A stronger Pensions Regulator: the government responds
Published on 20th Feb 2019
In July 2018 we reported that, following the publication of the white paper "Protecting Defined Benefit Pension Schemes" in March 2018, the Department for Work and Pensions had published a consultation paper in respect of proposed new powers for the Pensions Regulator (TPR). The government has now published its response to that consultation.
In this insight, we look at which of the proposals the government has decided to take forward and which it has decided not to take forward at this time.
Proposals the government is going to take forward
Corporate transactions and events
To improve TPR's and scheme trustees' ability to monitor corporate transactions and events, and engage with employers where appropriate, the government intends to:
- Introduce two new employer-related notifiable events: i) the sale of a material proportion of the business or assets of an employer where the employer has funding responsibility for at least 20% of a scheme's liabilities; and ii) granting security on a debt so that, in the event of employer insolvency, it would have priority over the debt owed to the pension scheme.
- Remove the existing notifiable event of "wrongful trading of the sponsoring employer"; because it is extremely unlikely that an employer will self-report wrongful trading.
- Require an employer to prepare a 'Declaration of Intent' in respect of certain transactions, namely: i) the sale of a controlling interest in an employer; ii) the sale of a material proportion of the business or assets of an employer where the employer has funding responsibility for at least 20% of the scheme's liabilities; or iii) the granting of security on a debt to give it priority over the debt to the pension scheme.
The 'Declaration of Intent' will be made by the 'corporate transaction planner', which is likely to include the employer or parent company. The content and timing are still being considered but, as a starting point, the declaration is likely to need to include: an explanation of the transaction; confirmation that the pension scheme trustees have been consulted; and an explanation of how any detriment to the pension scheme will be mitigated. It will need to be shared with the scheme trustees and TPR.
To improve TPR's powers and deter and punish "reckless behaviour" towards defined benefit pension schemes, the government intends to:
- Introduce two new criminal offences, being: i) wilful or reckless behaviour in relation to a pension scheme (which, in addition to the potential civil penalty mentioned below, will be punishable by up to seven years' imprisonment and/or unlimited fines); and ii) failure to comply with a contribution notice (which, in addition to the civil penalty mentioned below, will be punishable by unlimited fines).
- Give TPR the power to issue civil penalties of up to £1 million for serious breaches of the law or non-compliance, to apply to: i) wilful or reckless behaviour in relation to a pension scheme; ii) failure to comply with a contribution notice; iii) failure to comply with a financial support direction; iv) failure to comply with the notifiable events framework; v) failure to comply with the 'Declaration of Intent' requirements; or vi) knowingly or recklessly providing false information to trustees or to TPR.
Some of these penalties (for example, failure to comply with the notifiable events framework) will also apply to trustees.
To strengthen, clarify and improve TPR's anti-avoidance powers, the government intends to make changes to the contribution notice regime. It intends to:
- Make changes to the legal tests for a contribution notice.
- Continue to consider whether an 'uprating' mechanism should be introduced to allow for the value of a contribution notice to increase to take account the period of time between an event and the decision to issue a contribution notice.
- Change the cap calculation date, to apply a date which is closer to the final determination.
The government is also going to make changes to the Financial Support Direction regime. It will:
- Work with TPR and the Pension Protection Fund to change the FSD procedure to a single-stage process, where a specific type or amount of financial support is immediately imposed on a target, instead of the target being asked to put forward a support proposal.
- Extend the scope of the FSD regime to catch individuals who are controlling shareholders of the sponsoring employer (but not to catch directors).
- "Broaden the targets of FSD enforcement activity to ensure that pension obligations are met".
- Make changes to the legal tests for a FSD (specifically, replace the 'insufficiently resourced' test with a test which will be scheme-focused, and amend the definition of 'service company').
- Tighten up the forms of financial support the target of an FSD is required to provide to cash and/or joint and several liability, whereby the targets are "jointly and severally liable for the sponsoring employer's liabilities in relation to their pension scheme".
- Change the name of the regime to the "Financial Support Notice" regime.
Information gathering powers
To broaden and harmonise TPR's information gathering powers, the government intends to:
- Give TPR a stand-alone interview power where a formal request for information is made.
- Expand TPR's powers to inspect premises.
- Introduce fixed and escalating civil penalties for failure to comply, or delay in complying with, information (including interview) requests.
Proposals the government has decided not to take forward
For the time being, the government is not going to:
- Introduce three proposed new employer-related notifiable events, being: a significant restructuring of the employer's board of directors or a specified senior management appointment; a sponsoring employer taking independent pre-appointment insolvency or restructuring advice; or the payment of large dividends.
- Extend the existing notifiable event of 'breach of banking covenant' to include covenant deferral, amendment or waiver.
- Make some notifiable events reportable at an earlier stage (although this is being considered further).
- Give TPR the power to issue a FSD after a pension scheme has gone into the Pension Protection Fund.
- Change the 'reasonableness' test for FSDs to make it clear that a target's actions in creating or increasing risk would be a relevant factor.
- Extend the two year 'lookback' period for FSDs (although this is being considered further).
Changes to TPR's regulatory guidance
The consultation response confirms that, in connection with the changes discussed above, TPR will:
- Consult on a revised Notifiable Events Code of Practice, and update related guidance. As a part of this, TPR will include guidance on the new 'Declaration of Intent' requirement.
- Update its clearance guidance, for example to provide more information about the material detriment test and more information about the clearance process.
Osborne Clarke comment
Most of the changes confirmed in the consultation response will need legislation before they become law, and at least some of that legislation will, itself, need to be consulted upon. The consultation response says that the government will "bring forward legislation as soon as Parliamentary time allows". However, perhaps not surprisingly in the light of Brexit, it does not give firm timeframe for this or for the related changes to TPR's regulatory guidance. This said, the response does give a clear indication of the changes that are likely to be made. As such, it could start to influence TPR's responses and behaviour.
Trustees, employers and others involved in corporate changes should carefully consider the government's response and start to take the proposed changes into account when planning or considering any corporate change.