Clearance

Guidance

This guidance is for trustees and employers dealing with events that may affect their pension scheme where a clearance application is being considered.

This guidance does not apply to superfunds – if you’re a trustee or employer considering transferring to a superfund, read our superfunds guidance.

Bolded terms are defined in the glossary in Appendix B.

Queries and applications can be made by email to clearance@thepensionsregulator.gov.uk.

Issued: March 2010
Updated: September 2021

September 2021
Updates throughout the guidance as a result of the Pension Schemes Act 2021.

March 2010
First published.

Key points

• Clearance is the voluntary process for obtaining a clearance statement from TPR.
• A clearance statement is not approval of a transaction such as an acquisition or merger - it gives assurance that we will not use our contribution notice and / or financial support direction powers in relation to the transaction described in the clearance application.
• Clearance is relevant for those considering transactions or events which are type A events.
• Clearance should not be pursued for the purpose of settling any ongoing enforcement action.
• Clearance gives no assurance in respect of any of our powers besides our contribution notice and / or financial support direction powers, so we only expect applications to be made by those who could be subject to a contribution notice or financial support direction.
• We may use any information provided to us in the context of a potential clearance application in connection with the exercise of our wider functions, including our enforcement powers.
• Because clearance is a voluntary process, section 310(2) of the Pensions Act 2004 does not apply. This means that any information or statements provided to us in connection with a clearance application may be used and relied on in other contexts, including in connection with our enforcement powers, and may be relied on in criminal proceedings and / or where we decide to impose a financial penalty.
• This guidance is primarily aimed at professional advisers, who should bring it to the attention of trustees, employers and parties who are connected or associated with employers.

Introduction

1. The Pensions Regulator (TPR) is the regulatory body for work-based pension schemes in the UK. The Pensions Act 2004 (referred to here as the Act) gives us a set of specific statutory objectives.

2. Clearance is the voluntary process of obtaining a clearance statement from TPR. A clearance statement gives assurance that, based on the information provided, we will not use our powers to issue a contribution notice, a financial support direction, or both (depending on the scope of the clearance statement), to the applicant(s) in relation to a defined benefit (DB) occupational pension scheme and a particular event. Events include transactions, agreements, decisions, other acts and failures to act.

3. A clearance statement will not bind us if circumstances are materially different from the contents of the application.

4. Contribution notices require a cash payment to be made into a scheme, whereas financial support directions require financial support (in a form approved by TPR) to be put in place for a scheme. They were introduced by the Act in order to protect the benefits of scheme members and to ensure that pension liabilities are not avoided or unsupported. You can read more about these powers in Appendix A.

5. These powers are just one strand of our approach to ensuring that schemes are properly funded, administered and supported. We have other powers, such as the power to prosecute the offences of avoidance of employer debt and conduct risking accrued scheme benefits, powers to issue financial penalties, powers in relation to scheme funding, powers to wind up schemes or to appoint an independent trustee. A clearance statement provides no assurance in relation to any of our other powers, or to anyone other than the person(s) to whom the clearance statement is issued.

About this guidance

6. We have updated this guidance in light of legislative changes, and it reflects the way that both we and the market have developed since clearance was introduced in April 2005.

7. It is clear that there are many events that could be detrimental to the ability of a scheme to meet its liabilities. However, in line with our commitment to operate in a risk-based and proportionate manner, we only expect to issue clearance statements in relation to those which are materially detrimental, which we refer to as 'type A events'.

8. Type A events can be employer-related events or scheme-related events. Trustees and employers need to recognise and understand type A events.

9. Part I of this guidance provides information about:

• identifying type A events - assessing the impact of the event on the scheme and
• the action applicants and trustees should take before or during the clearance application process, including agreeing appropriate mitigation.

10. Part II of this guidance gives further information about:

• applying for a clearance statement and
• what happens during the clearance application process.

11. It is not practical to create guidance that contains sufficient detail to cover all possible circumstances and events. This guidance does not attempt to list all possible type A events.

12. Professional advisers should ensure that all parties involved in a possible type A event, including employers and trustees, are familiar with this guidance.

Our approach

13. Our power to issue a contribution notice is triggered by an act or a failure to act, whereas the power to issue a financial support direction arises because of the circumstances of the employer. However, it may be that consideration of an event leads us to conclude that it would be reasonable to issue a financial support direction. Therefore, applications for clearance will generally relate to one or more events.

14. The following guiding principles apply to trustees and employers when dealing with events that may affect the scheme and when there is an application for a clearance statement.

Trustees and employers

• In general, we would expect all stakeholders (eg DB pension schemes, lenders and shareholders) to be considered fairly in a manner consistent with their relative status.
• Trustees should understand their powers and duties and act appropriately, including managing any conflicts.
• Trustees should consider taking independent professional advice where appropriate.
• Trustees and employers should work together in relation to events that may be detrimental to the ability of the scheme to meet its liabilities or to the benefits of the scheme members, sharing appropriate information with each other.
• Trustees and employers should understand the nature and the impact of an event which could be detrimental to the ability of the scheme to meet its liabilities, and the appropriate mitigation for the event.
• Trustees and employers should recognise that we will want to know about all events that have a materially detrimental effect on the ability of a scheme to meet its liabilities, and that they may have legal duties to notify us.
• Employers and those connected or associated with them may also have legal duties to give us further information about the event or its expected effects, copied to the trustees, or changes to notifiable information, including whether the event is still expected to occur.

15. The following guiding principles apply to our decision as to whether to grant a clearance statement.

TPR

• Our generally preferred outcome is an appropriately funded scheme with a solvent employer.
• We will use our resources in a risk-based manner, targeting risk in a proportionate, responsive, flexible, pragmatic, consistent, transparent and reasonable way.
• We will seek to protect members' benefits and reduce the risk of calls on the Pension Protection Fund (PPF), while at the same time recognising commercial activity and business needs.

The scope of a clearance statement

16. A clearance statement only relates to the applicants, the relevant scheme and the events described in the application. Any clearance statement will only be effective in relation to our contribution notice and / or financial support direction power(s). It does not provide any reassurance in terms of any other of our powers, including our criminal powers or our financial penalty powers. For more information on these, please refer to our:

• Policy on our approach to the two offences of avoidance of employer debt and conduct risking accrued scheme benefits in section 58A and section 58B of the Act.
• Prosecution policy for general information about our approach to criminal cases.
• Monetary penalty powers policy - high fines (avoidance) for more information about our approach to the financial penalty powers of avoidance of employer debt and conduct risking accrued scheme benefits in section 58C and section 58D of the Act.
• Overlapping powers policy for more information about how we approach decisions where we have the option to choose between criminal sanction and a financial penalty.

