A newish Regulatory Regime
It is now over a year since regulations came into force effectively putting an end to pension scheme trustees borrowing money directly. Although little has been said about this latest dictat from Europe (the regulations in question, the Occupational Pension Schemes (Investment) Regulations 2005 ("the Regulations") were implementing part of the EU Occupational Pensions Directive) for many involved in the industry this prohibition is, frankly, a disappointment. In a world where it is accepted, and indeed encouraged, that individuals and companies should use debt to buy property with the potential to appreciate, why shouldn’t pension fund trustees? Assuming the level of debt is generally prudent, surely it is common sense to allow pension scheme trustees to gear up and enjoy some of the capital returns and, consequently, assist in meeting the needs of an ever increasing ageing population.
At one point during the consultation period for the Regulations a sensible outcome looked promising. Lobby groups argued that borrowing should not be overly restricted but should be permitted with appropriate safeguards attached, for example a higher standard of care on occupational scheme trustees in relation to borrowing. Unfortunately these arguments were rejected and the Government took the ‘safe option’ and substantially replicated the wording from the Directive; safe because those in the know argue that the Government recently implemented other European legislation relating to pensions with their own amendments that have subsequently been challenged before the European Court. This would perhaps explain the Government’s reluctance to stray from the wording set out in the Directive and the DTI’s reluctance to offer guidance on interpreting the Regulations.
In the absence of any guidance from the Government as to how widely the Regulations can be construed, it is likely that a UK court would interpret them as to only allow borrowing in an "emergency" situation because the Regulations specify that borrowing is only permitted for the purpose of providing liquidity for the pension scheme and on a temporary basis.
What does this mean for trustees of occupational pension schemes?
Are the objections purely theoretical? For the outward observer, there has clearly still been huge investment in UK property (amongst other assets) so one might argue that it does not matter.
The fact that investment levels have been strong is probably partly to the credit of investment managers, and their advisers, who devise ever more creative ways to pool pension money in investment vehicles which, in turn, borrow money to fund acquisitions. This, of course, has many attractions including diversity of risk. In the end, however, we could all be losers as with such creativity and complex structures come costs and a chance has been missed to provide trustees with the opportunity, where it may be a prudent investment strategy, to utilise bank financing to fund acquisitions where it may be cheap and efficient to do so.
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