financial support direction in relation to a scheme. This could include the employer and those connected or associated with the employer. Parties that may become an employer, or become connected or associated with an employer (for example, a purchaser), may also wish to apply for a clearance statement.
- While some corporate trustees may be connected or associated with employers, it will not usually be appropriate for any trustee to apply for a clearance statement because of the conflicts the application would create between the trustee's duties to members and the trustee's personal interests. In most cases, corporate trustees will not have any assets (other than the scheme assets), so the practical risk of contribution notices or financial support directions will be minimal. Most directors of corporate trustees as well as individuals will not be connected or associated with an employer as a result of their trusteeship.
- If an applicant does not appear to be connected or associated with an employer, the regulator may ask that applicant to explain why an application would be appropriate.
- If there are multiple applicants see paragraphs 132 to 135.
How to apply
- An applicant may apply by completing an application form, available on our website: Online services / Forms for download, enclosing the associated information and documents. All this should be sent electronically to: firstname.lastname@example.org
or by post to:
Case Management Team
The Pensions Regulator
Information and documents to be included in an application
- Any application should include full and accurate disclosure of relevant information. Clearance statements will only be effective in relation to the event detailed in the application. Before a clearance statement is granted, the substance of the application may be revised. A clearance statement will not bind the regulator if the circumstances giving rise to the regulator's powers to issue a contribution notice or a financial support direction (as appropriate) are materially different from the circumstances described in the application.
- To allow the regulator to consider an application, relevant documents should be attached to the application form, examples of which are listed below.
- To be provided with all applications:
- family tree showing composition of the wider employer group, and identifying the employers;
- table showing the estimated outcome for creditors pre and post event, both at group level and employer level on an ongoing and an insolvent basis;
- latest statutory accounts of all relevant entities (additionally latest draft accounts where prepared).
If any of these documents are not provided applicants should provide an explanation of why the document is not relevant to the application.
- To be provided where relevant:
- relevant correspondence with key stakeholders regarding the event (for example negotiations with trustees);
- financial forecasts/management accounts for all relevant entities;
- financial and other reports relevant to the event for which a clearance statement is being sought and the employer's viability;
- fair value reports or opinions, where the event for which a clearance statement is being sought involves a related party transaction;
- up-to-date valuation of significant assets of particular relevance to the employer or other applicants, the event or the scheme;
- details of debt and any other creditor that ranks above the scheme;
- details of intra-group balances and guarantee arrangements; and
- summary of related party transactions not disclosed in the statutory accounts provided.
Scheme information and documents
- To be provided with all applications:
- any relevant documents relating to the effect of the event on the scheme or actions to be taken to improve the position of the scheme;
- any independent reports that the trustees have commissioned in respect of the events described in the application;
- where trustees have not taken independent professional advice, the document recording this decision, as well as the trustees' views of the events described in the application;
- a copy of the current and complete winding-up power from the scheme's trust deed and rules;
- a copy of the current and complete power to set contributions from the scheme's trust deed and rules;
- a copy of the most recent actuarial valuation of the scheme and, where applicable, recovery plan and schedule of contributions;
- a copy of the assumptions used in assessing the scheme deficit on an FRS17/IAS19 basis, where relevant;
- a copy of any withdrawal arrangement relating to the scheme;
- a copy of any relevant proposed rule amendments relating to the event; and
- a copy of any existing apportionment rule from the scheme's trust deed and rules and any scheme apportionment arrangement
If any of the above documents are not provided applicants should provide an explanation of why that document is not relevant to the application. Parties may wish to send confidential documents such as legal advice and minutes of trustee meetings directly to the regulator. The regulator will not disclose such documents to the applicants without the relevant parties' consent.
- Applications should only contain relevant information. Lengthy submissions will increase the time it takes us to consider an application. Extracts or summaries of documents should be provided whenever possible. As a general principle, information provided to the regulator should be similar to the amount of information and level of detail provided to non-executive directors of a quoted company to allow them to make informed decisions.
- Documents attached to an application should be clearly indexed and referred to in the application form where appropriate.
- If there is more than one applicant, it is preferable to have all applicants included on one application form. Each applicant must be clearly identified, for example by registered company name and number. Each applicant should identify clearly whether they are seeking a clearance statement in relation to a contribution notice or a financial support direction or both, or complete separate forms for the different types of clearance statements. If there are numerous applicants, they should be listed in a separate annex to the application. The application form must be signed by, or on behalf of, each applicant.
- Applicants should be named individually, not described only by reference to their connection or association with an employer.
