March 5, 2019

A tougher Pensions Regulator – and gaining more powers

Over the last couple of years the Pensions Regulator (TPR) has been keen to emphasise that it is taking a "clearer, quicker, tougher" approach to the regulation of pension schemes – undoubtedly spurred on by some of the criticism that the Regulator received over BHS.

In the White Paper – Protecting Defined Benefit Pension Schemes – published in 2017, the Government announced that it would strengthen the regulatory framework for TPR.  This was backed up by a further consultation in June 2018 – Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator

The Government has now issued its Response to the Consultation outlining the legislative changes that it proposes to make.  These changes will affect all employers with defined benefit pension schemes – especially where M&A or re-financing transactions are proposed.

Criminal and civil penalties

The headline grabbing announcement was undoubtedly the new criminal offence of "wilful or reckless behaviour in relation to a defined benefit pension scheme."  A failure to comply with a contribution notice will also become a criminal offence, but the Government has dropped its plans for failure to comply with the notifiable events framework (see below) to become a criminal offence.

These new offences will carry a potential prison sentence of up to 7 years or an unlimited fine.  Whilst a failure to comply with a contribution notice order will be straightforward to identify, "wilful or reckless behaviour" might be more difficult to pin down. It is possible to draw some parallels with the criminal offence of "reckless misconduct in the management of a failed bank" which was introduced after the financial crisis – although that applies to senior management in respect of the failed bank they were controlling and already owed duties to. Here we are looking at behaviour in respect of a third party creditor of the employer.  

A new civil penalty of up to £1 million is also being introduced - this can also apply to "wilful or reckless behaviour", failure to comply with contribution notices and also a failure to comply with notifiable events or complete a declaration of intent (see below).  A table summarising all the new offences, penalties and the intended target is set out at the end of this briefing note.

Notifiable Events

The notifiable events framework requires trustees or employers to inform TPR if certain events occur.  The aim is that the framework would give TPR advance warning of schemes which become a claim on the Pension Protection Fund (PPF) due to employer insolvency.

The framework is being amended by the inclusion of two new events that employers will have to inform TPR of:

  • The 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" and
  • Granting of security on a debt to give it priority over debt to the scheme.

The definition of the terms relating to each of these events is critical: what exactly is a "material proportion" and how is funding responsibility for 20% of the scheme's liabilities determined?  The Pensions Regulator is going to "engage with stakeholders to develop its thinking further" on these issues.

A few respondents suggested that the payments of large dividends may be worth considering as a notifiable event.  The Government has decided against this, but notes that the Pensions Regulator will be considering the level of dividend payments as part of its review of scheme funding.  The Regulator is looking closely at the level of dividend payments relative to deficit and deficit recovery contributions, and a statement on this can be expected later in the year.

The trigger for the timing of notifications is still subject to consideration – the Government is continuing to work with TPR to identify how best to make this clear: whether in legislation or in a Code of Practice. The Government also plans to undertake an impact assessment of how the notifiable event changes will affect business.

Declaration of Intent

A Declaration of Intent will be a new requirement for a "corporate transaction planner" to set out an explanation of the proposed transaction, confirmation that the trustee board of any defined benefit pension scheme has been consulted and how any detriment to the pension scheme will be mitigated. The Declaration of Intent would be addressed to the trustee of the defined benefit scheme and shared with TPR. It would require the "corporate transaction planner" to make a statement in respect of:

  • The sale of a controlling interest in a sponsoring employer (which is an existing notifiable event)
  • The sale of the business or assets of a sponsoring employer (this is a new notifiable event)
  • Granting security on a debt to give it priority over the debt to the scheme (this is also a new notifiable event)

What the Declaration of Intent will need to contain is still to be considered in more detail by the Government and TPR. When the engagement between the sponsoring employer and the trustees needs to commence is also unclear: the Government agrees that the engagement should take place as early as possible, but there are also concerns about commercial sensitivity. So the Government and TPR are going to work together to identify a "flexible approach". When the Declaration of Intent should be shared with the trustees and TPR is also likely to be contained in a Code of Practice.

Clearance

Clearance – a formal confirmation from TPR that it will not use its anti-avoidance (or "moral hazard") powers – will continue and there are no plans to replace clearance with the Declaration of Intent.  But TPR is committed to reviewing its guidance in the light of the proposals and the responses received.

