Green Paper on DB regulatory and legislative framework issued
On 20 February the Government published its long-awaited Green Paper on the regulation of DB schemes.
“Security and Sustainability in Defined Benefit Pension Schemes”, partly inspired by such events as the BHS scandal (see our 2016 News Alert) is a wide-ranging overview of DB pension law and regulation aimed at addressing the many concerns registered in this field. For further details please see our News Alert.
Comment
The Government’s overall approach is predicated on the assumption that the evidence supplied by the Pensions Regulator and the Pension Protection Fund points to the current regulatory and legislative framework being largely fit for purpose. However, we can expect some changes to the regime to be put through, but which ones and on what timescales is not clear.
PPF proposes a new levy rule for schemes without a substantive sponsor
As anticipated when issuing its near final levy rules for 2017/18 (see Pensions Bulletin 2016/51) and with British Steel clearly in mind, the Pension Protection Fund has now published a consultation paper covering a levy rule for schemes which no longer have a substantive sponsor.
The PPF has been concerned for some while that the risk presented to it by schemes that are separated from their sponsor is not adequately reflected in the current levy methodology (which is focussed on the sponsor’s insolvency risk). Of particular concern is the fact that that in the absence of a genuine sponsor, it (and therefore PPF levy payers) would be directly exposed to the risk of failure of a scheme’s investment strategy; a risk which it feels is outside the remit it was set up to fulfil.
It has therefore sought to develop a new approach to charging such a scheme an appropriate risk-reflective levy, which does not include a risk of cross-subsidy from or to other schemes. But it also quite rightly observes that if separation is to become part of the system, the current legislative and regulatory framework would need review.
The PPF’s approach is set within a framework that anticipates that as part of the agreement to separate the scheme from its sponsor (through a regulated apportionment arrangement) a clear and legally binding arrangement is entered into which will, amongst other things regularly test whether the scheme is sufficiently well funded, able to afford the proposed levy and sustainable in the long term. This arrangement will include a funding trigger below which the scheme will need to wind up.
The PPF suggests that the protection it provides to such schemes is equivalent to it selling them a put option (with the strike price referencing the value of PPF compensation) and so the risk-based levy should be based on a Black-Scholes pricing model for valuing put options.
The PPF also suggests that, as a scheme with no sponsor will always pose a bigger risk than an identical scheme however weak the sponsor, the risk-based levy actually charged should not be less than the uncapped risk-based levy for a weak (“Band 10”) employer (using the standard calculation with some modifications). The scheme-based levy is to be calculated in the normal way.
The PPF intends to apply this to arrangements of the sort described above that are established between 1 January 2017 and 31 March 2018. This could mean that a scheme that pays its 2017/18 PPF levy on the normal basis this autumn could find that the PPF will ask it for more.
Consultation closes on 6 March 2017 and the final 2017/18 Levy Determination will be published by 31 March 2017.
Comment
This is a fascinating development that has been brought into focus by the British Steel Pension Scheme which is now to close to future accrual and could possibly be separated from its employer over the coming months. But as the PPF quite rightly observes, its approach in this area could well develop, particularly if the Government’s ideas on scheme separation sketched out in the Green Paper find expression in legislation.
EMIR collateral requirements
The European Market Infrastructure Regulation requires over the counter derivatives contracts to be cleared on a central exchange. As we reported in Pensions Bulletin 2016/51 pension schemes are exempt from this requirement until 16 August 2018.
However, where transactions are not centrally cleared the first of the EMIR requirements applicable to pension schemes is coming into force. These “margining” requirements are being phased and in relation to pension schemes will likely apply to OTC derivatives trades after, or in train on 1 March 2017.
Comment
In practice pension schemes already clear OTC transactions centrally and so we anticipate that these requirements will have little or no impact on them.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
