14 May 2019


In February 2019, the government outlined its plans to strengthen the Pensions Regulator ('tPR') by making significant changes to its powers. The aim is for the Regulator to be able to better protect defined benefit ('DB') scheme members.

In this briefing we consider what this will mean for sponsoring employers and their ability to refinance and for the financiers providing such financing. We have not set out a detailed description of all the government's proposals but we summarise some of the key points below.


Strengthening the regulatory framework for DB pension schemes was an important aspect of the government’s 2017 manifesto following, in particular, the collapses of BHS and Carillion. In March 2018, the government published its white paper on 'Protecting Defined Benefit Pension Schemes' (see our briefing). The white paper stated that while the existing system is working well for the majority of pension schemes, it could be improved and made more robust.

Summer 2018’s consultation 'Protecting Defined Benefit Pension Schemes - A Stronger Regulator' considered some of the ideas put forward in the white paper in more detail and sought industry and stakeholder views on the government’s proposals to improve the current system.

The government received 71 responses to its consultation from industry stakeholders (including one from Burges Salmon) and in February 2019 published its response in which it sets out its proposals to deliver practical changes that will 'support tPR to become a stronger and more efficient regulator'.

Key proposals in summary

The key proposals fall into four broad categories. The proposals that will affect employer refinancing to the greatest extent appear in bold.

1. Providing the Regulator and trustees with greater oversight of corporate transactions by:

  • Introducing two new employer-related notifiable events (these are events that impact employers, which employers have to notify to tPR).
    • sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liabilities
    • granting of security on a debt to give it priority over debt to the scheme.
  • Introducing requirements for a Declaration of Intent ('DOI') (see below) for certain corporate transactions (including on the granting of security on a debt in priority to the pension scheme).

2. Strengthening the Regulator’s powers to deter and punish wilful or reckless and other misbehaviour towards DB pension schemes. This includes:

  • A new criminal offence of wilful or reckless behaviour in relation to a pension scheme carrying a maximum penalty of seven years imprisonment and/or unlimited fines
  • The power to issue civil penalties of up to £1 million for serious breaches.

3. Clarifying and strengthening the Regulator’s anti-avoidance powers by:

  • Creating a new one-stage Financial Support Direction regime (which will be rebranded as a Financial Support Notice)
  • Specifying the forms of financial support required (cash or imposition of joint and several liability)
  • Expanding the Contribution Notice ('CN') reasonableness test (i.e. the 'is it reasonable for tPR to impose a CN' question) to focus on loss/risk to the pension scheme
  • Changing the ‘material detriment’ test for a CN, and also the date at which its quantum is calculated. (One of the ‘gateway’ tests before a CN can be imposed is whether the scheme has suffered material detriment – this is the 'material detriment' test).

4. Introducing enhanced information gathering powers for tPR including a new standalone interview power and enhanced inspection powers.

Focus on the key proposals which will affect financings:

Declaration of Intent

A key aspect of the consultation was reviewing the ability of tPR and of pension scheme trustees to monitor relevant corporate transactions and engage with employers to prevent possible harm to DB pension schemes.

With this in mind the government will introduce a ‘Declaration of Intent’, to be shared with the scheme trustees and tPR during certain corporate transactions (i.e. sale of controlling interest in a sponsoring employer, sale of a material proportion of the business or assets of a scheme employer with at least 20 per cent of the scheme’s liabilities, and granting of security on a debt in priority to the scheme).

New notifiable event

The government will also introduce new notifiable events to improve the oversight of tPR and pension scheme trustees on relevant corporate transactions. The granting of security on a debt to give it priority over debt to the scheme will be a new notifiable event (as well as being an event where a DoI must be issued).

Questions still to be clarified

The detail around the new DoI and the new notifiable event (NE) is still to be clarified. Questions outstanding include:

  • Timing – when does a DoI need to be made? And when must a NE be notified to tPR? (There had been a suggestion in the government’s consultation that a NE submission on the granting of security over debt should be made at the stage Heads of Terms are agreed although the government has since said it recognises there is more work to be done in identifying the best time for submission. The timing for a DoI is expected to be after a NE is submitted - but again the details are yet to be confirmed).
  • Scope – Does a DoI (and/or NE submission) need to be made for the grant of any new security, even if it is replacing existing security or is additional top-up security?
  • Content – what information should a DoI include? The government's consultation suggested a DoI might have to include:
    • a description of the nature of the planned transaction (i.e. the granting of security in priority to debt to the scheme)
    • a confirmation that the pension scheme trustees have been consulted and whether they agree
    • an explanation of any detriment to the scheme and how this is to be mitigated.

Where tPR has concerns as a result of information it receives via a DoI or NE, it could take action using its extensive suite of powers (including, potentially, its anti-avoidance powers).

The sanctions for failing to comply with a DoI or NE were also considered as part of the consultation. The proposal is that a new civil fine (of up to £1m) could be imposed for non-compliance.

For now, the government has promised to 'consider in more detail, together with the industry, the content of the Declaration of Intent, and how best to reframe the supporting guidance'. In relation to the proposed new notifiable events, the government said it 'accepts that the definition of the terms relating to each of these new events will be crucial' and that it plans to work with tPR 'to engage with stakeholders to develop its thinking further...'

What is clear is that sponsors are going to need to pay even closer attention to pensions when they undertake corporate activity. Banks also need to be aware that DB pension scheme trustees or tPR may become more involved than previously where new or additional security is to be granted.

Anti-avoidance powers

Those connected and associated with sponsors of DB occupational pension schemes should be aware of the changes to the Regulator’s anti-avoidance powers. Some of these are technical in nature but in particular: 

  • the Regulator will now stipulate the type of financial support to be put in place where a financial support notice is imposed (cash or effectively a guarantee)
  • the maximum amount of a contribution notice can now be updated to allow for the changing pension scheme deficit position over time.

The key takeaway for financiers and those looking to refinance is that the Regulator’s anti-avoidance powers are being strengthened.

One proposal not proceeding

The government had proposed to extend the current 'breach of banking covenant' notifiable event to include covenant deferral, amendment or waiver.

However, consultation feedback was that 'in practice there can be numerous amendments and waivers during the lifetime of a banking covenant, often for trivial matters, which have no bearing on the employer’s financial health'.

The government is therefore not proceeding with this proposal so as not to stifle legitimate business activity that could be beneficial to the pension scheme.

Next steps

The government has promised to proceed with new legislation to implement its proposed changes as soon as parliamentary time allows whilst continuing to consult on the detail of the proposals in the interim. It may be that many (although perhaps not all) of these proposals will make it into the Pensions Bill expected in Summer 2019.

The strengthening of the Regulator’s powers demonstrates the government’s desire to ensure recent high-profile pension scheme failures are not repeated. It is essential for financiers as well as sponsoring employers to take note of the proposed changes and ensure that defined benefit pension schemes are a key consideration when undertaking future refinancing.

This article was written by Chris Brown, Partner in Burges Salmon's Pensions Team and Rachael Ruane, Partner in Burges Salmon's Banking Team.

For more information, please contact the key contact or your usual Banking Team contact.

Key contact

Racheal Ruane

Rachael Ruane Partner

  • Corporate Banking
  • Real Estate Finance
  • Asset Finance and Asset Backed Lending

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