Part I type A events

Identifying type A events

17. Employers and trustees should assess whether any detrimental event is a type A event.

18. A detrimental event, including any type A event, will have one or more of the following effects, either immediately or in the future:

• it prevents the recovery of the whole or any part of the employer's s75 debt
• it prevents the employer's s75 debt becoming due or compromises the s75 debt
• it reduces the amount of the employer's s75 debt which would otherwise become due and/or
• it weakens the employer covenant because:
  • it has an adverse impact on the resources of the employer
  • it has an impact on the ability of the employer to meet its ongoing funding commitments to the scheme, or an impact on those commitments and/or
  • it reduces the dividend that would be available to the scheme in the event of employer insolvency.

Please read our separate guidance on assessing and monitoring the employer covenant for more information.

19. A detrimental event will only be a type A event if it is materially detrimental to the ability of the scheme to meet its pension liabilities. Type A events can be described as ‘employer-related’ or ‘scheme-related’. Employer-related type A events are events which affect employer covenant. Scheme-related type A events affect the scope of the employer’s legal obligations to the scheme.

Employer-related type A events

20. To assess whether an employer-related event is a type A event, employers and trustees should:

• compare and contrast the pre- and post-event employer covenant and
• assess whether any weakening of the employer covenant is to such a degree that the event could be considered to be materially detrimental to the ability of the scheme to meet its liabilities.

21. It may be helpful, as part of considering whether the event is materially detrimental to the ability of the scheme to meet its liabilities, to assess whether the event has:

• materially reduced the amount of s75 debt the scheme would receive from an actual or hypothetical insolvency of the employer, and/or
• reduced the value of the employer’s resources in a way that is material relative to the scheme’s s75 debt.

However, these are just effects which could indicate that the event has been materially detrimental to the ability of the scheme to meet its pension liabilities - the concept is wider than just these two. Considerations relevant to assessing whether there has been material detriment may include:

• the degree to which the employer covenant is weakened
• the size of the employer after the event (eg the net assets of the employer or wider employer group) and
• the amount of the scheme's s75 deficit.

22. When assessing the pre- and post-event employer covenant, employers and trustees should analyse both the employer's legal obligations to the scheme (to ascertain any change) and the employer's financial position (again, to ascertain any change in the financial strength of the employer and the wider employer group).

23. To assess whether a particular event weakens the employer covenant, it is necessary to consider where the pension creditor sits in the allocation of proceeds in the event of the insolvency of the employer, and then to consider the impact of that event on the potential allocation.

24. The scheme is, by default, an unsecured creditor of the employer, but different arrangements may be agreed in any particular case (eg if the employer grants the scheme security over its assets). The priority of an unsecured creditor, with regard to the realisation of the assets of a company in the event of insolvency and when compared to other creditors, is broadly summarised below:

1. creditors with fixed charges
2. where applicable, moratorium debts and priority pre-moratorium debts
3. expenses relating to the process (eg office holder’s costs and expenses)
4. ordinary preferential creditors (eg employee claims up to the statutory prescribed amounts)
5. secondary preferential creditors (HMRC taxes deducted at source, eg PAYE, VAT)
6. the prescribed part
7. creditors with floating charges
8. unsecured creditors
9. shareholders.

25. Trustees and employers should also be conscious of the long-term nature of the employer's obligation to the pension scheme and should therefore consider the employer's future over the short, medium and longer-term.

26. Assessing the impact of a possible type A event may be a complex process for which both employers and trustees may need independent professional advice. If a type A event is due to occur, we would expect employers to pay for the trustees to obtain independent financial advice. Where trustees obtain such advice, applications are likely to progress more efficiently.

27. If trustees decide not to take independent professional advice, they should document the reasons for this decision (for example, because the cost of advice would be disproportionate to the possible detriment), as well as their views on the particular event.

Examples of employer-related events

28. Some examples of employer-related events that could be type A events include:

• a change in priority – a change in the level of security given to creditors (eg the granting or extending of a fixed charge or floating charge over assets of the employer or the wider employer group)
• an increase in debt or a reallocation of debt
• a return of capital – a reduction in the overall net assets of the employer or the wider employer group, for example:
  • dividend payments (such as special dividends)
  • share buy backs
  • distributions in specie, including de-mergers
• a change to group structure. This could include:
  • a change or partial change to the control structure of an employer. This may be accompanied by new or increased debt, which may be secured. It is also a notifiable event
  • a change to the financial strength of parties with legal obligations to provide contingent support to a scheme or an employer, (eg by guaranteeing the employer’s schedule of contributions or its s75 debt)
  • a change to the parent company or the ultimate holding company of the employer
• a change to the employer in relation to the scheme, including replacement of a participating employer
• the granting or repayment of inter-company loans, particularly where the loan is not on arm's-length terms, where it is not documented or there is no fixed repayment date, or where there is credit risk
• 'phoenix events' – an arrangement resulting in the employer re-emerging as substantially the same entity following an insolvency event (including a ‘pre-pack’ sale of the business)
• business and asset sales from the employer or the wider employer group, particularly where the transaction is not on arm's length terms, where the sale proceeds are not retained, or where the whole or a substantial part of the operating business of the employer is sold, or
• a corporate event that would reduce the ability of the wider employer group to fulfil any contractual obligations which provide support to the scheme, such as a guarantee of deficit reduction contributions or for the scheme’s buy-out deficit

29. To establish whether there is a type A event in a particular case, a comparison of the pre- and post-event employer covenant is needed. In some circumstances events listed above will not be type A. For example, a change in priority is more likely to result in a material weakening of the employer covenant if it does not relate to new borrowing. Similarly, a return of capital may be more likely to be a type A event if any of the following apply:

• it is made by an employer to the wider employer group
• it is made to an entity outside the employer’s covenant
• it is made to a party who could not be subject to a financial support direction
• it is a large or unusual return

Scheme-related type A events

Assessing a scheme-related event

30. Although a scheme-related event has a direct impact on the employer's legal obligations to a scheme, the detriment it causes cannot usually be assessed solely by reference to the employer covenant. The method for assessing whether a scheme-related event is type A will vary, depending on the specific event.

