Restructuring professionals – are you ready for a stronger Pensions Regulator?Print publication
On 11 February 2019 the Government published its response to its June 2018 consultation on strengthening the powers of the Pensions Regulator (Regulator) in relation to corporate activity. The new regime will have an impact on those investing in and disposing of businesses with defined benefit schemes and is another example of the Regulator’s move to scrutinise corporate activity. If enacted, the changes will greatly affect restructuring and distressed transactions.
Notifiable Events Regime
The number of corporate events which must be notified to the Regulator will be expanded 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 schemes liabilities;
- granting of security on any debt taking priority over debt to the scheme (this would not include the granting of security for specific chattel financing).
Save for stating that notifiable events must be notified as soon as reasonably practicable after they have occurred, uncertainty remains about when a notification should be made. The requirement to notify should be not be taken lightly as failure to comply may result in a civil penalty of up to £1,000,000.
Declaration of Intent Regime
A declaration of intent regime will sit alongside the notifiable events regime. “Corporate Planners”, which will include parent companies, will have to issue a declaration of intent addressed to the schemes’ trustees and the Regulator setting out the nature of the proposed transaction and the implications for the 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 specific timing as to when a declaration must be sent which raises further uncertainty as to its timing.
The interaction between the Notifiable Events Regime and Declarations of Intent Regime is currently unclear.
Failure to provide a declaration of intent may also result in a civil penalty of up to £1,000,000.
Moral Hazard Powers
The Regulator’s moral hazard powers will also be strengthened.
Contribution Notices will be:
- amended so that the reasonableness test has more focus on the loss or risk caused to the scheme by the “act” when assessing the amount of the notice; and
- clarified so that the application of the material detriment test introduces a “snap shot funding approach” focusing on the financial weakening of the employer.
Financial Support Directives will be rebranded as “financial contribution notices” and will be changed as follows:
- 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 employers obligations to the scheme.
What is clear from the Government’s response is that there is a lack of clarity surrounding how the new regimes will work in practice. What is not clear is whether the necessary clarification will ever be forthcoming if, as suspected, legislation is introduced later in 2019. Advisers will need to carefully consider the timing of and nature of notifications and factor this into planning corporate activity. The Declaration of Intent regime in particular may mean that practitioners and advisers will need to deal with distressed businesses with a defined benefit scheme differently from businesses without such a scheme.