The Pensions Regulator has today issued a statement of overview guidance to defined benefit pension scheme trustees entitled "Understanding employer support for DB schemes". This sets out the Regulator's position on the trustees' role in relation to the sponsoring employer covenant and also on member transfer incentive exercises. It also forewarns us of lengthier guidance still to come.

Monitoring employer support

The statement serves as a reminder that the Regulator's main expectations of trustees on this topic include:

  • objectively assessing the covenant, in the context of the scheme's exposure to risk and volatility
  • having an ongoing framework in place to monitor covenant
  • asking "probing questions" of the employer to understand its covenant.

This all ties in with the Regulator's view that trustees should regard covenant monitoring as "just as important to the security of the scheme as monitoring fund performance".

However, in addition, the Regulator suggests that employers and trustees should prepare plans for realising employer support through the provision of contingent assets or negative pledges: without such arrangements it warns that trustees may only be able to crystallise employer support at a time when the employer is faced with many other competing claims. The Regulator accepts that this is subject to proportionality: "elaborate" contingent assets may neither be affordable, nor appropriate.

Transfer incentive exercises

In the light of ongoing debate surrounding the propriety of transfer incentive or enhanced transfer value exercises, the statement calls on trustees to play a more active role in guarding members' existing scheme benefits and to ensure informed decision-making by members.

The statement reiterates the Chairman of the Regulator's somewhat controversial statement from last December that trustees should begin with the presumption that a transfer may not be in a member's best interests. As such, today's statement goes beyond the approach set out in the Regulator's inducements guidance issued in 2007, which merely says that trustees should consider whether their fiduciary responsibilities cause them to question the appropriateness of an inducement offer.

What further guidance is expected?

The statement confirms that trustees can expect more detailed Regulator guidance to flesh out the issues it raises, namely:

  • new guidance on monitoring employer covenant and support, including how contingent assets and other arrangements can improve scheme security
  • specific guidance for trustees of multi-employer schemes, which will include reference to the mechanisms available where an employer leaves such a scheme (such as apportionment and withdrawal arrangements and the recently introduced easements for internal reorganisations)
  • revised, "principles-based" guidance on transfer incentives, formally replacing the current inducements guidance.

Action for trustees

In issuing this overview, the Regulator has laid down a clear marker that, pending the issue of its further guidance, it expects trustees to monitor closely the employer covenant in general, and enhanced / incentivised transfer exercises in particular. Trustees and employers will need to bear this statement in mind when considering those topics.

The full statement can be found here .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 09/06/2010.