Consultation outcome

Banking reform: draft pensions regulations

Updated 17 February 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

1. Introduction

The Financial Services (Banking Reform) Act 2013, which received Royal Asset in December 2013, implements the key Independent Commission on Banking (ICB) recommendation of ‘ring-fencing’ the deposits of individuals and small businesses, separating important everyday banking activities from investment banking.

The ICB recommended that ring-fenced banks should not have liabilities to group-wide pension schemes. The Financial Services (Banking Reform) Act 2013 therefore includes provisions allowing the Treasury to require by regulation that ring-fenced banks ensure that they cannot become liable for the pension schemes of the rest of the group, or anyone else.

This paper invites comments on the draft regulations implementing this requirement on ring-fenced banks – the Banking Reform Pensions Regulations, which will be made under powers in section 142W of the Financial Services and Markets Act 2000 (FSMA) as amended by the Financial Services (Banking Reform) Act 2013^{[footnote 1]}.

1.1 Next steps

The government remains committed to putting in place all necessary legislation to implement the recommendations of the ICB by the end of this Parliament. Following this consultation, the government will seek to introduce final versions of the draft regulations into Parliament as soon as time allows.

1.2 How to respond

Responses are requested by 15 October 2014. The government cannot guarantee that responses received after this date will be considered.

Responses can be sent by email to banking.commission@hmtreasury.gsi.gov.uk. Alternatively, they can be posted to:

Resilience and Resolution Team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding, please state whether you are doing so as an individual or representing the views of an organisation. If you are responding on behalf of an organisation, please make clear who the organisation represents and, where applicable, how the views of members were assembled.

1.3 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 and the Environmental Information Regulations 2004).

If you would like the information that you provide to be treated as confidential, please mark this clearly in your response. However, please be aware that under the FOIA, there is a Statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidence. In view of this, it would be helpful if you could explain why you regard the information you provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances.

In the case of electronic responses, general confidentiality disclaimers that often appear at the bottom of emails will be disregarded unless an explicit request for confidentiality is made in the body of the response.

2. Banking Reform Pensions Regulations

Under existing pensions legislation, when more than one employer shares a pension scheme, if one employer in the pension scheme fails, the other employers can be called upon to support the scheme in certain circumstances. Allowing ring-fenced banks to have potential liabilities to group-wide pension schemes, or schemes with employers outside of the group, could result in the viability of a healthy ring-fenced bank being threatened by extra pension liabilities in the event of the failure of another group member or employer. The government took the power in the Financial Services (Banking Reform) Act 2013 (‘the Banking Reform Act’) to require by regulations that ring-fenced bodies ensure as far as possible they are not, and cannot become, liable for the pensions liabilities of other bodies, except in cases prescribed by the Treasury.

The Banking Reform Pensions Regulations (‘the Regulations’) therefore require that ring-fenced banks are not, and cannot become, liable for the pension liabilities of other entities (except other ring-fenced banks in their group, or wholly owned subsidiaries of ring-fenced banks). Liability to other group members’, or anyone else’s, pension schemes could either be a statutory liability, or a non-statutory liability, for example contractual guarantees issued by the ring-fenced body to other group members’ pension schemes.

2.1 The government’s approach to the Regulations

The government’s approach to the Regulations is to prescribe the outcome which is to be reached, but not the means by which that outcome is achieved. The expectation is that ring-fenced banks, trustees and managers will largely use existing pensions mechanisms to achieve the required separation or segregation of liabilities to ensure that ring-fenced banks are not, and do not become, liable for the pension liabilities of other entities. The government believes that, as existing pensions mechanisms will be used, the safeguards in those mechanisms should remain in place, in particular section 67 and section 75 of the Pensions Act 1995.

The Regulations require that ring-fenced banks must ensure that they are not employers in relation to a multi-employer scheme^{[footnote 2]} unless the scheme meets one of the following conditions:

• The only other employers in that scheme are wholly owned subsidiaries of the ring-fenced bank^{[footnote 3]}, or other group ring-fenced banks (and where that is the case, their wholly owned subsidiaries), or;
• The scheme is a segregated scheme where the only other employers in the section of the scheme that the ring-fenced bank is in are either wholly owned subsidiaries of the ring-fenced bank, or other group ring-fenced banks (and where that is the case, their wholly owned subsidiaries).

This has the effect that, from 2026^{[footnote 4]}, the employees of organisations other than the ring-fenced bank, or other group ring-fenced banks or wholly owned subsidiaries, cannot be part of the ring-fenced bank’s scheme or section of scheme. Any future accruals arising in the ring-fenced bank’s scheme must come from employment with the ring-fenced bank (or with other group ring-fenced banks or wholly owned subsidiaries).