- Where one applicant wishes to apply in relation to different or separate circumstances, a separate application form may be appropriate. This may be the case, for example, where a seller and purchaser both wish to apply for a clearance statement. Whenever possible, copies of any related application forms should be attached and referred to.
- If there are related applications, the application process is likely to proceed more efficiently if the applicants liaise with each other as appropriate. Separate applications regarding the same circumstances should refer to each other.
Approved withdrawal arrangements and type A events
- If an approved withdrawal arrangement application is made and there is a related type A event for which parties wish to apply for a clearance statement, separate applications should be made for approval of the approved withdrawal arrangement and for a clearance statement.
- In most cases, the approved withdrawal arrangement will be relevant to the application, and therefore the approved withdrawal arrangement application should be submitted with the application.
Regulated apportionment arrangements and type A events
- A regulated apportionment arrangement may be a type A event. If an application is made the regulator will consider it together with the applications for a regulated apportionment arrangement.
Clearance statements requested
- In addition to clearance statements that confirm that in the opinion of the regulator it would not be reasonable to impose the requirements of a financial support direction or a contribution notice in relation to the scheme, the applicants, and the circumstances described in the application, the regulator has a power to grant a clearance statement in relation to contribution notices which states that, in its opinion and in the circumstances described in the application, the applicant would not be a party to an act or a deliberate failure to act. This would require significantly more evidence and, therefore, extensive due diligence, which would take much more time. It would, therefore, be more appropriate and proportionate for the applicant and also for the regulator to consider granting a clearance statement based upon reasonableness. It is for these reasons that clearance statements and the clearance process do not distinguish between different possible grounds for contribution notices or financial support directions. For example, it is not possible to obtain a clearance statement that only relates to the new 'material detriment test' (see further in Appendix B).
What happens when an application is received?
- Once the regulator's case management team has received the completed application form, a multidisciplinary case team will be allocated.
- The case team will usually discuss the application with the applicants and the trustees to seek clarification or explore the facts of the case further. The regulator will expect the trustees to have full knowledge of the application and to have had time to consider the impact of the type A event, to have considered appropriate mitigation, and to have entered into any necessary negotiations, taking independent professional advice as required.
- Once we have received the final, signed application form with sufficient information, we will formally consider whether to grant a clearance statement. In some circumstances, a clearance statement may not be granted.
- A decision by the regulator to grant a clearance statement is subject to a formal statutory process.
- If we are minded to grant a clearance statement, we will issue all directly affected parties with a 'warning notice'. This is a document that describes the circumstances set out in the application and that the regulator is relying on. It warns the directly affected parties that the regulator is considering granting a clearance statement based on these facts.
- All directly affected parties will have an opportunity to provide representations on the warning notice and any representations received before the stated deadline are considered prior to issuing any determination to grant a clearance statement (which would be in the form of a 'determination notice' together with the clearance statement). The time allowed for representations will usually be discussed with the directly affected parties.
- During clearance, the regulator has the power to ask for further information or to request that the application be amended. The determination notice confirms the contents of the application.
- It is inappropriate for the regulator to intervene on behalf of every scheme in relation to every type A event. Our preference is to be a referee in most transactions, rather than a player. We recognise, however, that this is an aspiration and that we will need to drive best practice, and it should be noted that the regulator has objectives over and above those of trustees, including the objective to reduce the risk of calls on the PPF.
- If it appears that the trustees have not dealt with any conflicts of interest, have not had the opportunity to consider the application, or have not taken independent professional advice to allow them to do so, then the progress of the application will be delayed.
- Where the insolvency of the employer is likely and the scheme may be assessed by the PPF, then the PPF may be included in any discussions with the applicants and trustees. The PPF is a separate body from the regulator.
Timescales for clearance
- Our timescales for dealing with an application will be reduced if applicants carry out the following steps as early as possible:
- involve the trustees and share relevant information;
- ensure that any trustee conflicts have been dealt with;
- ensure that the applicants and trustees have taken appropriate independent professional advice;
- discuss and agree mitigation proposals;
- inform the case management team of the likely application, and provide an outline of the event;
- inform the risk and funding team of any timescales and external deadlines, and provide an explanation of those deadlines;
- liaise with any parties who are making a related application, as appropriate;
- ensure that the applicants and the trustees will be available to discuss the application with the regulator; and
- provide the appropriate information to support the application.
- These steps will help us try to meet any reasonable timescales or deadlines the applicant may have.
- During clearance, the parties should inform the relevant case team within risk and funding if there are any changes to the proposed event or external deadlines.
