We have, by now, all become accustomed to the policing duties that trustees must undertake in relation to the employer’s covenant under the Pensions Act 2004 (2004 Act). Those duties have recently been extended further. This has been done by the Pensions Regulator (the Regulator) publishing new guidance (the Guidance) on 3 May 2007 on abandoning defined benefit (final salary) pension liabilities. Specifically, the Guidance applies to those situations where an employer in relation to a defined benefit pension scheme seeks to break the link it has with that scheme, whilst not satisfying some or all of its pensions liabilities.

The Regulator has taken this step because it has evidence of transactions being proposed which do exactly this. The Guidance points out that any such transactions place members’ benefits in jeopardy and could lead to clams on the Pensions Protection Fund.

The Guidance says that is intended to help trustees to identify those corporate transactions or restructuring exercises which may lead to abandonment. In particular, the Regulator expects trustees to consider first that a proposal which breaks the link with the sponsoring employer may not be in members’ interests. The Regulator also expects trustees to place a high level of scrutiny on a proposal which seeks to break the link with the sponsoring employer. Employers should also have regard to the Guidance and the Regulator's guidance on clearance (Clearance Guidance) (see our April 2007 briefing on clearance and moral hazard) when framing the structure of a transaction.

This publication is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to a particular matter.