The Department for Work and Pensions (DWP) has issued a consultation on its planned changes to the existing notifiable events regime. The changes will oblige employers with defined benefit (DB) pension schemes to notify The Pensions Regulator (TPR) of a broader range of corporate events and activities and to do so at an earlier stage than is currently the case.
This is another example of the increased scrutiny by TPR of employers with DB pension schemes and should be built into the corporate planning of all employers with DB schemes. Consultation on the proposals ends on 27 October 2021, with the changes currently expected to be introduced on 6 April 2022.
In this Insight, our pensions experts take a look at the government consultation and highlight what employers need to know.
Key points to note for DB scheme employers
1. The existing notifiable events regime will change on 1 October 2021 and then again on 6 April 2022
A new notifiable events regime will be in place from 1 October 2021. From this date, TPR will have additional powers to ensure compliance with the existing notifiable events regime.
More importantly for scheme sponsors, new notifiable events in relation to certain corporate transactions will be in place from 6 April 2022.
2. Certain corporate activities will require notification to TPR at an earlier stage
Under the new notifiable events regime, sponsoring employers will be required to notify TPR when a "decision in principle" is made in relation to certain key corporate transactions. These include sale of a material portion of the sponsor's business or assets, granting security over assets above a certain value and certain corporate restructuring (e.g. changes in who controls the sponsoring employer).
3. There will also be a new 'notice and statement' obligation for employers
There will be a new duty on employers to give notices and statements to TPR that set out:
- the implications for a DB scheme of certain corporate events; and
- how any risks to the scheme will be mitigated.
The notice and statement will be required at a later point in a corporate transaction than the notifiable event notification, when there is greater certainty as to whether the transaction is going ahead, its nature and the implications for the scheme.
4. Employers should review and assess their existing corporate governance processes
Scheme sponsors now have sufficient detail on the enhanced notifiable events regime to begin preparing for its implementation. This will involve reviewing day to day corporate activity as well as one-off transactions to determine if they will trigger notification requirements. In addition, sponsors should ensure that they have open and regular communication with the trustees of the DB schemes that they support. Finally, sponsors should consider taking professional advice to help ensure compliance with the new regime.
In more detail
The existing notifiable events regime is changing
The Pension Schemes Act 2021 (PSA 2021) passed into law in February 2021. Its arrival grabbed headlines, with many commentators focusing on the new criminal offences and civil penalties. The new regime is intended to deter employers who seek to avoid their DB pension scheme obligations.
But the planned changes to the existing notifiable events regime also have the potential to significantly impact on day to day corporate behaviour for employers that sponsor DB pension schemes. The new notifiable events regime has been detailed in the latest government consultation and draft regulations.
The notifiable events framework itself is not new. It has been in place since 2005, and requires trustees and employers in relation to a DB scheme to notify TPR of certain events. TPR is therefore put on notice of such events because they have the potential to negatively affect a DB pension scheme, either because the event risks an employer's insolvency, or because it might impact on the employer's covenant (an employer's legal obligation and financial ability to support a DB scheme).
The government's 2018-2019 reviews of TPR's powers concluded that the existing notifiable events framework sometimes results in TPR and the DB scheme's trustees being involved too late in the day. This can mean important decisions about the event have already been made without TPR or the trustees having a role in the negotiations. This can be particularly challenging when the corporate event negatively affects the sponsor's covenant, but no or insufficient mitigation has been offered to the scheme.
The planned changes will both increase the number of notifiable events, and also will require that the notification takes place at an earlier stage for certain events. There will also be new duties to give notices and statements to TPR, copied to the scheme's trustees, in respect of certain events, providing more detail about the event when there is more certainty about whether the transaction is going ahead.
This reflects a clear expectation that TPR will be informed earlier when certain corporate activities are at a formative stage, and that both TPR and the trustees will have a seat at the table when any decisions are made as to mitigation which might be offered as a result of the corporate activities. It's an important gear change which employers with DB schemes need to be aware of.
Certain corporate activities will require notification to TPR at an earlier stage
If the changes are introduced as proposed, sponsoring employers will be required to notify TPR when a 'decision in principle' is made:
- by a controlling company to relinquish control of a sponsoring employer or there is an offer to acquire control of the employer where there has been no decision in principle to relinquish control. This is similar to an existing notifiable event; the proposed change is that employers will be required to notify at an earlier point in time;
- by the employer to sell a material proportion of its business (broadly more than 25% of annual revenue) or a material proportion of its assets (broadly more than 25% of the gross value of its assets);
- by the employer or its subsidiaries to grant or extend security over assets in priority to the scheme. Broadly, this would mean a fixed or floating charge at a level of more than 25% of either the employer's consolidated revenue or its gross assets.
Particular focus is given in the consultation document to the:
- decision in principle to sell business/assets; and
- decision in principle to grant or extend security over assets
given concerns that these two events, not previously caught by the notifiable events framework, have the potential to weaken the employer's covenant and/or negatively impact on the scheme's funding position.
What does 'decision in principle' mean?
