The Government has considered responses and has moderated its proposals, but will proceed with a new criminal offence for “wilful or reckless behaviour in relation to a pension scheme” and a declaration of intent for material corporate transactions.
On 11 February 2019, the Government published its response to the consultation on Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator. Key measures being taken forward are set out below.
Strengthening the notifiable events regime
The notifiable events regime requires trustees and employers to report certain events to the Pensions Regulator.
The Government will consult on two new notifiable events:
- sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of a scheme’s liabilities; and
- granting of security on a debt to give it priority over a debt to a pension scheme.
Alongside this, the Government will work with the Pensions Regulator and the pensions industry to consider whether earlier notification of a notifiable event could be beneficial. Taking pre-insolvency advice, agreeing heads of terms for a transaction and board changes will not become notifiable events as had been proposed.
Introducing a declaration of intent
Through a combination of legislation and regulatory guidance, the Government will introduce a new early warning system requiring “corporate planners” to address a declaration of intent to pension scheme trustees (shared with the Pensions Regulator) in relation to any proposal, to:
- sell a controlling interest in a sponsoring employer (an existing notifiable event); or
- enter into either of the two new notifiable events referred to above.
The declaration of intent would:
- explain the nature of the proposed transaction;
- confirm that the “corporate planner” has consulted with the trustees and state whether or not they agree to the proposed transaction, and
- explain any detriment to the pension scheme and how this will be mitigated.
The “corporate planner” includes the sponsoring employer and a parent company, but is not limited to those entities. There may be further discussion around precisely who the requirement applies to.
The Government will engage further and there will be opportunity to comment on the specifics of the regime prior to implementation.
Strengthening the sanctions to punish wrongdoing
The Government will legislate to bolster existing civil penalties which apply to low-level non-compliance, with new civil penalties increasing with the seriousness of the breach and capped at £1m, and criminal sanctions. In particular, there will be a new criminal offence of “wilful or reckless behaviour in relation to a pension scheme” punishable by up to seven years’ imprisonment and/or an unlimited fine.
We expect more clarity on the precise elements required to demonstrate “wilful or reckless behaviour” through further consultation, but the response indicates this is a very serious offence intended to apply to the “most extreme cases” such as “chronic mismanagement of a business” or allowing “huge unsustainable deficits to build up”.
Strengthening and clarifying the moral hazard regime
The Government will take forward a number of technical changes which are intended to strengthen and clarify the Pensions Regulator’s moral hazard powers, including:
- extending the scope of financial support direction targets to include individuals who are controlling shareholders of the sponsoring employer;
- changing the “insufficiently resourced” test;
- streamlining the process for financial support directions so that they become cash obligations (and renaming them financial support notices);
- adding new financial tests for contribution notices on a material detriment basis; and
- pegging the cap for contribution notices to the deficit at the date of issue, not the date of the detrimental event.
- financial support directions will not be extended to directors of connected entities (other than controlling shareholders) as had been proposed; and
- criminal sanctions for failure to pay a contribution notice will only apply to the person named in the contribution notice.
It remains to be seen how the specifics of the proposals will translate into draft legislation and regulatory material, and there will be further opportunity to comment in consultation. However, the most uncertain aspects have either been tightened or dropped, or will be subject to further consideration.
The new offence of “wilful or reckless behaviour in relation to a pension scheme” may be seen as part of a trend in the UK of “criminalising” the board, however other proposed offences will not proceed.