A step closer to ring-fencing of banking activities?

The Government has taken some tentative steps towards ensuring ring-fenced banks cannot become liable for the pension schemes of other entities.

Last week, HM Treasury published its response to the recent banking pension's consultation. The Government's response suggests further regulatory requirements are in store for advisers as they will be required to assess whether a change to a pension scheme could be materially detrimental to the members of the scheme. 

In July 2014 HM Treasury published a consultation paper inviting responses on draft banking pensions regulations (the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015). The draft regulations sought to minimise ring fenced banks' exposure to the potential threat of additional liabilities if another group member suffered a loss. The final version of the regulations were put before Parliament on 21 January 2015, however the provisions are not intended to come into effect until 2026.

On 17 February 2015 the Government published their response to the key issues raised by respondents to the consultation as follows:

• The Clearance Process

The draft regulations required banks to apply to the Pension Regulator for a Clearance Statement for any changes they would make as part of the ring-fencing process. The Government has accepted that it would become overly burdensome for clearance to have to be obtained even if minor changes were to be made. The draft regulations have been amended to include a "materiality threshold" whereby banks would only be required to seek clearance if a change to the pension scheme could be materially detrimental to the scheme and its members.

• The requirement to provide information

The Draft Regulations made it mandatory for trustees of pension schemes to provide information to their members if any changes that related to the ring fencing process were to be made. Respondents identified that this requirement was unnecessary because trustees are already required to inform members of changes to the scheme. The Government has removed the information requirements altogether.

• Transitional tax protection for employees

Respondents to the consultation raised the issue that the current draft regulations mean that individual employees with transitional tax protections could be put at a disadvantage by the process of restructuring pension schemes. For example, those employees with a protected pension age, protected lump sum rights, or lifetime allowance could be disadvantaged under the draft regulations.

The Government accepted that this issue raised by respondents should not be overlooked and indicated they remain committed to addressing any transitional tax protection issues, however it was decided that that given the uncertainty of this topic the draft regulations will not be amended to seek to address this issue.

• Shared Liability arrangements

The Government recognised that some respondents to the consultation felt that the requirement for ring-fenced banks to use their "best endeavours" to obtain release from shared liabilities with overseas entities was too stringent.

The Government has stood by the draft regulations wording as it was thought to obtain release from a shared liability arrangement would weaken banks' responsibilities. The Government noted that if a genuinely unforeseen liability arose the PRA retains power not to penalise banks.

• Amendments to the court process

The draft regulations include a power for banks to apply to the Court to order changes to a pension scheme in cases where an agreement with the trustees cannot be achieved. Some trustees raised the concern that this regulation would provide banks with unnecessary power and that trustees should be provided with the same rights.

The Government's response is that this regulation is necessary to provide banks with the power to achieve implementation of the ring-fencing and to avoid a deadlock if the trustees are considered as acting unreasonably in the Court's eyes.

The consultation has prompted the Government to make two significant amendments to the regulations, the inclusion of a materiality threshold and the removal of reporting requirements on trustees.

It is arguable that the introduction of the ring-fencing requirements will create greater complexity for advisers as they will have to make an assessment of the likelihood of whether the Regulator would consider a change to the pension scheme could be materially detrimental to the scheme and its members. It is to be hoped that HM Treasury provide further practical guidance on the issue of the "materiality threshold" as at present it is unclear as to what would amount to making a change that could be "materially detrimental" to the members of a pension scheme.

It will also be interesting to see whether the Government's professed commitment to addressing the transitional tax protection issue raised in responses to the consultation in fact materialises.