Question – What about the Hanson case ?

CC – Hanson Trust plc (Lord Hanson’s conglomerate), historically invested pension fund assets in Hanson group securities and used the pension scheme as a corporate finance instrument to support acquisitions and group balance sheet strategy.

This occurred before the Pensions Act 1995, when there was no statutory 5% Employer-Related Investment (ERI) limit.

The Hanson example is frequently cited by regulators and historians as one of the pre-Maxwell governance weaknesses that illustrated why schemes needed strict limits on employer-related assets.

It wasn’t a fraud like Maxwell — but it showed how a strong sponsor could pressure trustees or influence the use of scheme assets for corporate purposes.

Along with the Maxwell scandal (1991), Hanson is often cited as part of the cultural and governance backdrop that justified:

• Trustee empowerment
• Investment independence
• The 5% ERI cap in the Pensions Act 1995

The Hanson case was not misconduct per se — it was aggressive corporate finance behaviour in a regulatory vacuum. It demonstrated the risk that corporate sponsors could treat pension assets as captive capital.

 

The proposal doesn’t remove that cap — it preserves the discipline, keeps trustees fully in control, and applies only to low-dependency surplus schemes.
This is not a return to pre-1995 practices — it’s a modern, prudential, trustee-led use of surplus

Concern –  Single exposure concentration risk & double jeopardy concern

CC – Both questions addressed in the presentation but worth re-addressing. I agree concentration and sponsor correlation deserve attention — those risks are exactly why the 5% ERI cap exists, and why this proposal does not remove it.

What we are suggesting applies only to schemes already in low-dependency surplus, where member benefits are effectively insulated. At that point, the question isn’t ‘should trustees take risk,’ it’s ‘should trustees have the option to deploy a portion of surplus productively rather than extract it and permanently reduce scheme assets.’

And unlike extraction, which removes capital irreversibly, mobilisation keeps assets inside the trust and can be stopped or unwound if covenant conditions change. So in risk terms it is actually the more reversible, more prudent path.

Moreover, arguably depending on the instrument used and the productive use that the mobilized funds inside the perimeter are used for, the sponsor covenant is strengthened and the double jeopardy risk reduces.

On concentration, it’s worth noting that sophisticated investors tolerate concentration where fundamentals are strong — the S&P 500 today has its top 10 stocks representing almost 30% of the index. The issue isn’t raw percentage; it’s governance, monitoring, and financial strength.

Here, trustees retain absolute discretion, fiduciary duties remain unchanged, and the 10% is a ceiling, not a target — in practice you’d expect schemes to sit around 5–7%. So this is not weakening discipline, it’s giving well-funded schemes another managed, reversible tool alongside extraction, not instead of it.

 

Concern – Trustees don’t have the skills / can’t assess sponsor securities

CC – Trustees already have to understand and monitor the sponsoring employer — that’s why covenant reviews exist, and why we have a whole advisory ecosystem supporting them.

The one exposure trustees are already required by law to understand, document, and actively monitor is the sponsoring employer.

This proposal does not introduce an alien risk or skill requirement — it simply gives trustees, in strong surplus situations, the option to make a related investment decision using knowledge and understanding they already have, supported by the same covenant advisers who exist today.

If the securities are part of a broader market issuance, trustees also benefit from public market discipline, price discovery, and liquidity.

If they are private, trustees rely — as they already do — on professional covenant advisers, investment advisers, and independent valuation frameworks.

In other words, this isn’t expanding trustees’ responsibilities. It’s aligning investment discretion with obligations and expertise they already posses

 

Concern – Pricing will be hard to agree / sponsors can borrow elsewhere cheaper”

CC – In some cases, sponsors will indeed access cheaper capital — and in those cases mobilization will not be used. That is exactly how it should work.

This is not a subsidy — it is a market-tested option. If trustees require a return premium that is above what the market demands, sponsors will raise capital elsewhere.

But in other situations — for example long-term strategic investment, patient growth capital, energy transition, or refinancing of non-bank liabilities — the pension scheme can offer long-dated, stable, relationship-aligned capital that markets may not price efficiently.

In those circumstances, a mutually acceptable price will emerge, and both parties benefit.

Pricing discipline is not a flaw — it is the safeguard. Mobilization only happens when the economics make sense for the members and the sponsor.

Concern – Schemes in payout mode can’t be patient capital”

CC – It’s true that many DB schemes are cashflow-negative and increasingly in payout mode — and that is precisely why this proposal does not prescribe private-equity-style risk capital.

Mobilisation is instrument-agnostic. Trustees select the instrument that suits their liquidity profile — for example, secured loan notes, amortising credit, or redeemable preference shares. These are income-producing, cash-flow aligned assets that can sit alongside gilts and high-quality credit.

If a scheme is buying gilts at 4% and the sponsor can issue a secured note at 5%, the question becomes:

Is it better for members to take a 1% uplift on a secured instrument from a sponsor they already monitor — or to leave surplus in gilts and forgo that return?

In other words, mobilisation is not about forcing schemes into illiquidity or venture risk — it’s about allowing low-dependency surplus to earn a prudent premium, fully collateralised if the trustees wish, while keeping assets inside the trust.

The liquidity and duration of the instrument are entirely in trustee control. This can be structured as patient capital where appropriate, or as secure income-generating credit where liquidity matters.

And again, there is no obligation — if a scheme cannot support duration or liquidity, it simply does not participate. And on the opposite side, if what Trustees are comfortable to consider is not meeting the requirements of the sponsor, there is no obligation on either side.

 

Concern – Massive legislation would be required to do this”

CC – I don’t believe this requires wholesale legislative change.

The existing ERI regime stays in place — the 5% limit continues to apply system-wide. What we are proposing is a targeted extension of headroom for schemes that are already in demonstrable low-dependency surplus.

Technically, this is an adjustment to existing ERI rules, not a dismantling of them. The structure, fiduciary duties, and oversight framework remain intact.

In many respects this is less about rewriting legislation and more about updating trustee mindset. Trustees already have the tools, the fiduciary discipline, and the advisory support to assess sponsor-linked exposure — they do it today through covenant monitoring, long-term funding decisions, and risk management frameworks.

This simply gives them an optional lever to support members by earning a prudent premium on surplus capital, rather than extracting it and permanently reducing the investment base.

So the question isn’t ‘can trustees do this?’ — it is ‘should trustees be allowed the choice to use surplus responsibly while keeping assets inside the trust?’

The regulatory scaffolding already exists; what evolves here is trustee discretion, confidence, and cultural comfort, not the statute book

 

Concern – Surely this would need major legislative change”

CC – I don’t believe this requires wholesale legislative reform.

The scaffolding already exists in law — the ERI rules, trustee fiduciary duties, covenant oversight, advice requirements, prudent-person principles, and the low-dependency framework are all in place.

We are not dismantling ERI or rewriting trust law. We are simply creating targeted headroom within an existing regime for schemes already in low-dependency surplus.

In fact, the fact that most schemes do not currently use their ERI allowance is evidence that trustees already operate very conservatively by choice. The law doesn’t stop them — culture and prudence do.

So what’s needed here is not a new governance structure but a mindset evolution: giving trustees the confidence that where the scheme is in demonstrable surplus and governance is strong, they may — not must — consider a modest, incremental ERI exposure, potentially secured, if it benefits members.

The controls are already there; the behaviour is already disciplined. This is not deregulation — it’s a modern extension of an existing framework, used only when trustees judge it is right for members.

We are very grateful for the trustees who debated at the Pension PlayPen, especially Christos Christou who led the debate.