31. Employers and trustees should always consider an event both in terms of its immediate impact on the scheme and its possible impact into the future. Assessing the impact of a scheme-related event can be very complex and independent professional advice will often be appropriate.

32. Examples of scheme-related events that could be type A events include:

• compromise agreements – an agreement entered into by the trustees to compromise the employer's s75 debt and reduce the amount that will be paid to the scheme
• apportionment of a scheme's deficit – the rules of some multi-employer schemes, and any apportionment arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (the Employer Debt Regulations), may determine how the total scheme's deficit will be apportioned between employers (eg when an employer exits the scheme or when the scheme winds up). The effect of the apportionment is to modify the amount of the employer's s75 debt that would otherwise become due
• non-payment of all or any part of a s75 debt for an unreasonable period (for example, more than 12 months) and
• an arrangement that has the result of preventing a s75 debt from triggering.

Compromises

33. There are some limited circumstances in which trustees may agree to the compromise of a s75 debt due to the scheme. Any compromise will always be a type A event, irrespective of the level of the scheme's s75 deficit before or after the compromise, and we will want to understand the reasons for and the effect of the compromise.

34. Schemes for which a compromise agreement has been reached may be ineligible for entry to the PPF. For more information on eligibility, see the PPF website.

35. Trustees and employers should note that any decision to compromise the s75 debt is also a notifiable event.

Apportionment of a scheme's deficit

36. The use of an apportionment rule or an apportionment arrangement under the Employer Debt Regulations is a type A event, except where:

• it increases the s75 debt that is immediately payable by an employer who can afford the increased s75 debt or
• it is a practical option because:
  • the cost and complexity of the other alternatives (including calculation of the unmodified s75 debt or an approved withdrawal arrangement or a withdrawal arrangement) are far greater or disproportionate, or
  • the apportionment results in a s75 debt that is the scheme actuary's best estimate of the unmodified s75 debt and it is immediately payable by the departing employer, or
  • the s75 debt arises in circumstances in which there is no net reduction of employer covenant – for example on the consolidation of several employers within the employer group in certain circumstances, provided that all employer assets and their pension liabilities transfer.

37. Apportionment that does not have any of the above features will be a type A event unless the scheme is fully funded on a s75 basis after the event. Such an apportionment will also be a type A event, irrespective of whether the power to apportion under the scheme's rules is only exercisable at a party's discretion or is automatic.

38. Trustees and employers should note that any retrospective apportionment (taking place after the event which has triggered the s75 debt) is similar to compromise and is always a type A event. This is regardless of whether or not the apportionment is under a scheme apportionment arrangement. The decision to enter into a scheme apportionment arrangement retrospectively is also a notifiable event. Unless the apportionment is in accordance with the Employer Debt Regulations the trustees should consider whether it has any impact on the scheme’s eligibility for entry to the PPF.

39. When considering any apportionment, trustees should seek to understand its purpose and all of the circumstances, including any related disposals of employers, substitution of employers, or changes to the wider employer group. Trustees should be cautious about agreeing to the use of any apportionment rule or arrangement under the Employer Debt Regulations. They should also consider their fiduciary duties and the likely impact on scheme members, in addition to the statutory tests that determine whether the apportionment arrangement is possible.

40. When considering any apportionment proposals, trustees should also consider the alternative of a withdrawal arrangement or an approved withdrawal arrangement, which would result in a guarantee to the scheme of the remainder of the full amount of the departing employer's s75 debt. Read our guidance on multi-employer schemes and employer departures for more information.

41. Employers and trustees should also consider whether there is an employer-related event linked with any apportionment, or the prospect of such an event in the near future. If there is a linked employer-related event, employers and trustees should consider what is appropriate mitigation for any apportionment and employer-related event taken together.

Regulated apportionment arrangements

42. A regulated apportionment arrangement is a type A event, and we expect applicants for approval of a regulated apportionment arrangement to seek clearance.

Withdrawal arrangements and approved withdrawal arrangements

43. An approved withdrawal arrangement may have a related type A event, particularly where the guarantee under the approved withdrawal arrangement does not provide sufficient mitigation for the event in the circumstances. For example, if a departing employer is financially strong but employed a small proportion of members of the scheme, and the debt to be guaranteed under the arrangement is relatively small, then the guarantee will not sufficiently mitigate the reduction in the strength of overall employer covenant. A withdrawal arrangement can equally relate to a type A event.

44. Approved withdrawal arrangements are required under legislation to be approved by TPR. Other withdrawal arrangements do not require our approval, and we would not expect all withdrawal arrangements to come to us for a clearance statement. However, there are some circumstances where a withdrawal arrangement could be a type A event, particularly if the guarantee does not sufficiently mitigate the fact that the s75 debt is not being paid in full. This may be for a number of reasons, for example the choice of guarantor, or the agreed payment events for the guaranteed debt.

Events that are related to each other

45. Trustees and employers should note that sometimes an event can be composed of several distinct events, or several events may be related to each other. If this is the case, then, as well as assessing the overall effect of the events, trustees and employers should assess each component separately to establish whether it could be a type A event.

46. There may be both employer-related and scheme-related components to the event, for example, any apportionment before the sale of a participating employer.

47. Where there are component or related type A events, trustees and employers should consider what the appropriate mitigation is for each event. Where applicants are applying for a clearance statement for more than one type A event in relation to the same scheme, these should usually be described in one application.

Where an event is type A

48. Where the employers and trustees have identified a possible type A event, they should consider and agree the most appropriate mitigation.

Considering mitigation

49. The level and type of appropriate mitigation will vary, depending on the nature, circumstances and impact of the event and the funding level of the scheme, taking into account the scheme’s s75 deficit.

50. The appropriate mitigation should be identified for each type A event.

51. Trustees should seek appropriate independent professional advice to enable them to assess their powers and duties in relation to a type A event and ascertain what mitigation may be appropriate. This will allow an application to proceed more efficiently.

