Whilst regulations published at the end of August confirmed that the majority of the changes under the Pension Schemes Act 2021 (PSA21) to the Pensions Regulator’s powers will be introduced on 1 October this year, the position in relation to the notifiable events changes which are designed to require employers to provide advance notice to the Regulator in relation to a wider range of scenarios and in more detail than currently, with the information being provided to the scheme trustees at the same time, have not yet been brought into force. A 2019 response to consultation indicated that the requirement would catch: (i) 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; (ii) the granting of security on a debt to give it priority over debt to the scheme; and (iii) sale of a controlling interest in a sponsoring employer (which is an existing notifiable event), but since then there had been very little information in relation to which transactions the new notification requirements will catch, what information will need to be supplied or when the notification requirement will commence. However, on 8 September 2021 a consultation was published on draft regulations to introduce the changes. The consultation provides further information on the proposed new notifiable events, including some amendments that have been made to the previous proposals.
The September 2021 Consultation
The September 2021 consultation confirms that:
- The existing notifiable event of sale of a controlling interest in a sponsoring employer is proposed to be amended to create a notifiable event when there is a decision in principle by a controlling company to relinquish control of the employer company or when an offer to acquire control of the employer company is received (where the employer company has not made a decision in principle to relinquish such control);
- New notifiable events are proposed to be created in respect of decisions in principle by the employer to:
- sell a material proportion of its business or assets. This has been included as a notifiable event because such transactions frequently indicate a change in the covenant support for a scheme, for example because it reduces the scheme sponsor’s ability to support the scheme;
- grant or extend security over its assets on a debt to give it priority over the scheme’s ranking in the order of priority for debt recovery in the event of employer insolvency.
- In relation to the proposed new notifiable events:
- the 2019 consultation response indicated that the first new notifiable event would only apply in respect of employers which had responsibility for at least 20% of the scheme’s liabilities (where the scheme is a multi-employer scheme). The 2021 consultation indicates that this has now been dropped due to the complexity of multi-employer scheme structures and the difficulty of assessing whether the threshold of liabilities had been met for an employer. This means that employers now just need to focus on whether the transaction affects a material part of their business or assets;
- in relation to the meaning of ‘material proportion’, the consultation proposes that this is defined as one that accounts for more than 25% of its annual revenue in relation to the business of the employer and 25% of the gross value of its assets in relation to the assets of the employer. The aim here is to catch significant changes and the consultation states that the government believes that 25% of the assets or revenue is a simple way of assessing this. Note that this does not take into account the size of the scheme, the scheme’s deficit or the size of the employer’s wider group or security such as parent company guarantees. The material proportion test is intended to include other disposals made or agreed in the 12 months prior to the notifiable event to prevent the requirement to notify being circumvented by engineering a series of smaller transactions;
- the rationale behind the grant of security notifiable event is that, in the event of debt recovery should the employer become insolvent, the scheme is more likely to receive a smaller amount of debt than if the security wasn’t in place. Relevant security is proposed to be defined as security granted or extended by the employer, or one or more subsidiaries of the employer. The level of security must be more than 25% of either the employer’s consolidated revenues or its gross assets and relevant security is proposed to include fixed and floating charges of the assets of the employer and the wider employer group but does not include the refinancing of an existing debt, security for specific chattels or financing for company vehicles. More information is expected in the Regulator’s Code of Practice and Guidance;
- the consultation proposes that the requirement to notify will bite when the decision in principle in respect of the event is taken. This is proposed to be defined as the point at which a decision to go ahead (for example sell the asset) is taken, prior to the negotiation of the terms and agreement of the contract. Conceptually, this is a significant change to the point at which notifications under the existing notifiable events regime are required to be made and will need to be factored into corporate transaction project planning.
- The new requirement under the PSA21 to provide a notice to the Regulator, with a copy provided simultaneously to the scheme trustees (previously referred to as the ‘Declaration of Intent’, although this term seems now to have been dropped), is proposed to apply in respect of similar circumstances to the three notifiable events listed above, however:
- the requirement applies once the main terms of the relevant event have been proposed;
- the consultation outlines the information proposed to be included in the notification statement, including details of the event and main terms proposed, the adverse effects on the scheme and the employer’s ability to meet its obligations to the scheme, mitigation steps and details of the communications with the trustees about the event; and
- as noted above, a copy of the notice and statement must be given to the trustees at the same time.
The rationale for this requirement is to balance the desirability of the Regulator and the trustees having the relevant information as early in the transaction as possible, whilst acknowledging that the full details of the transaction and proposed mitigation may not be available at the outset, when the notifiable event is triggered. Again, conceptually, this is a significant change in that it creates a legal requirement for trustee notification in scenarios where that would currently only happen as a matter of good practice or to mitigate risk, and again this will need to be factored into corporate transaction project planning.
- Finally, as expected, the existing notifiable event in respect of wrongful trading has been removed as a notifiable event. The requirement has been deemed ineffective and the Regulator has never received a notification pursuant to this requirement.
To date, a lot of attention has been focused on the Regulator’s new criminal powers under the PSA21, however the notifiable events changes are likely to have a greater potential to affect corporate transaction planning on a day-to-day basis.
Much has been made in the press about the Regulator embedding its clearer, quicker, tougher culture, however it can only act in respect of transactions which could affect a DB scheme where it is actually aware of the transaction and its impact on the scheme. Under the current regime, this may only happen at a late stage, either because the parties to the transaction do not inform the trustees (currently there is no absolute legal requirement for them to do this, although in practice trustees are often informed as a matter of good practice or to mitigate buyer/seller risk) or because the parties interpret the existing notifiable events framework as only applying when a transaction actually signs.
The new requirements, which will apply from the point that a decision in principle is taken in respect of notifiable events (i.e. the point at which the employer has made a decision to go ahead, but before specific terms have begun to be negotiated or the contract drawn up), and once the main terms of the relevant event have been proposed in respect of Regulator and trustee notification and statement, will mean that there will be a requirement for Regulator and trustee notification of the transaction at a much earlier stage in the transaction process than currently. This will need to be factored into transaction planning and addressed at a very early stage and could result in a need for increased dialogue with the trustees and Regulator than would currently ordinarily be the case, as well as increased adviser input on the impact and strategy. As well as affecting the process that a seller or borrower in a transaction must follow, buyers and lenders are also likely to approach transactions with increased caution unless the position in respect of the trustees and Regulator has been resolved.
There is still no clear confirmation in relation to the timing of the notifiable event changes. All that is known is that the DWP’s consultation closes on 27 October 2021. The Regulator’s Corporate Plan 2021-24 indicates that these provisions will be introduced in 2022.