Trustees have been issued a clearance reminder by the Pensions Regulator over corporate transactions such as leveraged buy-outs, to consider whether the event is 'financially detrimental' to the pension scheme.
In the note, published ahead of a planned update to clearance guidance in the summer, the Regulator says trustees should also consider whether to seek a “materially enhanced level of mitigation in excess of Financial Reporting Standard 17 (FRS17) or International Accounting Standard 19 (IAS19)”.
It says it has issued the reminder to trustees as it is “currently updating our clearance guidance to reflect our operational experience over the last two years and to clarify issues that have been raised with us”.
The clearance process is a voluntary exercise for companies with an under-funded defined benefit pension scheme considering a corporate transaction as provides assurance the regulator will not use its anti-avoidance powers.
However, while the Regulator points out firms can still continue with transactions even if clearance has been refused, it says companies risk the use of anti-avoidance powers as its underlying principle for clearance is “whether the event is financially detrimental to the ability of the pension scheme to meet its pension liabilities”.
As a result it says there is a particular concern where there is a significant weakening of the employer covenant as a result of a corporate transaction, for such as when a highly leveraged transaction occurs.
The Regulator says in these cases, and/or when the assets which the scheme "currently has recourse to” are removed from the employer group, “then clearance is an appropriate consideration irrespective of the funding position of the scheme involved”.
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