Followers of the pensions press will almost certainly have noticed an increase in innovative non-cash funding strategies being reported. Marks & Spencer, Sainsbury’s, GKN, John Lewis, ITV and others have all implemented strategies whereby some form of income-generating asset is placed into a special purpose vehicle which is then jointly owned by the sponsoring company and scheme trustees. The special purpose vehicle pays an agreed level of contributions to the pension scheme over a defined period of time.  

Against this background, and presumably in expectation of an increased number of funding deals of this nature, the Pensions Regulator has today issued a statement addressing theoretical concerns regarding the application of employer-related investment (ERI) restrictions to non-cash funding strategies1. Broadly speaking, ERI restrictions provide that no more than 5% of the market value of a pension scheme’s assets can be invested in employer-related investments. Some forms of ERI are absolutely prohibited including employer-related loans and transactions at an undervalue. ERI restrictions apply not only to direct investments in a scheme sponsor but also to investments in its connected/associated parties and in property used by the scheme sponsor or its connected/associated parties. Breaching ERI restrictions can attract civil and even criminal penalties for trustees.

The Regulator has stopped well short of suggesting that the new non-cash funding strategies breach ERI restrictions, but proceeds on the basis that there is as yet no concrete court ruling confirming that they are lawful.

Key points

The key points to note from the Regulator’s statement are that:

  • Sponsoring employers and trustees will need to agree an “underpin” which will apply in the event that non-cash funding strategies are ruled void by the courts for illegality. In effect, the parties will have to agree a recovery plan which does not involve any ERI risk alongside the non-cash funding deal.  
  • The Regulator expects to be explicitly informed about non-cash funding deals whether they occur as part of the triennial valuation cycle or between valuations.  
  • The Regulator expects members to receive a clear and transparent communication about non-cash funding deals (for instance, in a summary funding statement).  
  • Trustees will also need to be independently advised about the value of the assets which support the funding mechanism.

When considering its approach to a non-cash funding deal, the Regulator will consider a range of factors including whether:

  • the funding mechanism provides demonstrably better protection for members’ benefits than available alternatives that do not carry ERI risk  
  • there is an “underpin” in place (or not)  
  • the arrangement uses existing scheme assets  
  • the mechanism reduces the risk of a call on the PPF  
  • there are any concerns about potential conflicts of interest amongst the trustees  
  • the trustees are acting prudently and obtaining appropriate investment and other professional advice.  


The measured tone of the statement is helpful in that it alerts trustees and sponsors to the potential application of ERI restrictions to non-cash funding strategies, but permits them to continue provided that the issues are properly addressed. The Regulator’s expectations in relation to an “underpin” plan and formal notification (both to the Regulator and members) are purely “expectations” and not legal requirements. Nevertheless we expect that trustees and sponsoring employers will wish to conform with these expectations. The most challenging of these will be securing agreement to the alternative “underpin” when the parties to the deal believe it to be commercially irrelevant. It is hoped that the Regulator will issue comfort letters to trustees in advance of concluding non-cash funding deals, by way of informal “clearance”.