Our recent update described the key changes which the Government intends to introduce following a consultation last year on strengthening the powers of the Pensions Regulator. 

Here we consider the detail of the changes proposed for defined benefit pension plans in the Government's response.

New penalties 

Out with the old, in with the new; three proposed criminal penalties down to two! The consultation's original proposal to impose a criminal sanction for failure to comply with the notifiable events framework has been dropped and replaced with a civil sanction of up to £1 million. 

The Government will, however, introduce two new criminal offences for "wilful or reckless behaviour" in relation to a pension plan (which carries the penalty of up to seven years' imprisonment and/or unlimited fines) and for failing to comply with a contribution notice (unlimited fines and/or a civil penalty, but no custodial penalty). 

New civil sanctions (up to a maximum of £1 million) will be introduced for:

  • failure to comply with a financial support direction (to be renamed the 'financial support notice')
  • failure to comply with the new requirements for a 'declaration of intent' (see below), and
  • knowingly or recklessly providing false information to trustees or to the Regulator 

New fixed and escalating civil fines will also be introduced for non-compliance with information requests or delays in providing information to the Regulator. The Government will develop the levels of fines as part of its secondary legislation package. 

The potential targets of the new criminal penalties and civil sanctions include those who have responsibility to the pension plan, such as directors, sponsoring employers (and any associated or connected persons) and, in some cases, trustees. A key point to note is that individuals are within scope.

The Government considers that the likely impact of the new system of penalties will be limited for the vast majority of "responsible employers". Our view is that the new criminal penalties will be reserved for only the most serious cases. 

Although the new criminal offence of wilful and reckless behaviour in relation to a pension plan will certainly serve as a deterrent, it may be difficult to evidence that a person's behaviour was either wilful or reckless and for the Regulator to secure a conviction. Much will depend on how the wilful or reckless behaviour test will be applied and, as the Government has not yet clarified this, only time will tell.

Corporate transactions 

Notifiable events 

With a sigh of relief, employers will be pleased to hear that not all notifiable events proposed in the consultation have been adopted.

Two new employer-related notifiable events concerning:

  • "the sale of a material proportion of the business or assets of a pension plan employer which has funding responsibility for at least 20% of the [plan’s] liabilities"; and
  • "the granting of security on a debt to give it priority over debt to the [plan]" 

will be introduced. The duty to notify will sit with the employer.

The original proposals to extend the existing notifiable event in relation to breach of a banking covenant and to add two further notifiable events (an employer taking pre-appointment insolvency/restructuring advice and significant restructurings of the employer's board) have been dropped due to concerns that they may stifle legitimate business activity that could be beneficial to a pension plan. 

It had also been proposed to bring forward the timing of the requirement to report notifiable events to the Regulator. After receiving mixed reactions to this suggestion, the Government considered that its proposal required more work. The Government will work with the Regulator and the pensions industry to decide whether earlier notification might be beneficial and, if so, how this should be implemented. 

A lot of detail in relation to these new events remains to be provided. The Government has confirmed that it will consult on the changes, which should hopefully clarify how the new notifiable events will operate in practice. In addition, the Regulator will update its guidance on the notifiable events framework and consult on a revised code of practice. 

Declaration of intent 

Trustees and sponsoring employers will be pleased to hear that there will be no 'mandatory clearance' requirement. However, the "corporate planner" of a corporate transaction (which includes the sponsoring employer and the parent company) will be required to make a statement (known as a "declaration of intent") to the Regulator and the trustees, where the transaction involves the sale of a controlling interest in a sponsoring employer or either of the two new employer-related notifiable events outlined above. This declaration of intent will need to include an explanation of the transaction, confirmation that the trustees have been consulted with and how any detriment to the pension plan will be mitigated. 

The timing for making such a declaration has not been specified. However, the Government has agreed to develop a more flexible approach which takes into account the particular circumstances of each transaction. For employers this is a welcome move away from an absolute requirement that the declaration should be provided before a transaction takes place. 

Whilst the content of the declaration is still subject to further consideration, it is clear that this statement is intended to demonstrate to the Regulator that trustees and employers have adequately taken account of their pension plans when planning commercial activity. Regardless as to the outcome on the timing issue, a prudent employer should be prepared to engage with trustees at the earliest opportunity. 

Employers should be aware that although a civil penalty will apply for failing to provide a declaration of intent, there has been no suggestion that a transaction would be unwound if the statement is not provided. 

The Regulator's anti-avoidance powers 

Proposals to clarify, strengthen and simplify the Regulator's anti-avoidance powers to issue contribution notices or financial support directions (FSDs) against entities connected or associated with a defined benefit pension plan have been given the green light but with some amendments.

Key changes include the streamlining of the FSD regime into a single-stage process and replacing the current "insufficiently resourced" test with a new (but unspecified) "scheme-focussed" test. This may mean that more FSDs are issued by the Regulator in the future. 

Worryingly, unlike other aspects of the consultation, there is no indication that the Government will further consult with the pensions industry on these changes. 

The Regulator's information-gathering powers 

The Regulator will be given a "stand-alone" interview power and its power to inspect premises will be expanded. 

Employers and trustees should be aware that the power requiring any 'relevant person' who can reasonably assist the Regulator in discharging any of its functions to attend an interview will override an adviser's duty of confidentiality but that the rules surrounding legal privilege will still apply. 

Next steps 

Although much of the detail underpinning the changes is yet to be fleshed out, the Government's response to the consultation confirms that it will bring forward legislation to implement these reforms as soon as Parliamentary time allows. We understand that the intention is to include some of these changes in a Pensions Bill which is expected to be published in early summer. 

To guard against the long arm of the Regulator's powers, we urge employers contemplating any corporate activity to carefully consider the impact that the Government's intended changes may have on a defined benefit pension plan and to ensure that, if necessary, appropriate mitigation is in place. 

This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.