ECPA Chair, Guy Mander, commented: “The core propositions of “surplus should only be extracted where safe to do so from a member benefit perspective” and “trustees would retain responsibility for managing scheme funding levels” mean it is critical that scheme trustees have executive power in any decision to share surplus with the employer and/or members and that there is agreement of the sponsoring employer, which will ultimately need to meet any future funding shortfall.
“Incentives, from a tax perspective, could be used to encourage retention of surplus by the sponsoring employer for investment in the business, which in turn might be expected to be beneficial for the employer covenant and the security of members’ benefits.”
The ECPA response says the risk of a large deficit arising post the partial distribution of any calculated surplus would be reduced if a buy-out focused trigger (plus a margin) was used.
In all circumstances where surplus is extracted whilst the scheme remains on-going, the trustees should still form a view of the employer covenant’s ability to meet any future scheme funding requirements. This could be made a requirement as part of a new ‘gateway’ test or form of regulatory clearance (or notification), incorporating the proposed use of such funds by the sponsor.
A 100% PPF underpin system is likely to attract those schemes that stand to benefit from it the most; in general, these would likely be the schemes that are most willing to take risk at the potential expense of the PPF and therefore least likely to be attractive to the PPF, necessitating strict controls that would limit the effectiveness of the approach.
Commenting on the Public Sector Consolidator proposal, Guy Mander, added: “We welcome, in principle, an ‘end game’ solution for those schemes which are unattractive to commercial consolidation providers, recognising the benefits that this option could provide; however, we perceive the stated objectives could be seen as being ‘at odds’ with each other, given scale will be required to enable greater investment in UK high growth assets, which risks distorting the current commercial consolidation marketplace.”
The ECPA response notes that robust measures would need to be put in place to evidence that a scheme is ‘unattractive to commercial providers’ to avoid unnecessary market distortion.
ECPA says a ‘gateway’ test, including assessment of the change in covenant risks to the security of member benefits, and pricing like that for a commercial superfund could be introduced as part of an entry process for those schemes in deficit (against entry price) to mitigate against potential ‘moral hazard’ issues. TPR clearance could also be considered for such transactions or, as a minimum, the requirement to notify TPR.
“We see the potential for market disruption at a level higher than set out in the overarching objectives, if the PSC is to reach sufficient scale, as there will be a need to be in direct competition with the commercial consolidators to achieve that scale. We are encouraged by the discussions we have had with PPF, reflected in Friday’s revised proposals, that they are listening to the industry in shaping their views”, added Guy Mander.
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