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Clearance: Employer-related events
Clearance may be requested for events (transactions, agreements, decisions and other acts or failures to act) which are potentially materially detrimental to a defined benefit pension scheme and its members (known as “type A events”). (For more information, see Clearance: Basics.)
Type A events are either employer-related or scheme-related.
In order to assess whether an employer-related event is a type A event, employers and trustees should:
- assess the employer covenant before and after the event;
- determine whether any weakening of the employer covenant would be to such a degree that the event could be considered to be materially detrimental to the ability of the scheme to meet its liabilities; and then
- identify whether the scheme has a relevant deficit (see below).
Details of how this assessment should be conducted are contained in the Pensions Regulator’s guidance on clearance.
An employer-related event is only a type A event if the scheme has a relevant deficit.
The relevant deficit for an employer-related event will usually be the highest of the scheme's deficits according to the following bases:
- FRS17/IAS19 (current accounting standards);
- section 179 (PPF levy basis); or
- technical provisions (scheme funding basis, where available);
However, where the event is significantly materially detrimental to the scheme's ability to meet its liabilities (including where there is a significant weakening of the employer covenant), the deficit may be measured by a higher basis. For example, the relevant deficit will be measured by the section 75 basis (buy-out) where there are “going concern” issues in relation to the employer, the scheme is in wind-up, or there is “scheme abandonment”. (Scheme abandonment is where the sponsoring employer severs its link with the pension scheme without providing the scheme with sufficient funds or assets to compensate for losing its employer’s ongoing support).
The following employer-related events could be type A events:
- a change in priority – a change in the level of security given to creditors; for example, the granting or extending of a fixed charge or floating charge over assets of the employer or the wider employer group;
- a return of capital – a reduction in the overall assets of the employer or the wider employer group; for example: dividend payments;
- a change to group structure, including a change of control; or
- the granting or repayment of inter-company loans, particularly where the loan is not on 'arm's-length' terms, where it is not properly documented or where there is credit risk.