Background
Earlier in the year, the Government published the White Paper ‘Protecting Defined Benefit Pension Schemes’ in which it stated its view that the existing regulatory framework is working well for the majority of schemes and stakeholders. However, with the evolving pensions landscape and following recent high-profile corporate failures, there is the risk of complacency and it has proposed improvements to the existing framework, including:
- Clearer funding standards for all schemes;
- Clarity for employers on how and when to notify the Regulator of certain corporate events;
- Enhanced powers for the Regulator to obtain relevant information when it is required;
- New powers to enable the Regulator to deter and punish wrongdoing.
Central to the above is enhancing the protection of individuals’ pension rights and the White Paper acknowledged that the Government has agreement about what needs doing. However, it would be undertaking consultations to build a consensus to deliver its proposals.
First consultation
At the end of June 2018, the first of these consultations was published by the Department for Work and Pensions. The consultation sets out proposals to improve the Regulator’s powers with a new regulatory system.
The key sections of the consultation are covered below:
Corporate transaction oversight and the Notifiable Events framework
Notifiable Events are those which have the potential to cause harm to a pension scheme by weakening the sponsoring employer covenant and increasing the risk of an insolvency event. The Government believes that improvements can be made to the framework by broadening the range of employer-related events to ensure that the Regulator is better sighted on relevant business transactions and events which have the potential to have a detrimental impact on the pension scheme. It proposes to add the following to the list of Notifiable Events:
- Sale of a material proportion of the business assets of a scheme employer which has a funding responsibility for at least 20% of the scheme’s liabilities;
- Granting of security on a debt to give it priority over the scheme;
- Significant restructuring of the scheme employer’s board of directors and certain senior management appointments;
- Scheme employer taking independent pre-appointment insolvency/restructuring advice.
Declaration of Intent
A proposal has been put forward for sponsoring employers or parent companies to make a statement of intent, in consultation with trustees, prior to relevant business transactions taking place. This would confirm that they have appropriately considered the potential impact on any connected defined benefit pension scheme.
Declarations of Intent will work closely alongside the Notifiable Events framework. For some Notifiable Event transactions, the 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. A Declaration of Intent will be required at a later point in a corporate transaction than a Notifiable Event notification, when there is greater certainty as to whether the transaction is going ahead, its nature and the implications for the scheme.
Increased Regulator powers
The Government acknowledges that most employers and directors are committed to their defined benefit pension schemes. However, there is a risk that a small minority of employers and those associated or connected with them may try to avoid their responsibilities and therefore the Government needs to ensure that the Regulator can act effectively.
The Government will give the Regulator powers to punish those who deliberately put their pension scheme at risk by introducing punitive fines. It wants to complement the existing penalty regime with new penalties that can be imposed as appropriate, for both low-level compliance breaches and more serious offences. It is proposing a new power to issue a civil penalty of up to £1,000,000 for more serious breaches and criminal sanctions which would allow the courts to impose appropriate penalties.
Anti-Avoidance Powers
The Regulator has identified ways in which its current anti-avoidance capabilities could be enhanced.
A Contribution Notice can be imposed against an employer or connected party if they have acted in a way that is materially detrimental to the accrued scheme benefits being paid and requires payment of a ‘reasonable’ cash sum to the scheme. It is proposed that:
- The ‘reasonableness’ test will focus on the loss to the scheme;
- An additional limb to the material detriment test will be created with greater focus on the weakening of the employer (rather than the prospect of scheme benefits being paid); and
- Alteration to the date on which the cap on the level of the Contribution Notice is calculated (to allow for significant delays).
A Financial Support Direction requires a corporate entity to assume some financial responsibility for a scheme. The current multi-stage structure means that it can take a long time before support is obtained for a scheme. The proposed amendments include:
- Creating a single-stage process;
- Tightening the forms of financial support so that the target is required to either make a cash payment or impose a form of statutory guarantee for some or all of the sponsoring employer’s liabilities to the scheme;
- Allowing these directions to be issued to a broader range of individuals, mirroring the scope of Contribution Notices.
Closing remarks
The Government believes that these proposals will strengthen the powers of the Regulator giving it an increased ability to monitor corporate activity and protect DB pension scheme members’ interests.
The full consultation document can be viewed at: www.gov.uk/government/consultations/protecting-defined-benefit-pension-schemes-a-stronger-pensions-regulator
This consultation closes on 21 August 2018.