Green light for DB consolidation

United Kingdom

The Pensions Regulator (“TPR”) has this morning published interim guidance on the standards it expects from Defined Benefit consolidation vehicles. This guidance is expected to open the door for schemes to transfer to consolidation vehicles which meet the requirements of this new regime.

This long awaited regime comes into force immediately and will apply in the period before a final legislative regime is put in place. TPR acknowledges that various models for DB consolidation could begin operations and complete transfers within the current legislative framework but given the different nature of the risks they pose it wants to set out its current expectations.

The new regime is targeted at vehicles that allow for the severance of an employer’s liability towards a DB pension scheme. This might be where the scheme employer is replaced by a special purpose vehicle or a new unrelated employer backed with a capital buffer to support the funding of the liability. The buffer is generally created by investor capital and contributions from the original employers.

The DWP is continuing to develop its authorisation and supervision framework (which it consulted on in December 2018) and the government has confirmed that it still intends to put a long-term legislative solution in place. In the meantime, there are a number of consolidation models emerging in the market and TPR wants to ensure that members’ benefits are protected.

TPR will assess and supervise consolidators across three broad areas:

  • the pension scheme and the capital buffer must meet TPR’s requirements for financial sustainability and capital adequacy;
  • the key individuals who exert financial control and/or influence the scheme’s strategies and those that have control over the assets should be fit and proper, including being financially sound;
  • the governance, systems and processes associated with the capital buffer and the scheme must be adequate.

Details of how TPR will make these assessments are set out in the guidance.

A transfer to a consolidator will be considered to be a “Type A” event because the link to the original employer is terminated. Employers will be expected to apply to TPR for clearance and trustees will be expected to provide TPR with details of their due diligence during the clearance process. TPR says that it would be “inappropriate” for it to grant clearance for a transfer to a consolidation vehicle which had not been through the assessment process under this new regulatory regime.

TPR reminds trustees that they need to be certain that a transfer to a consolidator is in their members’ interests. They should also only consider using a consolidator or new business model once TPR has completed its assessment.

Consolidation should not generally be considered as an alternative to full buy-out with an insurance company for those schemes which can afford it. TPR does not expect a consolidator to accept the transfer from a transferring scheme that has the ability to buy-out or is on course to do so within the “foreseeable future” (suggesting that this might be within the next five years).

TPR will be providing more information for trustees and employers in “the coming months” and keeping its guidance under review.