Types of mitigation

52. There are different types of possible mitigation, for example:

• additional contributions of cash or other assets
• an improvement in priority, such as granting a fixed charge or floating charge to the pension scheme creditor, alongside, or in priority to, a lender
• escrow accounts. An escrow account is an arrangement (not available in Scotland) whereby the employer (or some other person) pays funds into an account that will pass to the scheme under certain conditions, but will otherwise be returned
• standby letters of credit, guarantees or insurance. Employers may obtain these from banks or financial institutions to cover, such as contributions to the scheme and/or the s75 debt
• negative pledges. A negative pledge is a commitment by the company that something will not be done – for example, that no new security will be granted without the agreement of the trustees. A negative pledge on its own is unlikely to represent adequate mitigation for detriment to the employer covenant but may be of value as part of a package of mitigation measures
• parental and intra-group guarantees. Where there is a wider employer group, the parent company or another company within the group may guarantee the payment of contributions and / or the payment of the full s75 debt in certain circumstances. Trustees should satisfy themselves that the strength of the guarantor is appropriate and that they have sufficient visibility. If necessary, they should have controls over the ongoing strength of the guarantor and appropriate ability to call on the guarantee, and that the guarantee is valid, binding and legally enforceable, particularly where the guarantor is an overseas entity
• joint and several liability. Employers or the wider employer group can be made jointly and severally liable for the funding of, or debts due to, the scheme
• the addition of one of more statutory employer(s). Other employers, typically from the wider employer group, could be added as statutory employers to bolster covenant and share responsibility for the funding of, or debts due to, the scheme. If any employer is added to the scheme, trustees should ensure that they become statutory employers to the scheme (for more on this, read Identifying your statutory employer statement (PDF, 81KB, 12 pages )
• scheme rule changes. Making an amendment to the scheme's trust deed and rules to change the balance of powers.

53. There may be other forms of mitigation. Which type, or which combination of types, is appropriate will depend on the circumstances. Please note that some forms of mitigation will reduce future PPF levy bills. For more information on PPF rules on contingent assets, see the PPF's guidance. We do not consider arrangements for employer contributions to reduce a scheme’s funding deficit under a schedule of contributions to be mitigation.

54. Trustees and employers may agree financial thresholds for the employer that, if breached, would have to be reported to the trustees. These information rights are useful and, if set appropriately, can act as early warning signals for trustees of any deterioration or change in the employer's financial circumstances. They may either have pre-agreed consequences (such as additional employer support being provided) or their trigger may provide an early opportunity for dialogue. We would not regard information rights on their own as mitigation.

Additional considerations for scheme-related events

55. For any apportionment, employers and trustees should also consider what amount should be payable to the scheme in place of the s75 debt that would otherwise become due.

56. Trustees should be cautious about agreeing to any apportionment that is far in advance of the time a s75 debt will trigger, because it would be less likely that both the full effect of the apportionment can be properly considered and that the statutory tests that determine whether a scheme apportionment arrangement is possible could be met. Similar considerations apply to withdrawal arrangements.

57. When considering a compromise of a s75 debt, trustees should also ensure they understand the purpose of the compromise, the history of the scheme and the employer and what the dividend would be for the scheme in the event of employer insolvency. Trustees should also consider and compare the outcome for other creditors, as well as the employer's situation following the compromise. They should particularly consider whether the scheme could receive further support in the future, whether or not there is any compromise.

58. When contemplating withdrawal arrangements or approved withdrawal arrangements, trustees should consider whether the guarantee provides sufficient mitigation in all the circumstances. Relevant factors may include the payment events for the guaranteed debt, or any payment on account of this, and the choice of guarantor. A guarantee from an existing employer may provide less mitigation than a guarantee from another party who does not already have an obligation to the scheme. Trustees should consider their fiduciary duties and the likely impact on scheme members to determine whether a withdrawal arrangement would be appropriate. These are in addition to the statutory tests that determine whether a withdrawal arrangement is possible. The parties should also take care to ensure that the contents of the agreement comply with statutory requirements.

59. When assessing possible mitigation, employers and trustees should always consider both the immediate and the possible future impacts of a scheme-related event.

The role of the trustees

60. We expect trustees to be involved in any application relating to their scheme as soon as possible. We will ask them for their view of the application and to explain why they hold that view. For an application to proceed efficiently, we expect trustees to have had the opportunity to assess the impact of a type A event, to consider appropriate mitigation, and to negotiate where appropriate, taking independent professional advice where needed. We will consider the trustees' views when deciding whether to grant a clearance statement, but trustee support does not ensure it will be granted and lack of support does not ensure it will not be granted.

61. Trustees have the prime responsibility for safeguarding members' interests. Their powers and duties are set out in statute, trust and pensions law as well as in the scheme's governing documents, mostly the trust deed and rules. They must always, and in particular during the course of an application, be familiar with those powers and duties and act in accordance with them. For example, trustees may have powers that are relevant to the type A event, such as the power to set contributions and/or wind up the scheme in certain circumstances.

62. If it is in deficit on a s75 basis, the scheme is a creditor of the employer. Usually, because of the size of the deficit, it is a material creditor.

Negotiation

63. When negotiating with an employer, trustees should be guided at all times by their fiduciary duties to scheme members. Employers should take careful account of their obligation to fund scheme benefits, and employers and trustees should co-operate with each other to achieve an appropriate outcome for the scheme.

64. Trustees must ensure that they understand the nature of the employer-trustee relationship including the identity of the employers for the relevant purposes.

65. Trustees should consider whether they have the necessary negotiation skills and whether they should instruct independent professional advisers to assist them in the negotiation process.

66. Trustees should be cautious about agreeing to fetter their discretions or restrictions to their duties. For example, trustees should not generally fetter their discretions in relation to investment decisions and should not be restricted from discussing any matters with us.

67. In addition to negotiations relating to the event, employers and trustees should separately consider the impact of the event on the scheme’s funding position under Part 3 of the Act.

Confidentiality

68. Most of the information trustees receive will be confidential. Confidentiality will be particularly important when trustees receive sensitive information about scheme members or the employer, including price-sensitive information. Trustees should be able to pass all information to their appointed professional advisers, if appropriate.

69. One way of ensuring that all parties understand the importance of confidentiality is to enter into a confidentiality agreement. This agreement should ideally be reviewed and revised every time a new trustee joins the board, rather than waiting until there is some important issue which the employer may be reluctant to discuss because of confidentiality issues. The lack of a confidentiality agreement may cause delay, which would be a particular problem if quick action by trustees is required.

