Backstops and gateways

While all the talk at Westminster over the past few weeks has been about "legal backstops", judging from the consultation on DB consolidation, the talk at Caxton House has clearly been about "regulatory gateways". Whilst the constitutional significance of these two legal mechanisms cannot be compared, there are a few striking similarities worth drawing out:

1. Both attempt to square a circle and to keep everyone happy - the backstop is designed to enable the UK to leave the EU whilst avoiding a hard border on the island of Ireland; the gateway is designed to enable the emergence of DB consolidation whilst not undermining the existing buy-out market.
2. A key criticism of the back-stop is that it could go on indefinitely; the gateway could also see some schemes trapped indefinitely, with schemes that could buy-out within five years prevented from transferring to a consolidator. But what if five years passes and those schemes are not in a position to buy-out, but may be in a position to do so within the next five years?
3. As with the backstop it is far from clear how the gateway will work. For example, how likely does it need to be that a scheme will be able to afford to buy-out? To what extent should a sponsor's willingness to fund to buy-out be taken into account? And is the cash injection that is available to secure consolidation a relevant factor for trustees in assessing the feasibility of a buy-out or not?

Although the legitimacy of the aims of the gateway, like the backstop, cannot be denied, it seems likely that there will be calls for it to be softened to ensure that it is workable. Five years is a very long time in politics and it is also a long time over which to assess with any certainty whether a scheme will be in a position to afford to buy-out. A time horizon of 12 months or, at most, 3 years would be much more meaningful.

And for those seeking reassurances that the gateway will not be abused, comfort can be drawn from the fact that, regardless of the gateway, trustees will still need to determine the most appropriate end game for their scheme with their members' best interests in mind. As the DWP's consultation paper makes clear, an insured buy-out will continue to offer the greatest certainty that members' benefits will be paid. For this reason alone, where buy-out is achievable, it will remain the ultimate exit strategy.