The Government is consulting on draft regulations to make fundamental changes to transactions which have to be notified to the Pensions Regulator (TPR) due to their potential impact on a defined benefit scheme.

The proposed changes are expected to come into force in April 2022 and will:

  • create two new notifiable events:
    • a decision in principle by a scheme employer to sell a "material proportion" (broadly 25%) of its business or assets; and
    • a decision in principle by a scheme employer to grant or extend a "relevant security" (broadly security comprising more than 25% of either the employer's consolidated revenues or gross assets) where the secured creditor will rank ahead of the pension scheme. This is subject to an exception for some refinancings;
  • require a decision to sell a scheme employer to be notified when the decision in principle is made rather than when the final decision is made;
  • in relation to the above three events, require more information to be provided to TPR and the trustees when the "main terms" have been agreed in an "accompanying statement". The information must include:
    • the main terms proposed; and
    • potential adverse effects of the transaction on the scheme, and any steps to mitigate the adverse effects; and
    • any communication with the trustees.

Subsequent material changes will also need to be notified to TPR and the trustees.

Although the changes are not expected to come into force until 2022, transactions happening now might be relevant to whether future transactions pass the 25% threshold as the 25% threshold is measured on a cumulative basis.

What is the penalty for non-compliance?

Changes introduced by the Pension Schemes Act 2021 will increase the maximum financial penalty for non-compliance with the notifiable events requirements to £1 million. This will apply to the notifiable events regime from 1 October even though the changes to the regime won't come into force until next year.

It is hoped that some of the technical detail will be clarified but the substance of the proposed changes are in line with what was expected and is unlikely to change.

Key takeaways

  1. There will be a significant increase in the number of notifications that DB scheme sponsors will have to make relating to M&A, new security and refinancings.
  2. TPR must be notified much sooner, and given the uncertainty over precisely when the requirement to notify is triggered, and the increased penalties for breach, employers are likely to need to err on the side of caution.
  3. Employers should ensure they have procedures in place to identify and report notifiable events promptly. Trustees will also push for this too.
  4. As employers will need to share commercially sensitive information earlier with trustees, employers should consider reviewing existing non-disclosure agreements (NDAs) with the trustees or putting them in place. Whilst it would be rare in practice for an employer to sue a trustee for breach of an NDA, such an agreement may still have a deterrent effect against unauthorised disclosure.
  5. TPR expects to see information sharing agreements in place between trustees and sponsors to support covenant monitoring. These may need to be put in place or updated in light of the new requirements.
  6. Reporting is likely to increase trustee and TPR engagement in relation to these transactions. Employers should also ensure they anticipate likely TPR and trustee reaction ahead of reporting so that such engagement can be managed.