27 Jun 2018

The Government has released a consultation document as part of its programme of change for defined benefit pension schemes. Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator contains proposals to give the Pensions Regulator (tPR) increased ability to monitor corporate transactions and sets out "a robust framework for punitive measures to deter and ultimately punish wrong-doing". 

In March 2018, the Government published the White Paper, Protecting Defined Benefit Pension Schemes, in which it said that it would be carrying out several consultations on different areas. This is the first consultation - improving tPR’s powers. The Government's stated aim is to provide improved protection for scheme members whilst balancing the interests of sponsoring employers. 

Objective 1: Enhancing tPR’s and the trustees’ role in scrutinising corporate transactions

The Government has rejected suggestions of a mandatory clearance regime applying to all sponsoring employers. Instead it will focus on the following:

The notifiable events framework

The Government proposes to extend the range of employer-related events that need to be notified to tPR to include: 

  • 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
  • the granting of security on a debt to give it priority over debt to the scheme (although the granting of security for specific chattels financing, such as hire purchase financing for company vehicles, would be excluded)
  • significant restructuring of the employer’s board of directors and certain senior management appointments, such as the appointment of a chief restructuring officer, an appointment made to a board by an external party and changes to certain senior personnel in the previous 6 months
  • the sponsoring employer taking independent pre-appointment insolvency/restructuring advice (such as an independent business review)
  • in respect of the current ‘breach of banking covenant’ notifiable event, covenant deferral, amendment or waiver.

The timing for notifying certain events will also be brought forward to much earlier in the planning process. Where the event relates to the sale of controlling interest in a sponsoring employer, the sale of the business or assets of a sponsoring employer or the granting of security in priority to scheme debt, notification will have to be made when a Heads of Terms agreement is first put in place (although the trustees should be involved earlier in the negotiations).

Declaration of intent

As trailed in the White Paper, the scheme's employer will need to issue a Declaration of Intent setting out the implications of the transaction for the scheme and how any risks will be mitigated. 

The Government proposes that this should be done where the notifiable event relates to the sale of a controlling interest in a sponsoring employer, the sale of the business or assets of a sponsoring employer or the granting of security in priority to scheme debt. The need for a Declaration will be based on risk-based criteria prescribed by tPR, such as the level of scheme funding, in a way that is consistent with the notifiable events regime. 

The Declaration will be addressed to the trustees from the transaction’s corporate planners (usually the employer, but potentially jointly with the parent company who may be driving the transaction) and shared with tPR. It will explain the nature of the planned transaction, confirm that the corporate planner has consulted with the trustees and confirm the trustees’ agreement (or otherwise) to the transaction and explain any detriment to the scheme and how this is to be mitigated. 

Voluntary clearance

TPR will be reviewing its guidance on the clearance process to clarify its expectations as to what employers and trustees should do. This will include, for example, clarifying/expanding the definition of "material detriment" and how applicants and trustees should approach the test. 

Objective 2: Toughening the sanctions regime: new civil penalty of up to £1,000,000 for serious breaches 

The Government intends to widen the circumstances in which fines and criminal proceedings can be used so that tPR has a comprehensive suite of powers. 

It proposes a new power for tPR to issue a civil penalty of up to £1,000,000 for a range of serious breaches (including non-compliance with new requirements being introduced as part of the White Paper). The intention is to deter behaviours which are more serious in nature and have resulted in actual harm to the pension scheme (or have the potential to do so if left unchallenged). The Government believes that a £1,000,000 cap would be in line with similar breaches levied by other regulators such as the Financial Conduct Authority. 

The Government is also proposing new criminal offences to punish wilful or grossly reckless behaviour in relation to a defined benefit scheme, non-compliance with a Contribution Notice and failure to comply with the notifiable events framework. This will give the criminal courts the power to impose further penalties such as a further tier of unlimited fines and/or custodial sentences. These sanctions are intended for the most serious cases of wrongdoing, where tPR decides that it is appropriate to bring a prosecution. 

The Government suggests that the new sanctions should be available in respect of all parties who have responsibility to the pension scheme, including directors, sponsoring employers and any associated or connected persons, and in some circumstances trustees. For example, it is suggested that trustees may face the new civil fine or the new criminal offence for failing to comply with the notifiable events framework.

Objective 3: Improving tPR’s existing powers to issue Contribution Notices (CNs) and Financial Support Directions (FSDs)

The Government proposes to strengthen the existing CN regime by, for example: 

  • amending the “reasonableness” test so that there is a stronger focus on the loss or risk caused to a scheme by the ‘act’ when assessing the amount to be demanded under a CN (as opposed to consideration of issues such as the relationship between the target and the sponsor, or benefit received by the target from the sponsor)
  • providing a way to reflect the delay in payment in the CN sum, rather than allowing for differing approaches under the reasonableness test
  • changing the date on which the cap on the level of a CN is calculated to a date closer to the final determination
  • amending the ‘material detriment’ test so that it is assessed by reference to the weakening of the employer rather than the prospect of scheme benefits being paid many years into the future. 

It also proposes to strengthen the FSD regime in a variety of ways, including: 

  • creating a simpler and quicker single-stage process, under which the FSD would create a specific and enforceable obligation on the target (rather than this occurring at some later stage as in the current regime)
  • tightening up the forms of financial support the target is required to make to the scheme, requiring a cash payment or imposing a form of statutory guarantee in relation to some or all of the sponsoring employer’s liabilities to the scheme
  • reviewing whether the “insufficiently resourced” requirements should be amended or replaced to make the criteria for imposing a FSD clearer 
  • amending the reasonableness test to make clear that the actions of a target in creating or increasing risk are a relevant (but not necessary) factor - this would mirror the scope of CNs
  • giving tPR power to impose a CN on any person associated or connected with the recipient of the FSD
  • looking into how and whether the ‘lookback’ period could be increased beyond two years
  • giving tPR power to issue a FSD after a scheme has entered the PPF and enabling the PPF to enforce the FSD in the form of a cash payment. 

Whilst the proposals build on the existing framework for regulating pensions, they are wide-ranging and could have significant implications for sponsoring employers and trustees. If you wish make your views known, the consultation runs until 21 August 2018.