- The case management team is happy to accept preliminary enquiries by relevant parties, such as potential applicants or trustees. These can be made on a no-names basis if necessary, although the level of guidance the regulator can provide may be limited accordingly. Such preliminary enquiries should be made direct to the case management team by contacting: email@example.com
- Those considering making an application should note that preliminary enquiries are not a substitute for obtaining a clearance statement. If an enquiry develops into an application, our view may change as new information and details are provided.
- The information we provide in the course of any enquiry, or in the course of an application, is for guidance only and should not be taken as a definitive interpretation of the law.
- The regulator does not accept liability for any reliance placed on any such information or guidance. Such information or guidance cannot be relied upon as assurance that the regulator will not later use its powers in relation to an event.
The effect of a clearance statement
- A clearance statement does not relate to any other events or circumstances, whether prior to, subsequent to or concurrent with the event described in the application. For example, if the regulator issues a financial support direction clearance statement in relation to the sale of the employer as described in the application, then this clearance statement will not restrict the regulator's powers to act in relation to any other events or circumstances. Using the same example, such a clearance statement would not prevent, for instance, the regulator issuing a financial support direction taking into account a return of capital that occurs after the sale of the employer, a prior apportionment of an employer's s75 debt or security granted to lenders as part of the transaction.
- In some circumstances, the regulator may decide not to grant a clearance statement. A clearance statement does not represent approval of an event, and a failure to obtain a clearance statement does not, by itself, prevent an event from proceeding.
- A clearance statement will not bind the regulator if the circumstances giving rise to the regulator's powers to issue a contribution notice or a financial support direction (as appropriate) are materially different from the circumstances described in the application. Therefore, a clearance statement will only be of benefit if the event, any mitigation, and other relevant circumstances are accurately and fully described in the application. If it is not and the differences are material, or if circumstances change in a material way, the regulator may consider exercising its anti-avoidance powers.
Changes to the circumstances described in an application
- After a clearance statement has been granted, any material changes to the event or circumstances described in the application should be notified to the regulator. If the parties wish to apply for a clearance statement in relation to a materially different event or circumstances, a new application must be submitted. If the regulator considers that the difference is not material, confirmation of this can be requested by the applicants.
Appendix A: Assessing the employer covenant
- When assessing the strength of the employer covenant it is necessary to assess both:
- the employer's legal obligations to the scheme; and
- its financial position (both current and prospective).
- Also relevant in the context of type A events and an application is the covenant of the wider employer group. This is always relevant but will be of particular importance where:
- the financial position of the identified employers is not of sufficient strength to support the scheme;
- the event affects the financial position of the wider employer group, for example by removing entities from the group or transferring assets (whether within or outside) the group;
- the employers have indicated that the trustees should take the financial position of the wider employer group into account when assessing the employer's financial position;
- there is existing support for the scheme from the wider employer group, for example in the form of a parental guarantee; or
- there is interdependency between entities in the wider employer group and the employer.
- Employees and trustees should remember, though, that only certain members of the wider employer group (employers or those with contractual obligations) may be legally liable to contribute to the scheme. Therefore, whilst the wider employer group is always relevant, trustees should be cautious about over-reliance on the wider employer group.
- When assessing the employer covenant, trustees may also consider the employer's willingness to fund the scheme. However, they should be aware that assurances from the employer that are not legally binding may not protect the position of the scheme.
Assessing the employer's legal obligation to the scheme
- To carry out a covenant assessment it is always necessary to identify the legal employers in relation to a scheme. This is important, because the scope of legal obligations to the scheme will define the extent of support for the scheme that trustees can legally enforce. The financial position of the employer and other relevant parties will determine the extent to which any legal obligations can be met.
- Identifying the employers, and analysing and assessing their legal obligations to the scheme, can be a complex process and will normally require legal advice. Employers and trustees should identify:
- those employers who could be liable, now or in the future, to pay a s75 debt, and ascertain the likely amount of the s75 debt that may become due from each employer in a multi-employer scheme (which may depend upon the circumstances in which the s75 debt arises and the trust deed and rules as well as legislation and any scheme apportionment arrangement, regulated apportionment arrangement, withdrawal arrangement or approved withdrawal arrangement);
- those employers required by a statutory schedule of contributions to pay contributions to the scheme and, in a multi-employer scheme, assess the proportion of the total contribution that is payable by each employer; and
- those employers participating in the scheme and who are bound by the scheme's trust deed and rules, and identify the employer's powers and obligations under the deed and rules.
