The Pensions Regulator has issued a reminder about how defined benefit (DB) scheme deficits should be treated in corporate transactions.
The reminder relates to the option of obtaining clearance from the Pensions Regulator as an appropriate course of action where events take place which are financially detrimental to the ability of a defined benefit scheme to meet its pension liabilities.
The document states: “Where there is a significant weakening of employer covenant as a result of a corporate transaction, for example where a highly leveraged transaction occurs and/or the assets for which the scheme currently has recourse are being removed from the employer group, then clearance is an appropriate consideration irrespective of the funding position of the scheme involved.”
John Broome Saunders, actuarial director at BDO Stoy Hayward Investment Management, said that the reminder was a significant toughening of the Regulator’s position. “It effectively means that defined benefit pension issues need to be considered irrespective of whether the scheme appears to be in deficit or not.”
but, Richard Jones, principal at Punter Southall, added: “It has always been the case that the overriding principle of the clearance process is that the Pensions Regulator is interested in cases where there is financial detriment to the pension scheme whatever the current level of funding or prospective funding.”
Previously, the size of a scheme’s benefit was measured on the basis used for corporate accounts, such as FRS17 or IAS19. Due to this, where a scheme had no deficit, the position of the pension scheme could be ignored in a deal.
The Regulator also pointed out that this is also true of transactions which may result in scheme abandonment.
The reminder comes in advance of a planned update to clearance guidance due this summer.