Protecting DB schemes: a stronger Pensions Regulator

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The Government made clear in its March 2018 Pensions White Paper that it is committed to ensuring that the Pensions Regulator (Regulator) has the right powers to be able to protect effectively defined benefit pension schemes.  On 29 June 2018 the Department for Work and Pensions (DWP) published a consultation paper setting out the Government’s plans to strengthen the Regulator’s powers. The consultation closes on 21 August 2018.  This Insight looks at the DWP’s proposals.

Scrutiny of corporate transactions

The DWP wishes to increase the Regulator’s ability to monitor relevant corporate transactions and events and engage much earlier with employers where appropriate. Changes are proposed to the types of notifiable event and the timing of any notification to the Regulator. A new notification, the declaration of intent, will be introduced.  Finally, the Regulator will review the voluntary clearance regime.

Notifiable events regime

The DWP proposes to broaden the range of events relating to the employer which must be notified to the Regulator. These 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)
  • significant restructuring of the employer’s board of directors and certain senior management appointments
  • sponsoring employer taking independent pre-appointment insolvency/restructuring advice (such as an independent business review)
  • breach of banking covenant to include covenant deferral, amendment or waiver.

Currently notifiable events must be notified as soon as reasonably practicable after they have occurred.  In practice this has tended to be when the transaction has gone through.  The DWP thinks that notification should be earlier where there is the:

  • sale of a controlling interest in the sponsoring employer
  • sale of business or assets of a sponsoring employer
  • granting of security in priority to scheme debt.

In those circumstances it is proposed that the Regulator should be made aware of planned transactions no later than when negotiations have led to agreement in principle of its main terms. According to the DWP this is the latest point at which trustees should be made aware of what is planned although they should have been involved earlier in the negotiations.

Declaration of intent

The declaration of intent regime will sit alongside the notifiable events regime.  For some notifiable event transactions the employer will need to issue a declaration of intent setting out the implications of the transaction for the scheme and how any risks will be mitigated. This declaration will be required at a later point in the transaction than the notifiable event notification when there is greater certainty whether the transaction will go ahead, its nature and implications.  This would be after due diligence is completed and financing is in place but before signature.

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
  • granting of any security in priority to scheme debt.

It is envisaged that the provision of the declaration will be assessed on risk-based criteria as set out by the Regulator to be consistent with notifiable events criteria.

The declaration would be addressed to the trustees from the transaction’s corporate planners and sent to the Regulator and:

  • explain the nature of the planned transaction
  • confirm that the corporate planner has consulted on its terms with the trustees and confirm the trustees’ agreement (or otherwise) to the transaction
  • explain any detriment to the scheme and how this is to be mitigated.

Where the Regulator has concerns it could intervene.

Moral hazard powers

The DWP proposes to strengthen the Regulator’s powers to impose contribution notices (CN) and financial support directions (FSDs) (the 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 DWP proposes to strength the CN regime 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
  • providing a specific mechanism by which the impact of delaying payment will be reflected in the amount of the CN
  • calculating the cap on the level of a CN not by reference to the day of the “act” but by reference to a date closer to the final CN determination
  • creating an additional limb to the ‘material detriment’ test, assessed by reference to the weakening of the employer rather than the prospect of scheme benefits being paid many years into the future.

The DWP proposes to strengthen the FSD regime by amongst other matters:

  • tightening up the forms of financial support the target is required to make to the scheme (ie a cash payment or a statutory guarantee)
  • reviewing whether the ‘insufficiently resourced’ requirements should be amended or replaced to increase certainty and clarity
  • allowing FSDs to be issued to individuals and not just corporates
  • amending the reasonableness test to make clear that the actions of a target in creating or increasing risk are a relevant (but not necessary) factor (again, to mirror the scope of CNs)
  • exploring how and whether the “lookback” period could be increased beyond two years.

Regulator imposed sanctions

The Regulator currently has the power to impose fines for certain regulatory breaches. The DWP proposes to create a new power for the Regulator to issue a civil penalty of up to £1,000,000 for more serious breaches. It is envisaged that the high-level fines will deter behaviours which have resulted in actual harm to the pension scheme or have the potential to do so. The amount of the fine imposed will be based on the seriousness of actions.

In addition, the DWP proposes to introduce new criminal offences to punish:

  • wilful or grossly reckless behaviour in relation to a DB scheme by a DB employer or associated/connected person
  • non-compliance with a CN by a sponsoring employer or associated/connected person
  • failure by the sponsoring employers and trustees to comply with the notifiable events regime.

The DWP intends these sanctions to be used in the most serious of cases of wrongdoing, where the Regulator decides that it is appropriate to prosecute.

Finally, the consultation paper lists a range of potential offences which the DWP thinks are not sufficiently covered by the existing penalty regime, as well as suggested new penalties and targets.


The Government is keen to ensure that the Regulator has appropriate powers to enable it to intervene when it considers there is a risk to a DB scheme. It will be interesting to see how effective these new powers, should they be introduced, are in practice and how corporates react to them. To date the Regulator has not used all the powers which it already has. In any case whilst some of the proposed changes require only a change to regulations others require primary legislation. The Regulator may have to wait for some time to get all its new powers.

At the same time the proposed changes will have a potentially significant effect on corporate transactions, restructurings and refinancings. Trustees would need to be informed when heads of terms are agreed and this is much earlier than currently occurs. In practice this may mean that the trustees (and maybe even the Regulator) will have a greater role to play than they do at present.