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Adviser  >  Technical Central  >  OPS Matters  >  Scheme Abandonment

Scheme Abandonment

What’s it all about?

The Pensions Regulator (TPR) says the intention of the discussion paper is to draw the abandonment issue to pension scheme trustees due to the increasing market in arrangements that seek to transfer scheme risk to third parties.

Whilst TPR is happy that solutions are out there which are designed to manage risk for schemes and trustees, they’re worried about some arrangements that result in schemes being abandoned. They see such abandonments as contrary to recent pensions legislation and possibly against the interests of the members. Needless to say, TPR are always concerned about anything which may jeopardise members’ interests and they will consider using their powers in abandonment cases where warranted.

What does TPR mean by abandonment?

Whilst TPR recognises that abandonment can happen in a number of different ways, they identify two key areas that could lead to abandonment:

The covenant of the employer that remains with the scheme (following a restructure, for example) may be nominal compared with the previous covenant. In other words, the financial strength of an employer after a transaction has taken place, both now and in the future and their willingness to keep paying into the pension scheme may not be what it should be.

The level of protection offered to the scheme is less than the cost of providing the benefits on a ‘full buy-out’ basis (known as a section 75 debt).

What do trustees need to do?

Trustees must examine very closely any transactions which could result in scheme abandonment and engage TPR early to discuss these transactions. TPR have issued guidance in this respect to help trustees with the issues.

Effectively, this is similar to the now established clearance arrangements and gives trustees more power and control over financial transactions by the sponsoring employer. All with a view to protect the interests of scheme members and help prevent schemes falling into the Pension Protection Fund, which, of course, are two of the main aims of TPR.

Further information

The discussion paper and guidance can be found here. Closing date for responses to the discussion is 9 February 2007.