- Depending on the circumstances, it may also be appropriate to identify: those employers whose insolvency could result in the scheme entering an assessment period.
- In some cases, former employers will be included in the above categories because of the relevant statutory definitions.
- It is important to remember that some employers may not fall into all of the above categories.
- Where a review of the wider employer group is appropriate, it will also be relevant to identify which parties are within the wider employer group.
- Other legal obligations of either the employer or another entity in the wider employer group to the scheme will also be relevant, for example, in any guarantee, ancillary deed or agreement.
- The legal relationships between the employer and the rest of the wider employer group are also relevant because these could have an impact on the employers.
- The legal domicile of the employers and the wider employer group should also be considered.
Assessing the employer's financial position
- Assessing an employer's financial position can often be a very complex process, and may require independent professional advice where there is likely to be a materially detrimental event. The level of detail necessary for such a financial review will usually be proportionate to the level and materiality of the potential detriment. The relevant factors to consider in assessing the current and prospective financial position of the employer (and, where relevant, the wider employer group) may vary depending on the nature and effect of the detrimental event, and may include:
- the nature and prospects of the industry in which it operates;
- its competitive position and its relative size within that industry;
- its management ability and track record;
- its financial policies;
- its profitability, capital structure (including balance sheet and financial leveraging), cash flow and financial flexibility; and
- its credit rating (if any), which may have some bearing on these considerations. However, the credit rating on its own should not be seen as a substitute for an independent review, unless the detail of the analysis behind the rating is made available and is acceptable to the trustees.
- For many detrimental events, the nature and structure of the wider employer group will also be relevant, including the ultimate owners of the employer or the wider employer group. The extent of a review of the wider employer group will depend upon the nature and materiality of the event. Relevant considerations may include:
- the legal domicile of the entities within the wider employer group, including the ultimate owners;
- any restrictions or limits on capital and cash flows within the wider employer group;
- whether there is interdependency between the wider employer group and the employer, for example:
- whether the employer is providing services to the rest of the group;
- whether the employer services debt that sits elsewhere in the group;
- whether there is security over the employer's assets in respect of any debt; or
- what additional funds, if any, exist within the wider employer group that the scheme may have recourse to, either through a financial guarantee or other legal right;
- what additional covenant, if any, is provided by the wider employer group, and whether the structure of the wider employer group adds strength to the covenant of the employer;
- any investment timeframe of the ultimate owners, covering the manner in which they extract returns on any capital invested and whether the ultimate owners have any legal obligations to support the scheme;
- the potential for the scheme to have access to additional funds from the wider employer group; and
- the nature and enforceability of any contingent security provided to the scheme by the wider employer group.
- Employers and trustees should be careful to review the financial position of the employers and the wider employer group in the context of each entity's legal relationship with the scheme and the extent of its enforceable obligations.
Information from the employer
- Information that may assist with the assessment of employer covenant may include the types listed below. The level and type of information that is appropriate will depend upon the nature and materiality of the event. Types of information may include:
- updates on the group's financial position, including key performance data and future business plans;
- statutory company accounts (and management accounts if appropriate) to ascertain its profitability, capital structure, cash flow and financial flexibility;
- independent business reports;
- confirmation of compliance with banking and other creditor covenants;
- information relating to security that has been or will be granted;
- any reviews of the scheme, or any plans or proposals in relation to the scheme;
- information from rating agencies or credit scoring institutions;
- information from credit specialist advisers;
- information that relates to the risk-based element of the PPF's levy;
- any new developments in the credit advisory services market aimed at assisting the trustees to evaluate the employer's financial position; or
- publicly available information such as press reports and the employer's website.
- Employers should recognise that it is in the best interests of all concerned to have properly informed, knowledgeable and competent trustees. To achieve this, they should share information relating to the employer covenant and plans for the scheme and any type A event that may occur with the trustees at the earliest opportunity. This should also help the application process proceed more quickly and efficiently. The confidentiality of information is discussed at paragraphs 105 to 107.
- Much of the information provided to the regulator is restricted information, which means that the regulator is restricted by law from disclosing the information without consent, although some statutory exemptions apply.
- Under the scheme administration regulations, the employer and its auditor or actuary is obliged, on request, to provide trustees with such information as the trustees or their professional advisers reasonably require for the performance of their duties. This includes information reasonably required to assess the employer covenant.
- The employer is also required under the scheme administration regulations to make the trustees aware, within one month of its occurrence, of any event that could reasonably be considered of material significance to the trustees or their professional advisers in the exercise of their functions. This includes type A events and any events that may impact on the benefits of scheme members. In practice, the regulator would expect employers to notify trustees of type A events much earlier.
