Over the last month or so, we've seen the Pensions Regulator (TPR) issue guidance addressing risks to pension scheme members.

Abandonment of defined benefit schemes

The latest guidance [PDF] concerns the abandonment of defined benefit schemes, i.e. where a sponsoring employer severs links with the scheme.

Trustees are expected to scrutinise all corporate activity which could result in abandonment without adequate funding to the full buy-out level. This includes where the scheme, or a portion, is transferred to a "nominal employer" with little or no value as a business other than the pension scheme.

Trustees should seek "appropriate and commensurate" independent advice during the review process. The potential conflicts of interest and cost should be assessed prior to engagement. TPR encourages members to be consulted and made aware of the type and extent of advice obtained.

Ultimately, trustees must consider the best interests of members when deciding whether to agree to any proposed abandonment arrangement. TPR provides a list of relevant factors here although it accepts this isn't exhaustive and other factors may be germane. Notable amongst the list is the need to assess and form an independent opinion of the value of the existing sponsor's covenant. This applies equally to a replacement employer or where the existing company experiences restructuring.

The trustee board itself should be assessed in order to manage potential conflicts of interest and ascertain whether the new employer will be able to assert undue influence over its composition.

The guidance also serves to highlight some issues which should not be accepted as justification for agreeing to any proposed abandonment arrangement - the main test being whether the same benefit could be derived without breaking the link with the current employer.

As with all corporate transactions which lead to a weakening of the employer's covenant, trustees should follow clearance procedures. When reviewing cases of potential abandonment TPR may see fit to exercise its anti-avoidance powers.

Regulation of risks to members in defined contribution schemes

25th April saw the publication of the consultation report [PDF]: "How the Pensions Regulator will regulate defined contribution schemes in relation to risks to members".

TPR correctly identified (according to the 40 responses) a number of, not altogether surprising, key risks including:

• risk to members' benefits from a poorly administered scheme;
• poor investment decisions;
• unduly high charges - which should be transparent and proportionate;
• incorrect decision making and lack of understanding from members.

There was also support for their proposed action, namely: education and guidance; working in partnership; and intervention. However, there was concern over the differing impact on contract-based and trust-based schemes. The former are already regulated by the FSA and TPR expects its focus to fall mainly on the trust-based type. However, TPR will tackle both if appropriate, subject to the differing regulatory regimes and the "Memorandum of Understanding" with the FSA.

In relation to the third key risk above, TPR has no desire to become a "price regulator". The intention is to promote transparency and provide adequate guidance and information to all parties involved.