70. Confidentiality agreements should not restrict the trustees' duties or fetter their discretions or seek to prevent the trustees from contacting us. If trustees feel that the terms of an agreement would affect their ability to carry out their duties, they should consult their independent legal advisers and consider raising this with the employer and with us, as appropriate.

Conflicts of interest

71. Trustees, who may include directors of the employer, will often have conflicts of interest. Other conflicted trustees may include shareholders of the employer or union representatives. Conflicts will be particularly relevant when trustees are negotiating with the employer in relation to a possible detrimental event, including a type A event.

72. We would generally expect trustees to seek legal advice in cases where material conflict is identified to identify the best way to proceed.

73. We expect a trustee who has a conflict or potential conflict of interest to notify other trustees at the earliest opportunity.

74. You can ready more in the conflicts of interest module of our code of practice, and in the Trustee toolkit.

Considering clearance

75. Clearance is only appropriate for type A events and is a voluntary process. We will review the guidance in the future taking into account evidence from the market and, in particular, we intend to review it when we have sufficient experience of the impact of the changes made by the Pension Schemes Act 2021.

When there is a type A event and a clearance statement is not sought

76. If trustees become aware of an event that they believe could be type A, they should raise their concerns with the employer and other relevant parties to ensure that appropriate mitigation is being provided, and to ascertain whether an application for clearance is being considered.

77. Where an application is not being considered and the trustees are concerned that no mitigation is being offered, or that mitigation is inadequate, they should consider contacting us.

78. Where trustees believe that a criminal offence may have been, or may be, committed, they should contact us. In addition, certain occurrences relating to employers and schemes must be reported to us as notifiable events. There may be obligations on employers and/or trustees to update information if there is a material change in the event or its expected effects, or if the event is not going to, or does not, take place. For more information, see the notifiable events code of practice and notifiable events guidance on our website.

79. Where there has been a breach of the law, trustees (amongst others) are required to report the matter to us. For more information see the reporting breaches of the law section of our code of practice and complying with the duty to report breaches of the law guidance on our website. 

When a detrimental event is not a type A event

80. An application will not usually be an appropriate course of action if there is no type A event. When there is uncertainty as to whether there is a type A event, parties should take appropriate advice. Employers and trustees can contact our Events Supervision Team with a clearance enquiry (see contact details at paragraph 90 below).

81. An event that is not a type A event may still be a detrimental event, so it may still be appropriate for employers and trustees to consider the impact of that event and any appropriate mitigation.

Contacting TPR

82. While this is not required, it is our experience that applications proceed more efficiently where potential applicants for a clearance statement, and the trustees of the scheme, have engaged with us before submitting a signed application.

83. Anyone considering contacting us in connection with a possible application should note that:

• we will use any information and statements provided to us to assess an application
• we may also use that information in connection with the exercise of our wider functions, such as statistical modelling or monitoring, informing our other activities, or to facilitate the exercise of our powers, including our enforcement powers
• except for certain categories of information defined in the Act, information we obtain in the exercise of our functions is subject to protections from onward disclosure by us. However, there are some legislative gateways enabling us to share that restricted information with others as necessary or appropriate, such as responding to freedom of information requests and in some other circumstances set out in the legislation
• anyone who knowingly or recklessly provides us with false or misleading information may be liable to a criminal sanction under section 80 of the Act or a financial penalty under section 80A
• as clearance is a voluntary process, section 310(2) of the Act does not apply to any information obtained from or provided by a person in connection with a possible application. This means that any information or statements you provide to us in this context may be used in other contexts, including in connection with our enforcement powers, and can be relied on in criminal proceedings or in proceedings to impose a financial penalty
• the process of engaging with us about a possible application for a clearance statement provides no assurance about the exercise of any of our powers.

Part II applying for a clearance statement 

84. This part of the guidance provides more information on the process of applying for a clearance statement, including the type of information applicants will need to supply, the use to which that information may be put, and the timescales involved.

Who can apply

85. We will only consider applications made by those who could be subject to a contribution notice or financial support direction. This could include the employer and those connected or associated with the employer. Parties that may become an employer, or become connected or associated with an employer (eg a purchaser of the employer’s shares), may also wish to apply for a clearance statement.

86. While some corporate trustees may be connected or associated with employers, it will not usually be appropriate for any trustee to apply for a clearance statement because of the conflicts the application would create between the trustee's duties to members and the trustee's personal interests. In most cases, corporate trustees will not have any assets (other than the scheme assets), so the practical risk of contribution notices or financial support directions will be minimal. Most directors of corporate trustees and individuals will not be connected or associated with an employer as a result of their trusteeship.

87. If an applicant does not appear to be connected or associated with an employer, we may ask them to explain why they believe an application is appropriate.

88. If there are multiple applicants see paragraphs 95 to 98.

89. Any person considering providing us with information in connection with an application for clearance should read the section 'contacting TPR'.

How to apply

90. Complete an application form (DOC, 276kb, 17 pages) enclosing the associated information and documents.

Send it by email to: clearance@thepensionsregulator.gov.uk or by post to:

Events Supervision Team
REF: CLEARANCE APPLICATIONS
The Pensions Regulator
Telecom House
125-135 Preston Road
Brighton
BN1 6AF

Information and documents to be included in an application

91. Any application should include full and accurate disclosure of relevant information. Clearance statements will only be effective in relation to the contribution notice and/or financial support direction power specified in them, and the scope will be confined to the event(s) detailed in the application. Before a clearance statement is granted, the substance of the application may be revised. A clearance statement will not bind us if the circumstances giving rise to our powers to issue a contribution notice and/or a financial support direction are materially different from the circumstances described in the application.

92. The application form lists some documents that we expect to be provided in connection with every clearance application, and some other documents that only need to be provided where they are relevant. If the applicant(s) fail to provide any of the documents we expect in connection with all applications, they should explain why those documents are not relevant. Parties may wish to send confidential documents, such as legal advice and minutes of trustee meetings, directly to us.

93. Applications should only contain relevant information. Lengthy submissions will increase the time it takes us to consider an application. Extracts or summaries of documents should be provided whenever possible.