Contribution Notices and Financial Support Directions

The Government is proceeding with its changes to the contribution notice regime and will amend:

  • The reasonableness test to reflect the actual or potential impact of the act / failure to act on the value of the scheme's assets or liabilities
  • The material detriment test to clarify the legislation.
  • The date for calculation of the contribution notice, so that it is closer to the date of the final determination.

Financial Support Directions (FSD) will be renamed "Financial Support Notices" and the changes here are potentially more significant as it makes the process more streamlined:

  • The form of financial support will be narrowed: only cash and/or joint and severally liability for the pension scheme will be available. (Although alternative support might be considered during negotiations with TPR before a Financial Support Notice is issued.)
  • The process will involve one stage: with the Determination Panel specifying the form and amount of financial support. (At present an FSD is an order to put support in place for a scheme, but the form of that support is subsequently agreed with TPR.)
  • The scope of an FSD will be extended to include controlling shareholders, who may be individuals. At present individuals are (almost entirely) outside of the scope of an FSD.
  • The Government intends to progress replacing the "insufficiently resourced" test with a scheme focussed test; but again this is an area requiring further work by the Government and TPR.

However, the Government has dropped plans to extend the lookback period of 2 years for the time being.

Information Gathering Powers

TPR's information gathering powers are also being extended:

  • A new power to call persons to interview (independent of the power under section 72 to request documents). This would override any duties of confidentiality – but not legal privilege.
  • The powers to inspect premises – which at present do not cover all of TPR's functions – will be extended.

These powers will be backed by fixed and escalating (daily) penalties.

Clyde & Co Comment

The criminal offence for wilful or reckless behaviour, punishable by up to 7 years' imprisonment, drew all the national press headlines.  But it is the rest of the Response – in particular the changes to notifiable events, the Declaration of Intent, and Financial Support Notices – which may prove to be more influential on a day-to-day basis.

The Declaration of Intent will force buyers to discuss an acquisition with the trustees (which surprisingly is not always the case now) and the streamlined FSN process may mean that TPR pushes more cases to the Determinations Panel than happens at the moment.

However, the big question is going to be "when?".  There are a number of areas still subject to further consideration by TPR and the Government to flesh out the detail.  And the Consultation Response ends by saying legislation will be brought forward when Parliamentary time allows – but with Brexit still consuming a lot of time it is not clear when that might be.

New Offence

New Penalty Target
Wilful or reckless behaviour in relation to a pension scheme

Criminal offence: up to 7 years’ imprisonment and/or unlimited fines

And/or

New civil penalty: up to a maximum of £1 million

Sponsoring employers and others associated or connected
Failure to comply with a Contribution Notice

Criminal offence: unlimited fines

And/or

New civil penalty: up to a maximum of £1 million

Sponsoring employers and others associated or connected
Failure to comply with a Financial Support Direction New civil penalty: up to a maximum of £1 million

Sponsoring employers and others associated or connected (Not individuals with the exception of controlling shareholders who are individuals)

Failure to comply with the Notifiable Events Framework

New civil penalty: up to a maximum of £1 million Sponsoring employers and trustees

Failure to comply with requirements for a Declaration of Intent

New civil penalty: up to a maximum of £1 million Sponsoring employers and others associated or connected

Knowingly or recklessly providing false information to trustees

New civil penalty: up to a maximum of £1 million Any person who is required to provide information to trustees as prescribed
Non-compliance with information requests (including inspections and interviews) or delays in providing information

Fixed and escalating civil fine

The Government will develop the levels of fines as part of its secondary legislation package

Any person targeted by TPR under section 72 to 75 of the Pensions Act 2004
Knowingly or recklessly providing false information to TPR New civil penalty: up to a maximum of £1 million

Any person who is required to provide information to TPR as prescribed

Non-compliance with clearer funding standards Strengthened section 231 (Powers of the Regulator) scheme funding power and existing powers (such as improvement notices) of the Pensions Act 2004 Trustees and sponsoring employers
Failure to provide a Chair’s Statement, failure to provide on time or providing a poor quality statement

Existing civil penalty under section 10 of the Pensions Act 1995

Trustees and sponsoring employers