Appendix B: Contribution notices and financial support directions
- The regulator can issue a contribution notice to a person, requiring an amount up to and including the s75 debt which is due from the employer, or the s75 debt which might become due on the winding up of the scheme, to be paid to the scheme (or a receiving scheme), or the PPF, if the regulator is of the opinion that a person was a party to an act or deliberate failure to act and:
- the 'material detriment test' is met in relation to that act or failure (see below paragraph 187); or
- the main purpose or one of the main purposes of the act or failure was:
- to prevent the recovery of the whole or part of a s75 debt which was, or might become, due from the employer in relation to the scheme; or
- to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of such a debt, which would otherwise become due.
- A contribution notice may be issued to a person who is party to the act or failure to act and who is also the employer or a person connected or associated with the employer. This includes parties who knowingly assist in the act or failure to act. A contribution notice may be issued to one or more persons.
- The regulator must consider that it is reasonable to impose liability on a person to pay the sum specified in a contribution notice. This will depend on various matters, examples of which are outlined below:
- the degree of involvement of that person in the act or failure to act; for example, did the person sanction the business deal?
- the relationship the person has or had with the employer; for example, is the person a director or a senior executive of the employer? Is the person a company that is the parent company of the employer?
- any connection or involvement the person has or had with the scheme; for example, is the person a trustee of the scheme or an employer in relation to it?
- whether the act or failure to act was a notifiable event that the person had a duty to notify to the regulator but failed to do so;
- all the purposes of the act or failure to act, including whether a purpose was to prevent or limit loss of employment;
- the financial circumstances of the person; for example, the regulator may consider that it is appropriate for less than the full s75 debt to be required if contributions to another scheme would otherwise be materially affected;
- the value of any benefits which, directly or indirectly, the person receives or is entitled to receive from the employer or under the scheme;
- the likelihood of relevant creditors being paid and the extent to which they are likely to be paid.
- The regulator does not have to consider a matter listed above if it does not consider that it is relevant, and it will consider other matters outside this list, for example the status of the scheme, if it considers that such matters are relevant.
- For acts or failures on or after 14 April 2008, when considering whether it is reasonable to impose liability on a person to pay the sum specified in a contribution notice, the regulator must also have regard to the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did.
- The 'material detriment test' is met where the regulator is of the opinion that the act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received by or in respect of members.
- The material detriment test can apply whether or not the benefits that had accrued in the scheme by the relevant time of the act or failure are still to be received from that scheme. But the regulator will disregard payments that might be received from the PPF.
- The material detriment test is not identical to the definition of type A events in this Clearance Guidance. For example, the regulator has issued a Code of practice (see paragraph 195) which relates to the material detriment test and not to type A events. In addition, employer-related events will not be type A events unless there is a relevant deficit in the scheme, but no such condition applies to the material detriment test.
- In deciding whether the 'material detriment test is met' the regulator must have regard to relevant matters, which may include:
- the value of the scheme's assets and liabilities and/or any effect on those;
- the 'scheme obligations' (including a contingent or possible liability to make a payment to the scheme) of any person and/or any effect on those obligations
- the extent to which any person is likely to be able to meet his scheme obligations in any circumstances including insolvency or bankruptcy and/or any effect on this likelihood
The regulator does not have to consider a matter listed above if not relevant, and may consider other matters outside this list.
- In some circumstances the material detriment test will also relate to any 'relevant transferee scheme' to which accrued benefits are transferred.
- The regulator must not issue a contribution notice on the grounds of the 'material detriment test' if the regulator is satisfied that the person has shown that they have a statutory defence. The statutory defence is met where the following conditions are met:
- before becoming party to an act or failure, the person gave due consideration to the extent to which there may be a resulting material detriment to the likelihood that members would receive their accrued benefits;
- where as a result of that consideration there was considered to be a potential detriment, that the person should take all reasonable steps to eliminate or minimise the potential detrimental effects that the act or failure might have on the likelihood that the members would receive their accrued benefits; and
- at the time of the act or failure the person, having regard to all the relevant circumstances prevailing at that time and performing reasonably diligent investigations, could reasonably conclude that the act or failure would not detrimentally affect in a material way the likelihood of members receiving their accrued benefits.
- Where the warning notice relates to a contribution notice on the material detriment test grounds it will explain the statutory defence and give the person an opportunity to satisfy the regulator that the statutory defence can be shown.