94. Documents attached to an application should be clearly indexed and referred to in the application form.

Multiple applicants

95. If there is more than one applicant, it is preferable for them to all be included on one application form. Each applicant must be clearly identified, for example by registered company name and number, and should make it clear whether they are seeking a clearance statement in relation to a contribution notice or a financial support direction or both. If there are numerous applicants, they should be listed in a separate annex to the application. The application form must be signed by, or on behalf of, each applicant.

96. Applicants should be named individually, not described only by reference to their connection or association with an employer.

97. Where one applicant is applying in relation to different or separate circumstances, a separate application form may be appropriate. Whenever possible, copies of any related application forms should be attached and referred to.

98. If there are related applications, the application process is likely to proceed more efficiently if the applicants liaise with each other. Separate applications regarding the same circumstances should refer to each other.

Regulated apportionment arrangements and type A events

99. A regulated apportionment arrangement is a type A event, so we expect an application for a clearance statement to be made at the same time.

Clearance statements requested

100. We have the power to grant clearance statements in relation to contribution notices that confirm that the applicant would not be party to an act for the purpose of the contribution notice power. However, consideration of this kind of application would require significantly more evidence and due diligence and, therefore take much longer. This is unlikely to be an appropriate use of our resources in a situation where the applicant is asserting that they have not been party to an act. It would, therefore, be more appropriate and proportionate in nearly all cases for an application to proceed for a clearance statement based on reasonableness.

101. For this reason, clearance statements and the clearance application process do not distinguish between different possible grounds for contribution notices or financial support directions. For example, it is not possible to obtain a clearance statement that only relates to the 'material detriment test', or the new ‘employer insolvency’ or ‘employer resources’ tests (see further in Appendix A).

What happens when an application is received?

102. We generally expect potential applicants to have engaged with us before submitting an application (see Considering Clearance above). Although not a legal requirement, we would expect to receive a draft application, and to have had an opportunity to provide preliminary feedback on it, before an actual application is submitted.

103. If there has been no previous engagement with us before an application is made, we will allocate a multidisciplinary team once we have received the signed application form.

104. The team will usually engage with the applicants and the trustees to seek clarification or explore the facts of the case further. We will expect the trustees to have full knowledge of the application and to have had time to consider the impact of the type A event, to have considered appropriate mitigation, and to have entered into any necessary negotiations, taking independent professional advice as required. If, exceptionally, any part of the application is confidential from the trustees, this should be made clear in the terms of the application.

105. Once we have received a signed application form with sufficient information, we will formally consider whether to grant a clearance statement. This is a statutory process.

106. If we are minded to grant a clearance statement, we will issue all directly affected parties with a 'warning notice'. This is a document that warns them that we are considering granting a clearance statement based on the facts in the application form, and either expressly assumes that the directly affected parties have a copy of the application or appends a copy of the application (and any documents that form part of the application, other than advice provided to the trustees) to the warning notice.

107. All directly affected parties will have an opportunity to provide representations on the warning notice, and the warning notice will tell them the deadline for submission of representations. Any directly affected party may make representations to us if they believe the timeframe for representations specified in the warning notice is too short. Any such representations must be received within the timeframe specified in the warning notice.

108. If we agree to extend the timeframe for representations on the warning notice as a result, we will inform all directly affected parties of this fact and of the revised deadline for representations on the warning notice. Any representations received before the stated (or revised) deadline are considered before we issue any determination to grant a clearance statement. This would be in the form of a 'determination notice' together with the clearance statement. The time allowed for representations will usually be discussed with the directly affected parties before the warning notice is issued.

109. If it appears that the trustees have not managed any conflicts of interest appropriately, have not had the opportunity to consider the application, or have not taken independent professional advice to allow them to do so, the progress of the application will be delayed.

110. Where the insolvency of the employer is likely, the PPF may be included in any discussions with the applicants and trustees.

Timescales for considering clearance applications

111. Our timescales for dealing with an application will be reduced if applicants carry out the following steps as early as possible:

• involve the trustees and share all relevant information, engaging with them at the same time as with other major stakeholders impacted by the event (eg lenders to the group)
• encourage the trustees to resolve any conflicts of interest that may arise in connection with the matters described in the application
• ensure that the applicant(s) have taken appropriate independent professional advice, and encourage the trustees to do the same
• discuss and agree mitigation proposals with the trustees
• inform us about the likely application, and provide an outline of the event and a draft of the application form
• inform us of any timescales and external deadlines, and provide an explanation of those deadlines
• liaise with any parties who are making a related application
• ensure that the applicant(s) are available to discuss the application with us, and encourage the trustees to similarly be available for discussions with us
• provide the appropriate information to support the application.

112. These steps will help us try to meet any reasonable timescales or deadlines the applicant(s) may have.

113. During the application process, the parties should inform us if there are any changes to the proposed event or external deadlines.

The effect of a clearance statement

114. A clearance statement does not relate to any other events or circumstances, before, after or at the same time as the event described in the application. For example, if we issue a contribution notice clearance statement in relation to the sale of the employer as described in the application, this will not restrict our powers to act in relation to any other events or circumstances. Using the same example, such a clearance statement would not prevent us issuing a contribution notice taking into account a return of capital that occurs after the sale of the employer, a prior apportionment of an employer's s75 debt, or security granted to lenders as part of the transaction.

115. A clearance statement does not represent approval of an event, and a failure to obtain a clearance statement does not prevent an event from proceeding.

116. Clearance should not be pursued for the purpose of settling any ongoing enforcement action. Please see our Settlement Policy for more information on our approach to settlement of regulatory and civil proceedings.

Appendix A: Contribution notices and financial support directions

Contribution notices

117. We have the power (exercised by the Determinations Panel) to issue a contribution notice to employers. This requires an amount up to and including the s75 debt which is due from the employer, or the s75 debt which might become due on the winding up of the scheme, to be paid:

• to the scheme or
• to a receiving scheme, or
• to the PPF

We may do this if we are of the opinion that a person was party to an act or deliberate failure to act (which could be a single act or failure, or a series of acts or failures) and:

• the material detriment test (see paragraph 121), the employer insolvency test (see paragraph 130), or the employer resources test (see paragraph 132) is met in relation to that act or failure, or
• the main purpose or one of the main purposes of the act or failure was:
  
  • to prevent the recovery of the whole or part of a s75 debt which was, or might become, due from the employer in relation to the scheme, or
  • to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of such a debt, which would otherwise become due. This is known as the main purpose test

118. We may issue a contribution notice to anyone who is party to the act or failure to act and who is also the employer, or a person connected or associated with the employer. This includes parties who knowingly assist in the act or failure to act. A contribution notice may be issued to one or more persons.

