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April 6, 2005 3:00 am

Companies face tougher regime over pension funds

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Companies and the trustees of their pension schemes will have to use a more conservative method to calculate liabilities when considering whether to approve corporate transactions such as buy-outs, restructuring or outright sales.

Guidance released by the Pensions Regulator, which is launched formallyon Wednesday, sets out a framework to help employers, trustees and others know whether they need to seek permission before proceeding with a corporate transaction.

The guidance offers greater protection to scheme members than previously existed. However, it will make it much harder for financially shaky companies with underfunded pension schemes to make rescue plans that will bail out their shareholders. This is because companies will be forced to use a calculation of liabilities that is larger under the accounting rule FRS17. For companies faced with a possible insolvency, the size of the deficit is defined as the cost of buying out all pension promises with annuities, a larger number still.

The regulator noted that the clearance procedure for seeking permission was aimed only at events that could place pension promises at risk. If the regulator deems that pension promises are at risk, it may issue a contributions notice or a financial directions notice under which shareholders, a parent company or other investors may be required to make payments into the scheme.

The guidance comes under a section of the 2004 Pensions Act, which was aimed at preventing companies and investors from stripping valuable assets for their own benefit before allowing the underfunded pension scheme to be bailed out by the Pension Protection Fund, the employer-financed safety net for pension funds that also becomes active today.

In response to an outcry, mostly from private equity investors, the act created a so-called clearance procedure for those considering corporate activity. This was introduced so that if a scheme later fell into the PPF safety net, those responsible for that activity would not find themselves at risk of a claim from the regulator.

Before the 2004 act, at least 65,000 people lost all or part of their pensions when their employers became insolvent, leaving behind an underfunded scheme. In several notable instances, the insolvency occured following acquisition by a private equity investor.

Separately, the CBI, the employers' group, called on the regulator to adjust levies paid by business to the protection fund according to the amount of risk they posed. "The CBI supports the establishment of the Pension Protection Fund but its success will depend on recognising the likely risk of a company becoming insolvent. Businesses at most risk and most likely to call on the PPF should pay more," it said.

It noted that without a clear link between risk and premium, businesses risked an ever-increasing cost of bailing out failed schemes.

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