- The regulator expects that the sorts of due diligence and discussions with trustees that are already undertaken by responsible employers would in many cases satisfy the regulator that the person can raise a statutory defence. This Clearance guidance provides further information about assessing the impact of a transaction, including employer covenant assessment (see Appendix A) and discussions with trustees. In addition, we have produced high level guidance for employers on corporate transactions, available on our website.
- The regulator's Code of practice No. 12 'Circumstances in relation to the material detriment test' describes the circumstances in relation to which the regulator expects to issue contribution notices on the material detriment test grounds.
- The regulator can issue a contribution notice in relation to acts that occurred, or failures to act that first occurred, on or after 27 April 2004, unless it is on the material detriment test ground in which case the contribution notice can be issued in relation to any act occurring, or any failure to act first occurring, on or after 14 April 2008. The regulator can determine to issue a contribution notice up to six years after an act occurred, or up to six years after a failure to act first occurred or continued.
- For acts occurring before 14 April 2008, an additional condition applies to contribution notices in some circumstances requiring the act to have had a main purpose that was 'otherwise than in good faith' (as set out in the previous version of this guidance).
- Government has confirmed and clarified the legislation so that an act or failure for a contribution notice can be taken to mean either a single act or failure or a series of acts or failures that a person was party to.
Financial support directions
- The regulator can issue a financial support direction, requiring financial arrangements to be put in place to support a scheme, when the employer is a service company or is insufficiently resourced at the relevant time. There is no requirement for there to have been an act or failure to act. The 'relevant time' is a time determined by the regulator which falls within the period of 12 months ending with the regulator's determination to issue the financial support direction. This prescribed period is 24 months unless transitional provisions apply: for determinations before 6 April 2010, the 24 month period is reduced by a period equal to the number of complete months between the time of the determination and 6 April 2010. This means that where a person has ceased to be an employer, or to be connected or associated with an employer, before 6 April 2008 the maximum look-back period for financial support directions to that party is 12 months, but where a person so ceases on or after 6 April 2008 the maximum look-back period is 24 months.
- A financial support direction can be issued to the employer or persons connected or associated with the employer. A financial support direction cannot normally be issued to an individual, except in specific circumstances.
- Once the regulator has issued a financial support direction, those named in the direction must put forward proposals for financial support for the scheme (or receiving scheme). If the regulator considers these arrangements to be reasonable in the circumstances, it may issue a notice approving the arrangements.
- The financial support arrangements which must be put in place under a financial support direction may include, but are not limited to:
- where an employer is part of a group, all members of the group becoming jointly and severally liable for the pension liabilities in relation to the scheme;
- the holding company within the group becoming liable for the pension liabilities in relation to the scheme;
- an arrangement whereby additional financial resources are provided to the scheme.
- The employer is a service company if:
- it is a member of a group of companies; and
- its turnover in the latest available statutory accounts is solely or principally derived from amounts charged for providing the services of its employees to other members of the group.
- The employer is insufficiently resourced if:
- the value of its resources is less than 50 per cent of the estimated s75 debt; and
- the value of the resources of a person who is connected or associated with the employer, or (at a time falling on or after 14 April 2008) the value of the aggregate resources of persons who are connected and associated with the employer and with each other, when added to those of the employer, would be 50 per cent or more of the estimated s75 debt.
- Assessing a person's resources is a complex process. The Pensions Regulator (Financial support directions, etc.) Regulations 2005 prescribe how to determine what constitutes the resources of a person and how to determine, calculate and verify the value of a person's resources.
- The regulator must consider that it is reasonable to impose the requirements of a financial support direction on a person. This will depend on various issues, examples of which are outlined below:
- the relationship the person has or had with the employer; for example, is the person a company that is the parent company of the employer?
- the benefits the person has received directly or indirectly from the employer; for example, has the person received assets or dividends from the employer, or shared common security or cash flow arrangements or gained tax advantages?
- any connection or involvement the person has or had with the scheme; for example, was the person a trustee of the scheme or an employer in relation to it?
- the financial circumstances of the person.
- The regulator does not have to consider a matter listed above if it does not consider that it is relevant, and it will consider other matters outside this list, for example the status of the scheme, if it considers that such matters are relevant.
- A person is connected with a company if:
- he is a director or shadow director of the company, or an associate of such a director or shadow director; or
- he is an associate of the company.
- A person is an associate of an individual if that person is, for example:
- the individual's husband or wife or civil partner;
- a relative of the individual;
- a relative of the individual's husband or wife or civil partner;
- the husband or wife or civil partner of a relative of the individual; or
- the husband or wife or civil partner of a relative of the individual's husband or wife or civil partner.
