On 14 April 2008, the Department of Work and Pensions published a consultation paper on the proposed changes to the Pensions Regulator’s moral hazard power under the Pensions Act 2004. The consultation closed on 20 June 2008. This briefing summarises our understanding of how the Pensions Regulator intends to use its expanded powers, as currently proposed, and comments on the proposed new statutory defence.

The Department of Work and Pensions (DWP) consultation on the proposed changes to the moral hazard powers under the Pensions Act 2004 closed on 20 June 20081. The proposed changes, summarised in our previous EPB briefings of 15 and 29 April 20082, are to have retrospective effect on and from 14 April 2008 (with one exception).

The Pensions Regulator (TPR) issued a statement3 on 25 April 2008, setting out how it intends to apply the proposed changes to transactions/events occurring between 14 April 2008 and the date that the regulations giving effect to the proposed changes (regulations) ultimately come into force (relevant date) (whenever that may be), to provide sufficient certainty to business during that period.

How TPR intends to use its expanded powers

The table overleaf summarises our understanding of the relevant grounds on which TPR may issue a contribution notice (CN) under section 38(5) of the Pensions Act 2004, which will apply between 14 April 2008 (when the changes were announced) and the relevant date. The precise wording of the relevant provisions, and any exceptions or qualifications to them, is unknown at this time as the regulations have yet to be released (even though the consultation period ended on 20 June 2008). The table assumes that the changes effected by the regulations will be as currently set out in the DWP consultation paper.

Proposed statutory defence

The DWP is proposing to replace the ‘otherwise than in good faith’ defence with a new statutory defence (proposed defence) that would prevent TPR from issuing a CN against a person that can demonstrate that, based on what they knew or ought to have known, they could not reasonably have known that the act or failure or course of conduct would have a materially detrimental effect on the security of member’s benefits4.

The proposed defence has been criticised by various respondents to the DWP’s consultation. The principal concerns include the following.

  • The proposed defence is based on a concept of ‘reasonable forseeability’, which is a highly nebulous concept. Arguably, a person may be unable to rely on the proposed defence if it was reasonably foreseeable that their actions/omission may have had a materially detrimental effect on the security of members’ benefits, however unlikely that outcome was, unless it was far-fetched. As a result, the proposed defence may be almost useless in practice.
  • As it will be very difficult for an employer or associated person to rely on the proposed defence, the number of applications to TPR for clearance are likely to increase materially. This, in turn, may give even greater leverage to pensions trustees to ‘extract a price’ from employers to obtain such clearance where it may well not have been sought under the current legislation. This would ultimately result in additional costs and delays for corporate transactions that are not the stated target of the proposed changes.
  • The removal of the ‘in good faith defence’ (and replacement with the proposed defence) would result in TPR being able to ‘pierce the corporate veil’ and impose personal liability on individuals (ie directors and officers), even where there has been no conscious fault or recklessness on the part of those individuals. This is a fundamental shift in policy from other

Power to issue contribution notices under section 38(5) of the Pensions Act 2004

Timing of the regulations

It is not yet known when the regulations will be released (in draft or otherwise). However, they cannot be effected until the amendments contained in clause 123 of the Pensions Bill 2008 (enabling the regulations to be made) are enacted, which is not expected to be until at least October 2008.