Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of occupational pensions.

This week we cover topics including: the latest regulatory intervention report by the Pensions Regulator; and a government challenge to institutional investors on investment in long-term UK assets.

• Latest TPR regulatory intervention report: FSD warning notice to overseas parent
• Government ‘challenge’ to institutional investors on investment in long-term UK assets

Latest TPR regulatory intervention report: FSD warning notice to overseas parent

The Pensions Regulator (TPR) has published a regulatory intervention report about its involvement with Keytec (GB) Ltd, the statutory employer of a small hybrid scheme, and its German parent, Turbon AG. This arose in circumstances where the employer covenant had been eroded and, although TPR acknowledged the parent had made legitimate business decisions in respect of Keytec’s business, it considered that the scheme’s funding needs had been under-prioritised.

Following the scheme’s 2016 actuarial valuation, TPR was concerned that the scheme was being treated unfairly in comparison with Keytec’s shareholders. The trustee and employer had agreed a two-year contribution holiday after the 2013 valuation (with GBP30,000 paid in the year ending 5 April 2016). A further contribution holiday was agreed during the 2016 valuation. The employer had paid a GBP876,000 dividend in 2015 (after the parent decided to wind up Keytec’s manufacturing business), with nothing further for the scheme. TPR was concerned that: Keytec (now a service company) would not be able to support the scheme without help from Turbon, which preferred to prioritise general company cash needs. Two existing parent company guarantees provided insufficient financial support as they were limited in value and one was time-limited. The trustee had attempted to improve the security of the guarantees but Turbon did not engage, and as a result TPR issued a Warning Notice in March 2020 to Turbon and its majority shareholder, HBT Holdings.

Following the issue of the Warning Notice, the targets and scheme trustees negotiated a funding package which TPR considered would provide meaningful long-term support (including a cash lump sum, deficit repair contributions, a replacement parent company guarantee and an agreed funding framework for future valuations). On this basis, TPR was satisfied that it was no longer appropriate to use its powers.

TPR commented that ‘We will not hesitate to exercise our anti-avoidance powers in respect of targets – whether UK or (as in this case) overseas based – to ensure DB schemes receive sufficient financial support. … Where targets are willing to engage with us and the trustees to address our collective concerns, we are willing to bring an early end to our regulatory action to save the time, costs and resources of all parties while still achieving a strong outcome for the scheme and its members.’

Read the report.

Government ‘challenge’ to institutional investors on investment in long-term UK assets

The government has published an open letter from the Prime Minister and the Chancellor urging UK institutional investors to consider investing in long-term UK assets. Over the last few years, the government has tried different policy levers aimed at removing barriers to investment in longer-term illiquid assets, and encouraging UK pension schemes to invest in areas such as patient capital and infrastructure. The latest letter is couched in terms of driving the UK’s economic recovery from the Covid-19 pandemic. It acknowledges that there is ‘no single ‘right answer’ for the amount that should be invested in these long-term asset classes’ and that there are some structural obstacles to be addressed, but challenges DB and DC trustees and investment advisers to consider investing more in long-term UK assets where this is appropriate.

Read the letter.

As a reminder, earlier this summer TPR published a blog post on the management of scheme liquidity risk, which addressed the issue of investment in illiquid assets. TPR noted that although illiquid investments may present opportunities to capture an illiquidity premium or improve member outcomes, trustees should be considering factors including their scheme’s investment, risk management, governance and funding arrangements, the holding structure for those investments, and the degree of investor protection provided.

TPR also proposed a specific limit in its forthcoming single code of practice on the maximum allocation of assets to investments that are not admitted to trading on regulated markets. TPR appears likely to adjust this proposal in response to consultation feedback, but the details of any revised expectation have not yet been confirmed.

Read the blog post.