119. We must consider it reasonable to impose liability to pay the sum specified in a contribution notice. This will depend on the relevant circumstances, which could include:

• the degree of involvement they have in the act or failure to act - for example, did they sanction the business deal?
• the relationship they have or had with the employer. For example, is the person a director or a senior executive of the employer? Are they a company that is the parent company of the employer?
• any connection or involvement they have or had with the scheme. For example, is the person a trustee of the scheme or an employer in relation to it?
• whether the act or failure to act was a notifiable event that they had a duty to tell us about but failed to do so
• whether the act or failure to act was a notifiable event and they had a duty to update information in respect of it, but failed to do so
• all the purposes of the act or failure to act, including whether a purpose was to prevent or limit loss of employment
• their financial circumstances. For example, we may consider that it is appropriate for less than the full s75 debt to be required if contributions to another scheme would otherwise be materially affected
• the value of any benefits which, directly or indirectly, the person receives or is entitled to receive from the employer or under the scheme
• the likelihood of relevant creditors being paid and the extent to which they are likely to be paid

120. We will not consider a matter listed above if we do not think it is relevant, and will consider other matters outside this list, for example the status of the scheme, if we do think it is relevant.

121. The material detriment test is met where we are of the opinion that the act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received by or in respect of members.

122. The material detriment test can apply whether or not the benefits that had accrued in the scheme by the relevant time of the act or failure are still to be received from that scheme. However, we will disregard payments that might be received from the PPF.

123. None of the main purpose test, the material detriment test, the employer insolvency test or the employer resources test is identical to the definition of type A events in this Clearance Guidance.

124. For example, in deciding whether the material detriment test is met, we must have regard to relevant matters, which may include:

• the value of the scheme's assets and liabilities and/or any effect on those
• the scheme obligations (including a contingent or possible liability to make a payment to the scheme) of any person and/or any effect on those obligations, and/or
• the extent to which any person is likely to be able to meet their scheme obligations in any circumstances including insolvency or bankruptcy and/or any effect on this likelihood

125. We do not have to consider a matter listed above if not relevant and must consider other matters outside this list if we believe they are relevant.

126. In some circumstances the material detriment test will also relate to any 'relevant transferee scheme' to which accrued benefits are transferred.

127. We must not issue a contribution notice on the grounds of the material detriment test if we are satisfied that the person has shown that they meet the statutory defence. The statutory defence to the material detriment test is met where the following conditions are present:

• before becoming party to an act or failure, they gave due consideration to the extent to which there may be a resulting material detriment to the likelihood that members would receive their accrued benefits
• where they considered there to be a potential detriment, they have taken all reasonable steps to eliminate or minimise the potential detrimental effects that the act or failure might have on the likelihood that the members would receive their accrued benefits, and
• at the time of the act or failure, and having regard to all the relevant circumstances prevailing at that time and performing reasonably diligent investigations, they could reasonably conclude that the act or failure would not detrimentally affect in a material way the likelihood of members receiving their accrued benefits.

128. We expect that the sorts of due diligence and discussions with trustees that are already undertaken by responsible employers would in many cases satisfy us that the person can raise a statutory defence to the material detriment test.

129. Our Code of practice No. 12 Circumstances in relation to the material detriment test, the employer insolvency test and the employer resources test describes the circumstances where we expect that one or more of the material detriment test, the employer insolvency test and the employer resources test will be met.

130. The employer insolvency test is met where we are of the opinion that the act or failure would have materially reduced the amount of the s75 debt likely to be recovered by the scheme if a s75 debt had fallen due from the employer at that time.

131. We must not issue a contribution notice on the grounds of the employer insolvency test if we are satisfied that the person has shown that they meet the statutory defence. The statutory defence to the employer insolvency test is met where the following conditions are present:

• before becoming party to an act or failure, the person gave due consideration to the extent to which, if a s75 debt were to fall due from the employer to the scheme, the act or failure might materially reduce the amount of the debt likely to be recovered by the scheme
• where, as a result of considering that the act or failure might have such an effect, the person took all reasonable steps to eliminate or minimise the potential for it to happen, and
• at the time of the act or failure, and having regard to all the relevant circumstances and performing reasonably diligent investigations, they could reasonably conclude that the act or failure would not materially reduce the amount of the s75 debt likely to be recovered by the scheme.

132. The employer resources test is met where we are of the opinion that (a) the scheme is in deficit on a s75 basis, and (b) the act or failure reduced the value of the employer’s resources and that reduction was a material reduction relative to the scheme’s estimated s75 deficit.

133. We must not issue a contribution notice on the grounds of the employer resources test if we are satisfied that the person has shown that they meet the statutory defence. The statutory defence to the employer resources test is met where the following conditions are present:

• before becoming party to an act or failure, the person gave due consideration to the extent to which the act or failure might reduce the amount of the resources of the employer relative to the scheme’s estimated s75 deficit
• where as a result of considering that the act or failure might have such an effect, they took all reasonable steps to eliminate or minimise the potential for it to happen, and
• at the time of the act or failure, and having regard to all the relevant circumstances and performing reasonably diligent investigations, they could reasonably conclude that the act or failure would not bring about a reduction in the value of the resources of the employer that would be a material reduction relative to the scheme’s estimated s75 deficit.

134. We can issue a warning notice in respect of a contribution notice up to six years after an act occurred, or up to six years after a failure to act first occurred or continued.

Financial support directions

135. We can issue a financial support direction, requiring financial arrangements to be put in place to support a scheme, when the employer is a service company or is insufficiently resourced at the relevant time. There is no requirement for there to have been an act or failure to act. The 'relevant time' is a time determined by us which falls within the period of 24 months ending with the issue of a warning notice in respect of a financial support direction.

136. A financial support direction can be issued to the employer or persons connected or associated with the employer. A financial support direction cannot normally be issued to an individual, except in specific circumstances.

137. Once we have issued a financial support direction, those named in it must put forward proposals for financial support for the scheme (or receiving scheme). If we consider these arrangements to be reasonable in the circumstances, we may issue a notice approving the arrangements.

