DWP consults on draft regulations for notifiable events regime
Published on 7th Oct 2021
Proposed draft changes to DB pension scheme notifiable events regime to include business transfers and issuing security over assets
The Department for Work and Pensions (DWP) has issued the draft Pensions Regulator (Notifiable Events) (Amendment) Regulations 2021 for consultation until 27 October 2021. These introduce two new notifiable events which need to be notified to the Pensions Regulator (tPR) by employers of defined benefit (DB) pension schemes eligible for the Pension Protection Fund (PPF) (an "eligible scheme") together with some additional notification requirements later in the process. As a result of these changes, the notifiable events regime will become a two stage notification process for certain events.
These changes are expected to come into force from April 2022.
Section 69 of the Pensions Act 2004 requires trustees and employers of eligible schemes to notify tPR of prescribed events set out in The Pensions Regulator (Notifiable Events) Regulations 2005. This regime is intended to give tPR advance warning of events impacting on tPR's objectives of reducing the risk of compensation being payable from the PPF, and safeguarding members' benefits.
The draft regulations make amendments to the 2005 regulations following the government's response to its 2018 consultation "Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator".
Changes to notifiable events
The draft regulations introduce two new notifiable events (both notifiable by the employer):
(1) a decision in principle by the employer to sell a material proportion of its business or assets; and
(2) a decision in principle by the employer to grant or extend a relevant security over its assets, where that would result in the secured creditor being ranked above the scheme in the order of priority.
The existing requirement to notify wrongful trading has been deleted – part of the reason is because tPR has never received such a notification.
The existing notifiable event requiring employers to notify tPR of a decision by a controlling company to relinquish control of an employer has been deleted and replaced by a requirement to notify:
(1) a decision in principle by a controlling company to relinquish control of an employer company; and
(2) an offer to acquire control of an employer company, where the employer company has not made a decision in principle to relinquish that control.
Business or asset sales
In terms of the new duty to notify the sale of business or assets, the rationale behind this is that these transactions can be significant because they frequently indicate a change in covenant support for an eligible scheme.
The 2018 consultation applied a 20% threshold which was intended to apply to employers responsible for 20% or more of the scheme’s funding. However, tPR's view was that this would have been overly complicated for employers and trustees to assess in practice, and this has been replaced by a duty to notify the sale of a "material proportion" of an employer's business or assets. Broadly speaking, a material proportion is currently defined as more than 25% of annual revenue, while a material proportion of assets is more than 25% of the gross value of an employer's assets, in both cases, either on their own or cumulatively with other business or assets sales in the past 12 months, and as recorded in company accounts or records. The definition of asset has been drafted to specifically exclude "money".
Granting or extending security
The draft definition of "relevant security" includes security granted or issued by (i) the employer or (ii) one or more of its subsidiaries comprising more than 25% of either the employer's consolidated revenue or its gross assets. It includes fixed or floating charges of the employer or wider employer group, and an "all assets" floating charge giving the charge holder the right to appoint an administrator. It does not include security for specific chattels, financing for company vehicles or refinancing of existing debt except where this entails the granting of fixed or floating charges.
Decision in principle
Both of the new notifiable events and the updated notifiable event concerning relinquishing control must be notified to tPR by the employer when the employer has made a decision in principle. This is defined as "a decision prior to any negotiations or agreements being entered into with another party".
Additional notification requirements
The 2021 Act also introduces a new section 69A into the 2004 Act which requires "relevant persons" to give advance notices and statements to tPR setting out the implications for the pension scheme of certain corporate events relating to the employer, including how any risks will be mitigated. These new requirements apply only to the following three events (that is, the two new notifiable events and the updated existing notifiable event as described above) where they are intended, and the main terms, have been proposed:
(1) Sale by the employer of a material proportion of its business or assets;
(2) Granting or extending of a relevant security by the employer over its assets, where that would result in the secured creditor being ranked above the scheme in the order of priority; and
(3) The relinquishing of control by a controlling company of the employer company (or in the absence of any intention or main terms where the controlling company relinquishes such control without a decision to do so having been taken).
The statement accompanying the notice requires details of the event and the main terms proposed, any adverse effects on the pension scheme or the employer's ability to meet its legal obligations to support the scheme, any steps taken to mitigate any adverse effects, and any communications with the trustees. Effectively, this means that additional notices and statements will required to be notified following notification at the decision in principle stage when transactions are more advanced.
A copy of the notice and statement must be given to the trustees at the same time, and there is also a requirement to notify of any material change in the event or any mitigation. The need to provide advance notice to the trustees represents a significant change to the existing notifiable events regime, where currently notification only needs be given to tPR.
Osborne Clarke comment
In addition to introducing two new notifiable events, the draft regulations introduce a new two stage notification process for three of the notifiable events within the notifiable events regime, first when a decision in principle has been made, and secondly when the events become intended and the main terms have been proposed. We anticipate that it might prove tricky in practice for employers to establish when a decision in principle has been made, given that this is defined as a decision "prior to any negotiations".
Likewise, it may be difficult to establish what is meant by "main terms have been proposed" for the purposes of the second stage. If introduced as currently drafted, these new obligations will require a greater level of advance scrutiny by tPR and trustees of corporate transactions affecting defined benefit pension schemes, and much earlier in the process, which is of course their aim. For example, employers will now be required to notify tPR of the receipt of an offer to acquire a pension scheme employer. The consultation closes on 27 October 2021, and the changes to the notifiable events regime are expected to come into force in April 2022.