Where there is an existing multi-employer scheme in relation to which a ring-fenced bank is an employer, it may be that the scheme is restructured, or a new pension scheme created, to enable the ring-fenced bank to comply with the Regulations. Where that is the case the Regulations do not prescribe the proportion of assets and liabilities to be allocated to each scheme, or section of a scheme, or make any requirements on where liabilities associated with employment before the obligations in the Regulations come into force should be allocated. As long as the conditions above are met, the allocation of all other assets and liabilities is at the discretion of the trustees and the banks, including, for example, the option of a 0:100 split, where 100% of liabilities associated with past employment go to the ring-fenced bank.

2.2 Role of trustees/managers

In some cases, scheme rules may mean that the trustees or managers of a scheme may not be able to make to make the modifications to a scheme required to enable the ring-fenced bank to comply with the Regulations. The Banking Reform Act sets out that the Treasury may make regulations which confer on the trustees the power to make the necessary modifications.

The Regulations therefore give the trustees or managers of an existing pension scheme the power to segregate a scheme, allocate assets and liabilities between sections of a scheme, or transfer assets and liabilities to a new scheme, and to make any consequential modifications, including allowing an employer to withdraw from the scheme and changing the principal employer.

This power conferred on the trustees or managers is subject to the following safeguards: it does not give the trustees the power to adversely modify the accrued rights of scheme members; it can only be used when making modifications for the purpose of enabling the ring-fenced bank to comply with the requirements on multi-employer schemes made by the Regulations; and the trustees must get the consent of all employers with liabilities to the scheme before making modifications.

The Regulations provide that if the trustee or manager of a scheme unreasonably refuses to resolve to modify an existing scheme in a way that is necessary in order for the ring-fenced bank to comply with ring-fencing, the ring-fenced bank may apply to the court for the modification to be made. The ring-fenced bank may also make an application to the court if another employer with liabilities to the scheme unreasonably refuses to consent to such modifications. The intent is that this should only be used as a last resort by the ring-fenced bank, in the event that it has no alternative means of complying with the Regulations.

In addition, the government has taken the power under the Banking Reform Act to modify, exclude or apply any primary or subordinate legislation for the purposes of ring-fenced banks meeting their pension arrangement requirements. At this stage, the government does not think that it is necessary to disapply any existing provisions for the purposes of achieving the outcome required by the Regulations.

Question 1

Do you have any views on the approach taken in the Regulations to the allocation of liabilities associated with employment before 2026 (or 5 years after the bank in question has become subject to ring-fencing, if later than 2026)?

Question 2

Do you have any views on the approach taken in the Regulations to liabilities associated with ongoing employment with a body other than the ring-fenced bank?

Question 3

Do you agree that the tools provided by the Regulations are sufficient to allow the trustees or managers of a scheme to enact the separation or segregation of schemes required by the Regulations?

Question 4

Do you have any views on any existing pensions provisions which may need to be disapplied in order for ring-fenced banks to comply with the Regulations?

2.3 Timing

In order to give banks sufficient time to ensure they have the appropriate arrangements in place, the Banking Reform Act sets out that the obligation to have the required pension arrangements in place cannot come into force before 1 January 2026. The Regulations set out that ring-fenced banks should have the required pensions arrangements in place either by 1 January 2026, or, if later, five years after the day on which the body becomes a ring-fenced bank. For example, a ring-fenced bank created in 2025 will have made the necessary changes to its pensions arrangements to comply with the Regulations by 2030.

Though the requirement on banks to have carried out the necessary restructuring will not apply until 2026, the Regulations, including the tools provided to trustees to implement the restructuring, the option for ring-fenced banks to make an application to the courts in certain circumstances, and the requirement for ring-fenced banks to apply to the Pensions Regulator for clearance, will come into force in 2015. This will allow banks and their trustees to begin planning and implementing this restructuring alongside the corporate restructuring that must take place to comply with ring-fencing, and will ensure that the safeguards in the Regulations are in place throughout the restructuring process.

Question 5

Do you have any views on the Regulations coming into force in 2015?

2.4 Requirements on ring-fenced banks: non-statutory liabilities to pension schemes

In addition to ensuring that they cannot become liable for the pensions liabilities of other entities due to shared statutory liabilities to a multi-employer scheme, ring-fenced banks will also be required to ensure that, from 2026 (or 5 years after the bank in question has become subject to ring-fencing, if later than 2026), they are not and cannot become liable for the pension liabilities of other group members (except other group ring-fenced banks, or wholly owned subsidiaries), or of outside companies, through other, non-statutory means, such as guarantees, bonds or indemnities. This is to prevent ring-fenced banks from setting up non-statutory arrangements which give rise to similar risks to statutory liabilities to multi-employer pension schemes, leaving open the risk of the pension liabilities of other bodies falling on the ring-fenced bank in the event of the failure of those bodies.

The Regulations therefore provide that, from 2026, the ring-fenced bank may not be, or become, a party to any ‘shared liabilities arrangements’, meaning guarantees, indemnities, bonds or other arrangements which would result in the ring-fenced bank becoming liable for the pensions liabilities of other companies.