- A person is an associate of any person with whom he is in partnership, and of the husband or wife or civil partner or a relative of any individual with whom he is in partnership. A Scottish firm is an associate of any person who is a member of the firm.
- A person is an associate of any person whom he employs or by whom he is employed. Any director or other officer of a company is to be treated as employed by that company.
- If a person is associated with another person then they are associates of each other.
- A company is an associate of another company if:
- the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other; or
- a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate.
- A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it.
- A person is to be taken as having control of a company if:
- the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions; or
- he is entitled to exercise, or control the exercise of, one-third or more of the voting power at any general meeting of the company or of another company which has control of it.
- Where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company.
Appendix C: Definitions
The following terms, which are in bold in the text, are defined below. Please note that depending on the context of their use the single may also include the plural and the plural the single.
- Act: means the Pensions Act 2004 (as amended).
- Applicant: means those seeking a clearance statement as an applicant named in the application.
- Application: is an application made for a clearance statement under:
- s42 of the Act in respect of the regulator's power to issue a contribution notice; or
- s46 of the Act in respect of the regulator's power to issue a financial support direction.
- Approved withdrawal arrangement: is an approved withdrawal arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended), which does require regulator approval.
- Associated: has the same meaning as in s435 of the Insolvency Act 1986. See also paragraphs 200 to 205.
- Assessment period: is the period after a qualifying insolvency event has occurred in relation to an employer of an eligible scheme, during which the PPF will assess whether or not it must assume responsibility for the scheme. See s132 of the Act.
- Civil partner: includes former civil partner and reputed civil partner.
- Clearance: is a term used to describe the voluntary process of obtaining a clearance statement from the regulator.
- Clearance statement: is statement that, in the regulator's opinion and in the circumstances described in the application, it would not be reasonable to impose, on the applicants, any liability under a contribution notice or the requirements of a financial support direction, all in relation to a scheme and a particular event. The form of the clearance statement will depend upon whether it is sought in respect of a contribution notice, a financial support direction or both. See also paragraphs 139 and 157 to 159.
- Connected: has the same meaning as in s249 of the Insolvency Act 1986. See also paragraph 199.
- Contribution notice: require payments to be made to the scheme (or a receiving scheme) or to the PPF by employers or connected or associated persons and the term has the same meaning as in s38 of the Act. See also paragraphs 182 to 189.
- Detrimental event: is an event that could be detrimental to the ability of the scheme to meet its liabilities as well as some events that are directly detrimental to members' benefits. See also paragraph 26.
- Directly affected party: is a person appearing to the regulator to be directly affected by the regulatory action under consideration.
- Employer: is, as the context requires, an employer of persons in the description of employment to which the scheme in question relates for the purposes of the contribution notices and financial support directions as defined by s318(1) of the Act and as may be extended under s318(4) of Act , or an employer for any of the purposes referred to in paragraphs 165 to 169. See also paragraph 21. Also, in the case of a multi-employer scheme, where this guidance refers to the 'employer', this should be taken to include all employers.
- Employer-related event: is an event in respect of an employer. See also paragraphs 31 to 62.
- Employer covenant: is measured by the employer's legal obligation to the scheme and its financial position (both current and prospective). See also paragraphs 33 to 35 and Appendix A.
- Event: includes transactions, agreements, decisions, other acts and failures to act.
- Financial position: is the employer's financial standing and prospects (both current and prospective). See also paragraphs 174 to 176.
- Financial support direction: require financial support to be put in place for the scheme (or a receiving scheme) by employers or connected or associated persons and the term has the same meaning as in s43 of the Act. See also paragraphs 190 to 198.
- Fixed charge: is a charge either over ascertainable and defined assets or assets capable of being ascertained and defined that prevents those assets from being dealt with free from the charge without the consent of the chargee.
- Floating charge: is a charge over a class of present or future assets that allows those assets to be dealt with in the usual course of business until it becomes a fixed charge or crystallises upon the occurrence of an event or satisfaction of a condition.
- FRS17/IAS19: are current accounting standards for retirement benefits, the primary objective of which is to ensure that a company's statutory financial statements reflect, at fair value, the assets and liabilities attributable to the employees' retirement benefits entitlement and any related funding. The FRS17/IAS19 deficit will be the amount reported in the latest available audited statutory accounts, unless the trustees and the employer agree that an updated amount is appropriate.
- Husband: includes former husband and reputed husband.
