30 November 2009 - Post by:Caroline Overton
Thanks to the well-known advertising slogan, regardless of our usual aptitude for domestic DIY, when it comes to buying a particular brand of British wood dye preservative we’re well trained in where to look so as to manage our expectations as to the product’s scope and limitations.
In my experience, the same is not always true for pension scheme trustees and employers, whose expectations of clearance statements from the Pensions Regulator can go far beyond what it says on the tin (that’s to say, the underlying law and guidance).
Clearance is voluntary, and it gives a successful applicant comfort that the Regulator will not, at a later date, make the applicant provide financial support to an underfunded DB pension scheme. This can be especially helpful in corporate or restructuring deals where certainty as to future pension liabilities is important all round.
Often I find, when pension scheme trustees are told of a transaction being considered by the sponsor, their first reaction is to ask whether the sponsor will be seeking clearance from the Regulator. I can see the merits of this question in terms of checking that the sponsor has thought through the pensions implications of its corporate plans. The answer will also show what bargaining chips the trustees will have, as the mitigation for the trustees’ support of any clearance application may well be a funding injection into the scheme. However, trustees shouldn’t expect that Regulator involvement will absolve them from their duties as trustees of their scheme or give any greater degree of comfort.
Clearance isn’t the Regulator blessing a transaction or sanctioning any particular mitigation that may have been agreed between trustees and their sponsor. Indeed, the Regulator describes itself as a referee rather than a player. Clearance isn’t short-cutting the Regulator’s review of the scheme’s technical provision and recovery plan following the triennial actuarial valuation and getting premature comfort that the Regulator won’t challenge any of these. Such a review is done separately by the Regulator and would not be considered as part of a clearance application.
Clearance is quite simply a statement that the Regulator is not minded to exercise its moral hazard powers against the applicants on the basis of the facts described in the clearance application. Quite simply, it does exactly what it says on the tin.
Caroline Overton is a senior associate at Allen & Overy LLP.