On 9 September the Pensions Regulator published a consultation document on revised clearance guidance. The clearance process involves the Regulator issuing a clearance statement giving assurance that it will not issue a contribution notice or financial support direction in respect of a particular event or state of affairs. The original guidance was published in April 2005.
The draft revised guidance updates the original guidance and is stated to reflect changes in the market place since that time, in particular:
- The Regulator's view that clearance has not, as many feared, had a negative impact on corporate activity;
- The way in which the market has increasingly considered the pension scheme as a creditor; and
- The impact of FRS17 in driving greater recognition in the market of the importance of the pension scheme.
The Regulator's view that the best outcome for members is likely to be an appropriately funded scheme with a solvent employer remains unchanged. The revised guidance focuses on the Regulator's expectations of professional advisers working with trustees and employers in considering events that may have a detrimental impact upon a pension scheme. Some help is given in relation to employer covenant and the assessment of covenant, and on how parties should work together to minimise or eliminate detriment. Some aspects of the application process have been clarified.
The main proposed changes to the 2005 guidance are:
- Encouraging a move away from a reliance on prescriptive tests in deciding which events should be considered for clearance, to a more principles-based approach, intended to assist parties in assessing the real impact of any event on the scheme. This is because some applicants and advisers are interpreting the guidance more restrictively than had been intended in relation to materiality;
- Greater clarity as to the level of mitigation that trustees should be looking for;
- Simplification of the classification of corporate events, with removal of Type B and Type C events (rarely identified or referred to in practice);
- Splitting of potential Type A events into employer-related events (involving corporate activity, now a longer list than before) and scheme-related (relating more directly to the scheme, e.g. compromises and apportionment of pension deficit), though many events will involve both types;
- Further guidance on assessing the materiality of corporate events; and
- Updating of the basis for assessing the relevant deficit, including where appropriate the reopening of a recovery plan by triggering a new scheme valuation.
In our view a less prescriptive basis for clearance is to be welcomed. The guidance emphasises the need for trustees, employers and professional advisers to work together to recognise circumstances which could give rise to a clearance application and to take appropriate action. Consultation closes on 2 November 2007.