- Insufficiently resourced: has the same meaning as in s44 of the Act See also paragraphs 195 and 196.
- Legal obligation: is any legislative, contractual, trust based or other legal requirement (both current and prospective) imposed upon a person in relation to a scheme's funding. See paragraphs 165 to 173.
- Material detriment test: one of the grounds for contribution notices that is set out in amendments to section 38 and section 38A of the Act as inserted by the Pensions Act 2008 – See also paragraphs 187 and 188.
- Notifiable events: are events in respect of either a PPF eligible scheme or its employer which must be reported to the regulator in accordance with s69 of the Act. See also paragraph 115.
- Ongoing deficit – is the funding shortfall revealed in a valuation undertaken under the scheme's trust deed and rules.
- PPF: is the Pension Protection Fund.
- Person: may be an individual, a company, or a partnership, including a limited liability partnership. Its application will depend upon the context.
- Receiving scheme: is a work-based scheme that, on or after 14 April 2008, receives a transfer of liabilities from the initial scheme in relation to which the contribution notice or financial support direction conditions were met, in accordance with sections 39A, 39B, 43A and 43B of the Act (as inserted by the Pensions Act 2008). A work-based scheme is either an occupational pension scheme, a personal pension scheme where direct payment arrangements exist in respect of one or more members of the scheme who are employees, or a stakeholder pension scheme.
- Regulated apportionment arrangement: is a regulated apportionment arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended), which requires regulator approval.
- Relative: has the same meaning as in s435 of the Insolvency Act 1986 and is an individual's: brother; sister; uncle; aunt; nephew; niece; lineal ancestor; or lineal descendant (treating any relationship of the half blood as being a relationship of the whole blood and the stepchild or adopted child of any person as his or her child, and an illegitimate child as the legitimate child of his or her mother and reputed father).
- Relevant creditors: has the same meaning as in section 38(7A) of the Pensions Act 2004 and means creditors of the employer or creditors of any other person who has incurred a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to the scheme.
- Relevant deficit: only applies in relation to employer-related events and is any deficit revealed by the comparison of the scheme's assets with its liabilities, calculated in accordance with the appropriate basis as detailed in paragraphs 48 to 55.
- Scheme: is, for the purpose of contribution notices and financial support directions, an occupational pension scheme, but does not include a scheme that only provides money purchase benefits or is exempt from contribution notices and financial support directions as prescribed under s38(1)(b) and s43(1)(b) of the Act respectively. Other statutory definitions apply as the context requires.
- Scheme administration regulations: is the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/1715) (as amended).
- Scheme apportionment arrangement: is a scheme apportionment arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended), which does not require regulator approval.
- Scheme-related event: is an event in respect of the scheme. See also paragraphs 63 to 79.
- S179: refers to s179 of the Act and is the PPF's valuation basis for a scheme's deficit, and it is used for the purpose of calculating the risk-based pension protection levy.
- S75 basis: refers to s75 of the Act and it is often known as the buy-out basis for a scheme's deficit. S75 requires the scheme actuary to apply certain methodology to estimate the amount needed to secure the scheme's liabilities with annuities purchased from a regulated insurance company.
- s75 debt: is the debt (including a contingent debt) owed by the employer to the trustees of the scheme and calculated in accordance with the s75 basis, including the whole or part of any such debt and debts that are, or might become, due (as the context requires).
- Service company: has the same meaning as in s44 of the Act. See also paragraph 194.
- Statutory defence: is the defence to contribution notices on the material detriment test ground that is set out in section 38B of the Act as inserted by the Pensions Act 2008. See also paragraphs 192 and 193.
- Statutory funding objective: has the same meaning as in s221 to s233 of the Act (Part 3 of the Act), which is that a scheme must have sufficient and appropriate assets to cover its technical provisions (its liabilities).
- Technical provisions: is a calculation, based on methods and assumptions usually agreed by the trustees and employer and set out in Part 3 of the Act, of the amount needed at a particular time to make provision for the scheme's liabilities. Technical provisions are individual to each scheme. This will not yet be available for every scheme. Further information can be found in the scheme funding section on the regulator's website.
- Type A event: is any event that is materially detrimental to the ability of the scheme to meet its pension liabilities, as well as some events that are directly detrimental to members' benefits, as described in more detail in Part I.
- Wider employer group: consists of any person who is connected to or associated with the employer.
- Wife: includes former wife and reputed wife.
- Withdrawal arrangement: is a withdrawal arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended) which does not require regulator approval.