A Stronger Pensions Regulator: the DWP consults

The white paper set the headlines, with separate consultations to follow and seek views on more detailed proposals.  The first of these consultations has now been launched. In  "Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator", the DWP asks for views on a series of changes to the Pensions Regulator's powers.  These changes are intended to help the Pensions Regulator to achieve its goal of being a 'clearer, quicker and tougher' regulator without putting an unfair burden on business.

Corporate transactions and events

To help the Pensions Regulator and trustees to monitor corporate transactions and events, help the Pensions Regulator to step in at an earlier stage if it needs to, and prompt companies to think at an early stage about the effect of corporate proposals on DB schemes, the DWP proposes to:

• Extend the list of notifiable events (events that employers or trustees must notify to the Pensions Regulator) to include four new events.  In each case, it would only be necessary to notify if a 'risk threshold' is exceeded (for example, if the scheme is underfunded on a basis specified by the Pensions Regulator):
  • the sale of a 'material proportion' of the business or assets of an employer which has funding responsibility for at least 20% of the scheme's liabilities;
  • granting security on a debt so that, in the event of employer insolvency, it would have priority over the debt owed to the scheme;
  • a 'significant restructuring' of the employer's board of directors, or a specified senior management appointment (for example, two or all of the chairman, CEO and CFO changing in a 6 month period, or appointment of a chief restructuring officer, chief transformation officer or equivalent to the board or senior management team);
  • an employer taking independent, pre-appointment, insolvency or restructuring advice (for example, commissioning an independent business review).

• Extend the existing notifiable event of 'breach of banking covenant' to include covenant deferral, amendment or waiver, but remove 'wrongful trading of an employer' from the list because "experience has shown that an employer that is trading wrongfully is extremely unlikely to make this public irrespective of any notification duty".
• Extend the duty to report a notifiable event to the Pensions Regulator to more people, for example the directors of a parent company who are planning a transaction.
• Change the law to make some events notifiable at an earlier stage.  For example, the sale of the controlling interest in an employer, the sale of the business or assets of an employer, or granting security in priority to scheme debt would all need to be reported at the 'heads of terms' stage.
• Change the law to require an employer to prepare a declaration of intent  where it is considering a sale of the controlling interest in an employer, a sale of the business or assets of an employer, or granting security in priority to scheme debt and a 'risk threshold' is exceeded (for example, the scheme is underfunded on a basis specified by the Pensions Regulator).  The employer will need to send the declaration of intent to the trustees and share it with the Pensions Regulator.  The declaration will need to set out "the implications of the transaction for the scheme and how any risks will be mitigated".  It will also need to confirm that the trustees have been consulted about the transaction and say whether the Trustees have agreed to it. 

The DWP also confirms that the Pensions Regulator intends to review and update its clearance guidance to "clarify [its] expectations as to what employers and trustees should do".

Improved powers

The consultation also suggests a number of changes to give the Pensions Regulator access to a wider range of penalty powers and greater flexibility as to how it uses those powers.  The DWP proposes to:

• Give the Pensions Regulator the power to impose a fine of up to £1m to punish more serious non-compliance.  For example, this power might be used if one of the three new offences (discussed below) has been committed, if an employer has failed to provide a declaration of intent (above), if an employer has deliberately provided false information (or refused to provide information) to trustees, or if an employer or trustee has failed to comply with the new DB funding code proposed in the white paper.  Fines of £1m would be reserved for the most serious cases.
• Change the law to create three new criminal offences, all punishable by criminal fine and or custodial sentence: wilful or grossly reckless behaviour in relation to a DB scheme; failure to comply with the notifiable events framework; and failure to comply with a contribution notice.  The notifiable events offence would apply to trustees, as well as to employers.
• Give the Pensions Regulator discretion as to how it exercises its penalty powers, including the existing power to impose a penalty of up to £5,000 on individuals and £50,000 on companies.  This would allow the Pensions Regulator not to impose a penalty in less serious cases.

Anti-avoidance powers

Finally, the consultation suggests changes to strengthen the anti-avoidance (or 'moral hazard') regime.  Contribution notices are 'fault based' and typically require parties connected with an employer to make a payment into the scheme.  Financial support directions (FSDs) are not fault-based.  Instead, they require financial support to be put in place for a scheme where an employer is a service company or 'insufficiently resourced'.  The DWP proposes, for example, to:

• Change the contribution notice regime to give the Pensions Regulator more flexibility as to the amount it can issue a notice for, and to allow it to adjust the amount to be paid and the cap on that amount to take account of the time that has passed since the date of the act to which the notice relates.
• Change the FSD regime so that a FSD will impose an immediately enforceable obligation to make a cash payment or immediately enforceable statutory guarantee (instead of asking the target to put forward a support proposal) and the Pensions Regulator will be able to issue a FSD to individuals who are connected to or associated with an employer (instead of just to companies who are connected or associated).
• Make changes to the legal tests for contribution notices and FSDs.
• Look at whether the two year 'look back period' for FSDs can be increased and or whether the Pensions Regulator should be able to issue a FSD after a scheme has gone into the Pension Protection Fund.

Osborne Clarke comment

This consultation helps to put some flesh on the bones of the proposals in the recent white paper.  However, it is a consultation and we will not know the final detail of any changes until new draft guidance and legislation become available.   For now,  trustees should note the changes.  Nevertheless, employers may wish to discuss with their legal advisers the impact that the changes to the Pensions Regulator's penalty and anti-avoidance powers could have on any corporate changes or transactions they complete from this point on.  The consultation will be open until 21 August 2018.