This article was written by Chris Brown, Senior Associate, and Alex Fallon, Associate, in Burges Salmon's Pensions Team.
Introduction
The government has outlined its plans to strengthen the Pensions Regulator by making significant changes to its powers. The aim is for the Regulator to be able to better protect DB scheme members.
In this briefing we consider what this will mean for sponsoring employers and trustees. We have not set out a detailed description of all the government's proposals but we summarise some of the key ones below.
Background
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.
Last Summer’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. A key aspect of the consultation was to strengthen the Regulator’s enforcement powers and powers to punish those who act recklessly in relation to pension schemes. Recent high-profile failings at BHS and Carillion had cranked up the political pressure on the government to equip the Regulator to ‘get tough’ where necessary to protect DB schemes.
The government received 71 responses to its consultation from industry stakeholders (including one from Burges Salmon) and has now 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
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; and
- 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.
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 (FSN)).
- 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 the Regulator including a new standalone interview power and enhanced inspection powers.
Picking out a few of the key proposals:
Corporate transaction oversight
A key aspect of the consultation was reviewing the Regulator’s and pension scheme trustees’ ability to monitor relevant corporate transactions and engage with employers to prevent possible harm to DB pension schemes.
With this in mind, as well as the new notifiable events, the Government will introduce a ‘Declaration of Intent’, to be shared with the scheme trustees and the Regulator 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).
The DOI is a major change to the existing framework and we welcome methods of encouraging information sharing. It will be interesting to see what the impact is likely to be on corporate activity. This will depend largely on the timing of when a DOI needs to be delivered and this is still to be decided (the government says it intends taking a flexible approach). What is clear already is that sponsors are going to need to pay even closer attention to pensions when they undertake corporate activity.
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'.
New criminal offences and civil penalties
Employers and trustees alike will have taken note of the new headline grabbing civil penalties and criminal offences.
The government’s new ‘tougher’ approach was embodied by Secretary of State for Work and Pensions’, Amber Rudd who, when announcing the government’s response, promised to crack down on 'the reckless few playing fast and loose with people’s futures'.
The government’s determination to protect pension scheme members should be applauded but it remains to be seen how easy it will be for the Regulator to establish ‘wilful’ or ‘reckless’ behaviour beyond reasonable doubt (this is the test for the new criminal offence).
It may be that the new criminal offences operate more as a deterrent than as powers which the Regulator uses very often – they are likely to be reserved for use in the most serious cases.
We expect the new civil penalties should also work well as a deterrent because they will more easily allow tPR to hold to account the small number of employers who are evading their responsibilities. (For example, whether an employer has failed to comply with the notifiable events regime should be relatively straightforward to determine and could now carry a – potentially very large for many – maximum civil penalty of £1 million.)
Anti-avoidance powers
We welcome the replacement of the current Financial Support Direction regime with a one-stage Financial Support Notice. Specifying what financial support is required (cash or effectively a guarantee) will provide certainty to targets and trustees alike. Increased certainty will reduce costs and the timeline for those who are directly affected parties to regulatory proceedings.
Notwithstanding the changes proposed to the FSD regime, the government has expressly noted in the response that alternative forms of support can still be agreed outside of the new one-stage FSN process. We welcome this as it recognises that other forms of support can be suitable for pension schemes and in our experience creative solutions can often be found.
We also welcome the proposed change in the calculation of the maximum amount of a CN which should better protect schemes from the impact of the lengthy CN process. Essentially, the maximum amount can now be uprated from the date of the relevant act which has caused material detriment to the date of the determination to impose a CN.
Information gathering powers
Broadening the Regulator’s information gathering powers to enable investigations to be carried out in a more efficient and effective manner is a positive development. This includes a new standalone interview power as well as enhanced inspection powers designed to close loopholes in the current regime.
Aside from this, the government has also proposed plans to grant the Regulator the power to apply fixed and escalating penalties (up to a statutory maximum) for non-compliance with a s.72 notice.
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 sponsoring employers to take note of the proposed changes and ensure that defined benefit pension schemes are a key consideration when undertaking future corporate transactions.
Trustees and employers alike should keep an eye on developments and consider how the proposed changes could affect their business.
For more information please contact Chris Brown or your usual Pensions Team contact.