138. The financial support arrangements which could be put in place under a financial support direction may include, but are not limited to:

• where an employer is part of a group, all members of the group becoming jointly and severally liable for the pension liabilities in relation to the scheme
• the holding company within the group becoming liable for the pension liabilities in relation to the scheme
• an arrangement whereby additional financial resources are provided to the scheme.

139. The employer is a service company if:

• it is a member of a group of companies and
• its turnover in the latest available statutory accounts is solely or principally derived from amounts charged for providing the services of its employees to other members of the group.

140. The employer is insufficiently resourced if at the relevant time:

• the value of its resources is less than 50 per cent of the estimated s75 debt and
• the value of the resources of one or more persons connected or associated with the employer, when added to those of the employer, would be 50 per cent or more of the estimated s75 debt.

141. Assessing someone’s resources is a complex process. The Pensions Regulator (Financial Support Directions etc) Regulations 2005 prescribe how to determine what constitutes a person’s resources and how to determine, calculate and verify their value.

142. We must consider that it is reasonable to impose the requirements of a financial support direction. This may depend on various matters, examples of which are outlined below:

• the relationship the person has or had with the employer. For example, is it a company that is the parent company of the employer?
• the benefits they have received directly or indirectly from the employer. For example, have they received assets or dividends from the employer, or shared common security or cash flow arrangements or gained tax advantages?
• any connection or involvement they have or had with the scheme. For example, were they a trustee of the scheme or an employer in relation to it?
• their financial circumstances.

143. We do not have to consider a matter listed above if we do not think it is relevant, and will consider other matters outside this list, for example the status of the scheme, if we think such matters are relevant.

Appendix B: Definitions

The following terms, which are in bold in the text, are defined below.

• Act: means the Pensions Act 2004 (as amended).
• Applicant: means those seeking a clearance statement as an applicant named in the application.
• Application: is an application made for a clearance statement under:
  • s42 of the Act in respect of our power to issue a contribution notice, or
  • s46 of the Act in respect of our power to issue a financial support direction.
• Approved withdrawal arrangement: is an approved withdrawal arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended), which requires our approval.
• Assessment period: is the period after a qualifying insolvency event has occurred in relation to an employer of an eligible scheme, during which the PPF will assess whether or not it must assume responsibility for the scheme. See s132 of the Act.
• Associated: has the same meaning as in s435 of the Insolvency Act 1986 (as amended).
• Clearance: is a term used to describe the voluntary process of obtaining a clearance statement from TPR.
• Clearance statement: is statement that, in our opinion and in the circumstances described in the application, it would not be reasonable to impose on the applicants any liability under a contribution notice and/or a financial support direction, in relation to a scheme and a particular event. The form of the clearance statement will depend upon whether it is sought in respect of a contribution notice, a financial support direction or both.
• Connected: has the same meaning as in s249 of the Insolvency Act 1986.
• Contribution notice: a notice stating that the person is liable to pay the sum specified in the notice to the trustees or managers of the scheme (or a receiving scheme) or to the Board of the PPF. The term has the same meaning as in s38 of the Act.
• Directly affected party: is any person we consider directly affected by the regulatory action under consideration.
• Employer: an employer of persons in the description of employment to which the scheme in question relates for the purposes of the contribution notices and financial support directions as defined by s318(1) of the Act and as may be extended under s318(4) of the Act. In the case of a multi-employer scheme, where this guidance refers to the 'employer', this should be taken to include all employers.
• Employer covenant: is the extent of the employer's legal obligation and financial ability to support the scheme now and in the future.
• Employer’s resources: means the resources of the employer as described in The Pensions Regulator (Employer Resources Test) Regulations 2021.
• Event: includes transactions, agreements, decisions, other acts and failures to act.
• Financial support direction: a direction which requires the person to whom it is issued to secure that financial support is put in place for the scheme (or a receiving scheme), as more fully described in s43 of the Act.
• Fixed charge: is a charge either over ascertainable and defined assets or assets capable of being ascertained and defined that prevents those assets from being dealt with free from the charge without the consent of the chargee.
• Floating charge: is a charge over a class of present or future assets that allows those assets to be dealt with in the usual course of business until it becomes a fixed charge or crystallises upon the occurrence of an event or satisfaction of a condition.
• Insufficiently resourced: has the same meaning as in s44 of the Act.
• Material detriment test: one of the grounds for contribution notices.
• Notifiable events: are events in respect of either a PPF eligible scheme or its employer which must be reported to us in accordance with s69 of the Act.
• Person: may be an individual, a company, or a partnership, including a limited liability partnership. Its application will depend upon the context.
• Receiving scheme: is a work-based scheme that receives a transfer of liabilities from the initial scheme in relation to which the contribution notice or financial support direction conditions were met, in accordance with sections 39A, 39B, 43A and 43B of the Act. A work-based scheme is an occupational pension scheme, a personal pension scheme where direct payment arrangements exist in respect of one or more members of the scheme who are employees, or a stakeholder pension scheme.
• Regulated apportionment arrangement: is a regulated apportionment arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended), which requires our approval.
• Scheme: is, for the purpose of contribution notices and financial support directions, an occupational pension scheme, but does not include a scheme that only provides money purchase benefits or is exempt from contribution notices and financial support directions as prescribed under s38(1)(b) and s43(1)(b) of the Act respectively. Other statutory definitions apply as the context requires.
• Scheme apportionment arrangement: is a scheme apportionment arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended), which does not require our approval.
• Scheme-related event: is an event in respect of the scheme.
• s75 basis: refers to s75 of the Pensions Act 1995 and it is often known as the buy-out basis. S75 requires the scheme actuary to estimate the amount needed to secure the scheme's liabilities with annuities purchased from a regulated insurance company.
• s75 debt: is the debt (including a contingent debt) owed by the employer to the trustees of the scheme and calculated in accordance with the s75 basis, including the whole or part of any such debt and debts that are, or might become, due (as the context requires).
• s75 deficit: refers to a scheme’s deficit as calculated on the s75 basis.
• Service company: has the same meaning as in s44 of the Act.
• Type A event: is any event that is materially detrimental to the ability of the scheme to meet its pension liabilities.
• Wider employer group: consists of any person who is connected to or associated with the employer.
• Withdrawal arrangement: is a withdrawal arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (as amended) which does not require our approval.

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