The introduction of the wording 'decision in principle' will be key to understanding when these new notifiable event duties bite.
'Decision in principle' is defined as a "decision prior to any negotiations or agreements being entered into with another party". TPR will be put on notice of certain corporate events at a formative stage. The example given in the consultation is the point at which the employer has made the decision to go ahead (e.g. sell the asset) but prior to negotiation on the specific terms or drawing up the contract. The idea being that an early stage the employer considers the position of the scheme, and possible mitigation.
We expect that employers would welcome further examples and guidance from TPR as to the meaning of 'decision in principle' to aide their understanding of when the new notifiable events duties are triggered.
What about a decision to sell a 'material proportion' of business/assets?
The government has dropped its previous plan to require notification where an employer in a multi-employer scheme with responsibility for 20% or more of the scheme's funding proposes the sale of a material part of its business. The government has accepted that this would be too cumbersome and complex a test to work in practice.
Instead, the government proposes a new notifiable event where an employer decides in principle to sell a material proportion of its business or assets.
A 'material proportion' will constitute:
- sale of more than 25% of the employer's annual revenue; or
- sale of more than 25% of the gross value of its assets
assessed in both cases by reference to the most recent annual accounts for Companies Act 2006 purposes.
The government's stated intention is to capture significant transactions. As such, the 25% threshold is designed to achieve this without creating an unduly complicated test.
Equally, the government also recognises that a series of smaller transactions might, cumulatively, have the same effect of an employer's ability to support the scheme. The definition of 'material proportion' therefore also takes into account other disposals made or agreed in the 12 months prior to the notifiable event.
This definition is likely to require consideration by employers when a corporate transaction is in contemplation, notwithstanding the introduction of a simpler test than was previously proposed.
Meanwhile, the existing notifiable event of wrongful trading will be removed. Otherwise, the existing notifiable events are not affected by the proposed changes and will remain in place.
There will also be a new 'notice and statement' obligation for employers, requiring separate notifications to be made to TPR
The PSA 2021 anticipates new 'notice and statement' obligations being placed on employers in connection with their DB schemes. This is the duty on employers to give notice and statements to TPR that set out the implications for a DB scheme of certain corporate events, and how any risks to the scheme will be mitigated. The notice and statement are required at a later point in a corporate transaction than the notifiable event notification, when there is greater certainty as to whether the transaction is going ahead, its nature and the implications for the scheme.
The consultation adds more detail to the principles set out in the PSA 2021:
- the notice and statement requirements will apply when the three notifiable events referred to above are at a more advanced stage i.e. when the main terms have been proposed and an intention has been formed;
- in summary, the required statement must set out:
- the event, including the main terms proposed;
- any adverse effects of the event on the DB scheme;
- any adverse effects of the event on the employer covenant;
- how any risks to the scheme will be mitigated; and
- communication with the trustees/managers of the scheme about the event.
- The notice and the statement must be provided to TPR with a copy to the scheme's trustees.
The new notice and statement obligations will provide TPR with more visibility on how corporate activities are being managed in practice, and the types of mitigation being offered to DB schemes as a result.
What does this mean for employers?
The expanded notifiable events duties should be seen in the context of an increasingly engaged and interventionist TPR, which has now - through the PSA 2021 - been armed with a much stronger and broader set of powers.
We do not expect the new criminal sanctions introduced by the PSA 2021 to be used other than in extreme cases of wrong-doing which affect underfunded DB schemes. However, the other changes being introduced by the PSA 2021, including the notifiable events changes, will require all employers with DB schemes to have robust and joined-up processes in place. These will need to ensure that whenever certain corporate activities are being proposed:
- the position of any relevant DB scheme is considered;
- the trustees of that scheme are involved; and
- TPR is notified, where appropriate.
Employers should review and assess their existing corporate governance processes to be able to:
- consider the position of the DB scheme and the sponsor's covenant when certain corporate activities are being proposed. Is mitigation for the corporate activities to be offered to the scheme?
- appropriately document the issues considered, the advice taken and the decision made;
- involve the trustees of that scheme at an early stage; and
- formally notify TPR (and the trustees of the scheme where this has not already happened), where relevant.
Should scheme sponsors be aware of anything else?
Yes. The draft regulations which accompany the consultation are helpful to indicate when TPR expects to be notified when corporate events are proposed, or are at a more advanced stage. However, the draft regulations are a little hazy in places. We expect that, in its consultation response, the DWP will flush out some currently unresolved issues.
In particular, it's not currently clear whether the new notifiable events regime will apply in all circumstances (e.g. when a scheme is in surplus). This would seem to be a burden for employers where the scheme is in a well-funded position, and would seem to go against the wider intention that only changes which materially negatively impact a DB scheme's position should be notified. It is possible that TPR may, in time, extend its guidance on the new notifiable events so that the requirements don't apply in certain circumstances e.g. where there is no detrimental impact on the pension scheme
More detail from TPR would be valuable to aide employers in understanding when the new notification requirements are triggered. We understand that TPR intends to provide more detail in accompanying guidance on the new requirements.