The Pensions Regulator has issued a statement setting out its approach to employer-related investments (ERIs). This has been prompted by the increasing use of complex, asset-backed, partnership funding arrangements and recent changes to how investments through collective investment schemes are treated under ERIs regulations.
Currently, legislation prohibits some ERIs – employer-related loans, guarantees and transactions at an undervalue - and restricts others to a maximum of 5 per cent of the current market value of a scheme's assets.
Key points in the Regulator's statement are:
- The Regulator expects Trustees to provide a clear explanation of complex funding arrangements to it and scheme members.
- Trustees should take legal advice on compliance with the ERIs restrictions and ensure there is an independent valuation of the funding structure's underlying assets.
- Trustees should take a cautious approach to funding structures and ensure alternative, equal-value funding arrangements will apply if complex arrangements have to be unwound due to being incompatible with the ERIs restrictions.
- Trustees should have adequate mechanisms in place to monitor the level of ERIs made through collective investment schemes in a reasonable and proportionate way.
We welcome the Regulator's stated object of focusing on how funding arrangements impact on the security of members' benefits. Most of the new partnership funding arrangements should be beneficial to members by providing better security against employer insolvency than a simple contractual commitment to make periodic cash contributions. They should also not be ERIs.
We also welcome the Regulator's suggestion that it will not seek to take action against Trustees who take reasonable and proportionate steps to managing ERIs made through collective investment schemes. In practice, where schemes invest via multiple collective investment schemes, ensuring that ERIs are always within the 5 per cent limit may not be possible.