The Association of Consulting Actuaries has revealed that it is critical of certain sections of a consultation proposing stronger powers for The Pensions Regulator.
The comments come as part of its response to the Department for Work and Pensions’ consultation on Protecting defined benefit pension schemes – a stronger Pensions Regulator, which closes today, 21 August.
The ACA is largely welcome of the direction of travel but it has questioned the lack of reasons behind certain proposals and suggests there may be some unforeseen consequences of others. ACA Chair, Jenny Condron said: “We are supportive of the consultation paper’s direction of travel, but it provides little detail in all of the areas and in some instances, particularly in relation to the Contribution Notice and Financial Support Direction proposals, there are hardly any policy reasons as to why the proposals were being put forward, making it difficult for us to provide a full response.
“We look forward to working with the DWP and Pensions Regulator as the various proposals in the consultation document are worked up – it will be important for further consultation to take place in order to ensure that what is delivered is appropriate and proportionate.”
With regards to the Contribution Notice, the ACA noted that the response notes that a test along the lines of “detrimentally affected in a material way the covenant of the employer towards the scheme” could bring many more situations into scope than at present, a number of which are unlikely to be appropriate for regulatory action.
The obvious example is that the regulator views payment of dividends as covenant reducing, which it is, in an immediate quantitative sense, but companies need to attract investors and one way to do that is to provide them with annual returns, so on a qualitative basis, paying dividends can be covenant enhancing, the ACA explained.
“We have a concern that a pure covenant test, measured at a point in time, could enable intervention which with hindsight would prove not to be appropriate,” Condron said.
In addition, the ACA said of the Financial Support Direction that it understands that due to impreciseness of the legislation there can be difficulties in determining whether the first leg of the test is met – i.e. establishing the value of the employer’s resources to compare against the estimated section 75 debt to see whether the “less than 50 per cent” test is met.
“The ‘rich uncle’ second leg is normally a formality. But rather than seek to resolve the ‘poor parent’ issue it may be better to replace the insufficiently resourced test with a completely different measure, such as providing that the corporate veil can be pierced in relation to any scheme that is funded below a certain percentage of its technical provisions. It may then also be possible to drop the service company gateway,” the ACA said.
Condron added: “A technical provisions approach could act as a spur to better scheme funding and lessen the need to seek a lookback period greater than two years. But any such proposal would need separate consultation before being finalised so that its pros and cons can be thoroughly scrutinised.”