The Regulations also provide for a restriction as to when a ring-fenced bank may be party to an arrangement where it may become liable for the pension liabilities of one of its wholly owned subsidiaries, or one of the wholly owned subsidiaries of another ring-fenced bank in the same group. In those cases the ring-fenced bank may only enter into such arrangements where the subsidiary is an employer in a pension scheme in which the ring-fenced bank is also an employer and which meets the requirements of the Regulations.

The government does not believe that the prohibition on ‘shared liability arrangements’ will prevent the restructuring of multi-employer pension schemes using existing pensions mechanisms. Ring-fenced banks will still be able to take on liabilities under a s75 arrangement, or in accordance with Regulations 6ZB or 6ZC of the Occupational Pension Schemes (Employer Debt) Regulations 2005, provided that under such arrangements the ring-fenced bank takes on sole liability for specific pension liabilities, and does not take on ‘shared liability arrangements’ that will run on beyond 2026, thus making them liable for the pensions liabilities of other bodies (other than other group ring-fenced banks and wholly-owned subsidiaries).

In order to comply with this obligation, the ring-fenced bank may have to negotiate its release from any existing non-statutory agreements it may have. The Regulations provide that, as a last resort, the ring-fenced bank may make an application to the court to be released from such arrangements, on terms which the court is satisfied are commercial, and are fair and reasonable in all circumstances.

The Regulations set out that a ring-fenced bank will not be in breach of the Regulations if it has made an application to the court to be released from a ‘shared liability arrangement‘ and the application has yet to be determined, or a court order has been made but is not yet in force. It is expected that the terms of the court order will ensure that it only commences after any reasonable time period necessary to allow the ring-fenced bank to put in place the arrangements required by the court order, so that when the order comes into force the ring-fenced bank is not in breach of the Regulations.

The Regulations also make an exemption for the case where the other party to the arrangement is an overseas company. The reason for this exemption is that in some instances it will not be feasible to expect that a ring-fenced bank will be able to negotiate a release or obtain a court order that is readily enforceable when the other party is an overseas company. This exemption is subject to the safeguards that it will only apply when the arrangement predates the date the Regulations come into force and if, despite all best endeavours, the ring-fenced bank has been unable to secure its release from the ‘shared liability arrangement’.

It should be noted that any intra-group exposure due to these arrangements may fall within the Prudential Regulation Authority’s rules on the level of intra-group exposures which ring-fenced banks are permitted to have, and the expected rules relating to arm’s length requirements.

Question 6

Are there any other circumstances which ought to be provided for when a ring-fenced bank may not be able to negotiate its release from such arrangements, in order to comply with the Regulations?

2.5 Information to members

The Banking Reform Act provides that the Regulations may require the trustees or managers of a scheme to provide specified information to specified persons. The Regulations require the trustees or managers of any existing scheme which will be modified in the process of complying with the Regulations to inform any members or survivors of members of the scheme of the nature of the proposed modifications and, what, if any, effect the modifications made have had on the rights of scheme members. The government envisages that this will take the form of a simple, yet clear and comprehensive, statement of what is being considered^{[footnote 5]}.

2.6 Roles and powers of the regulators

The Pensions Regulator (tPR): applications for clearance

Applying for clearance from tPR would under other circumstances be a voluntary process, however the government believes that it is necessary to require applications for clearance in this case, as an added safeguard against ring-fencing being used as an opportunity to restructure in such a way as to unduly disadvantage pensions scheme members.

The Banking Reform Act gives the Treasury the power to require by regulation that ring-fenced banks do all they can to obtain a clearance statement from tPR. The Regulations therefore require that the ring-fenced bank must make a clearance statement application for any restructuring undertaken to comply with the Regulations, and for any corporate restructuring undertaken to comply with ring-fencing in general. It must also comply with any requests for information from tPR associated with those applications.

The Regulations clarify that that nothing in the Regulations, or in ring-fencing legislation, restricts tPR’s discretion in deciding whether to grant clearance to a bank, or to issue a contribution notice or financial support direction.

Prudential Regulation Authority (PRA)

In line with other ring-fencing requirements, a breach of the Regulations will constitute a breach of a FSMA requirement. The Regulations require the PRA to monitor the compliance of ring-fenced banks with the Regulations, and, if necessary, take steps to ensure that ring-fenced banks comply.

Question 7

Do you have any other views on the approach taken in the Regulations?

1. Note that, as is common practice, terms which are defined in FSMA are not defined again in the draft Banking Reform Pensions Regulations. ↩

2. An occupational pension scheme which is not a money purchase scheme. ↩

3. It is expected that under PRA rules ring-fenced banks will be prohibited from owning subsidiaries which carry out activities that ring-fenced banks themselves cannot do under ring-fencing. ↩

4. Or 5 years after the bank in question has become subject to ring-fencing, if later than 2026. ↩

5. This requirement does not affect the existing disclosure requirements under the Occupational Pension Schemes (Disclosure of Information) Regulations 1996(a). ↩