A stronger Pensions Regulator: the Government’s responsePrint publication
The Government made clear, in its March 2018 Pensions White Paper, it is committed to ensuring the Pensions Regulator (Regulator) has the right powers to be able to protect effectively defined benefit pension schemes. On 11 February 2019 the Government published its response to its June 2018 consultation on strengthening the Regulator’s powers in relation to corporate activity. This Insight looks at the Government’s response.
Scrutiny of corporate transactions
The Government has confirmed it will expand the number of corporate events which must be notified to the Regulator. This increased notification will increase the Regulator’s ability to monitor relevant corporate transactions and events, and engage much earlier with employers where appropriate.
Notifiable events regime
The range of events relating to the employer, which must be notified to the Regulator, will be broadened to include:
- sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities,
- granting of security on any debt to give it priority over debt to the scheme (this would not include the granting of security for specific chattels financing).
The Government has stated that it is crucial these new events are clearly defined. The Government will work with the Regulator to do just that. There will be further a consultation on the draft regulations as well a revised Regulator Code of Practice.
Currently, notifiable events must be notified as soon as reasonably practicable after they have occurred. The consultation suggested that earlier notification would be beneficial in certain circumstances. The Government’s response makes it clear that it continues to believe earlier notification is desirable and will work with the Regulator and the industry as to how best achieve this.
The consultation had suggested that failing to notify a prescribed corporate event should be a criminal offence. The Government’s response provides that failure to comply will result in a civil penalty of up to £1m rather a possible criminal prosecution.
Declaration of intent
The Government has confirmed it will introduce the declaration of intent regime to sit alongside the notifiable events regime. “Corporate planners” (which include, but are not restricted to, the sponsoring employer or parent company) will be required to prepare a declaration of intent, addressed to the scheme’s trustees and the Regulator, which will set out the nature of the proposed transaction and the implications of the transaction for the pension scheme.
Transactions which would require a declaration of intent are:
- sale of a controlling interest in a scheme employer
- sale of a business or assets of a scheme employer, and
- granting of any security in priority to scheme debt.
At present the Government is not proposing to legislate specifying the timing when a declaration of intent must be sent to the trustees and the Regulator. The Government accepts that there may be concerns over transaction confidentiality and commercial sensitivity.
The Government confirms that it intends to do further work with the Regulator concerning the content of a declaration of intent, its timing and to ensure that the declaration dovetails with the notifiable events regime.
The Government has confirmed a declaration of intent will not replace voluntary clearance. However, the Regulator will be reviewing its clearance guidance to provide more information on the clearance process and its expectations around the timing of clearance applications.
Failure to provide a declaration of intent may result in a civil penalty of up to £1m. In addition, companies who fail to comply, and the transaction has resulted in a material detriment to the scheme, may be at risk of the Regulator’s powers to impose contribution notices (CN) and financial support directions (FSDs) (the moral hazard powers).
Moral hazard powers
The Government has confirmed it will go ahead with proposals to strengthen the Regulator’s moral hazard powers. Broadly speaking, the Regulator may impose a CN where there has been material detriment to the scheme and it is reasonable to impose such a notice. An FSD may be imposed where, broadly speaking, the group supporting the scheme is insufficiently resourced and it is reasonable to impose such a direction.
The Government confirms the CN regime will be strengthened, amongst other matters, by:
- amending the “reasonableness” test so that there is more focus on the loss or risk caused to a scheme by the “act” when assessing the amount of a notice,
- clarifying the application of the material detriment test by introducing a “snapshot funding approach” which focuses on the financial weakening of the employer.
FSDs will be rebranded as “financial contribution notices” and simplified into a single-stage process. In addition they will also be changed:
- so that they may be issued against individuals who are controlling directors of the sponsoring employer, and
- to tighten up the forms of financial support which must be given to a scheme to require cash support and/or for the target to assume joint and several liability for the sponsoring employer’s obligations to the scheme.
The Government did confirm that it would not extend the “lookback” period beyond the current two years.
New criminal penalties
The Government has announced the creation of a new criminal offence punishable by seven years’ imprisonment and/or an unlimited fine. The new offence is designed to punish “wilful or reckless” behaviour in relation to a defined benefit scheme by an employer or associated/connected persons. It is important to note that the consultation response provides no details as to the exact nature of the new offence or whether there will be any statutory defences to it.
Failure to comply with a CN may also result in a criminal penalty. However, the original proposal to impose a custodial sentence has been amended to an unlimited fine imposed by the Regulator. In addition, the Regulator may also impose a civil penalty of up to £1m.
It is still unclear when the proposed changes will be brought into force. Some of the changes will require primary legislation and so may be included in the promised 2019 Pensions Bill. However, it is important to note that the Government (and the Regulator) have a lot of work to do to turn the aspirations in the consultation response into unambiguous legislation.
At the same time it is clear the Regulator will be scrutinising corporate behaviour in relation to pension schemes even more keenly. It is of the utmost importance, therefore, for employers to plan their corporate activity to appropriately mitigate any detriment to their schemes. The trustees should be involved as soon as relevant and these steps (and any agreement with the trustees) should be properly documented.