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Pensions Client Directorate
Department for Work and Pensions
1 – 11 John Adam Street
London
WC2N 6HT / 23 June 2008
Dear Sirs
The Powers of the Pensions Regulator
Our Association is pleased to have the opportunity to respond to the DWP’s consultation on the powers of the Pensions Regulator and potential amendments to the ant-avoidance measures in the pensions Act 2004. ABI Members’ interest in this subject derives both from their role as providers of pensions savings products and annuities and as shareholders of companies that potentially make use of strategies for managing or exiting from their DB pension liabilities.
The consultation paper (Paragraph 1.28) says “It is essential that we strike the right balance between maintaining an environment in which market solutions can flourish, while ensuring the Regulator has the right mix of powers to intervene where appropriate”. We agree that achieving this balance is essential. In achieving this, care should be taken to avoid the implication that “running a scheme for profit” is in some sense a dishonourable or suspicious activity (as Paragraph 1.3 might be read to imply) or that (as alluded to in Paragraph 1.31) there are kinds of “undesirable market behaviour” that the Government is seeking to prevent. Pension scheme participation is indeed provided as an employee benefit but is done so by sponsoring employers because it is in the interests of the company to do so and will be accretive to shareholder value. However, it is important that member protection is not circumvented and it is true that the trust model, the basis of pension scheme governance, can be put under strain in some circumstances.
It is important that any deficiencies in pension scheme governance are addressed at source. In particular the concept of bulk transfers being effected in order to frustrate the efforts of the Pensions Regulator to set contribution notices suggests such a deficiency. It is the role of trustees of schemes to properly safeguard member interests and they should continue to be empowered to do so.
Paragraph 2.37 of the consultation paper indicates that the Government would be concerned by business models in which “the model depends on undertaking to pay pensions without ensuring that there is an on-going employer or adequate capital standing behind the pension promise”. There will be times, though, when the value of a sponsor’s covenant may be markedly weak. It is unclear whether in such circumstances the Regulator is seeking to prevent reorganisations that may be in the best interests of all concerned but which fall short of providing “adequate capital”. It may be that in this and other circumstances it is right that “liabilities can be met more cheaply under the pensions regime” than they would be under the insurance company model which provides a very high degree of capital assurance.
Companies considering exit solutions from DB liabilities should critically evaluate the quality of the different products on offer from insurance companies and other providers. Insurance offerings may well be the product of choice in such circumstances but we hesitate to argue that it should be imposed through application of regulation.
As regards the balance of powers to be given to the Regulator we tend toward the view that the burden of proof as to whether consequences of actions should have been foreseen should not be applied to either side. We support removal of the need by the Pensions Regulator to prove that decisions had been taken otherwise than in good faith. However, as regards a possible statutory defence, we believe that it should be for the Regulator to establish on the balance of evidence that materially adverse consequences of actions should have been foreseen by parties being made subject to contribution notices.
On a point of clarification, we take it that Paragraph 2.28 was not intended to imply that the Government would only be concerned if the overwhelming majority of schemes were to be covered by contribution notices. We would hope that this would be relevant for only a small minority of schemes.
We welcome the clear indication made (see Paragraph 2.43) that the Regulator seeks to use its powers only as a last resort and that it intends to operate its clearance procedure in a pragmatic, proportionate and responsive manner. This, however, is not a substitute for careful delimitation in law of those powers in the first place.
We hope this response is of assistance and we would be happy to discuss any aspects further if this would be helpful.
Yours sincerely
M W McKersie
Assistant Director
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