Following the March 2018 White Paper “Protecting Defined Benefit Pension Schemes”, the Department for Work and Pensions (the DWP) has published a consultation on changes to the powers of the Pensions Regulator (TPR) to make it easier for TPR to be more proactive, intervene earlier, obtain information and take enforcement action.
The DWP’s proposals are:
- Notifiable events: to expand the list of notifiable events and require advance notification when heads of terms are agreed.
- Declaration of intent: to require a declaration of intent to be issued in advance on the impact of a transaction and the steps taken to mitigate risks to the scheme.
- Improved TPR powers: to introduce a range of new offences and a new civil penalty of up to £1m.
- Anti-avoidance powers: to amend the Contribution Notice (CN) and Financial Support Direction (FSD) regimes, in particular, to include new grounds for a CN and extending FSDs to individuals.
As stated in the White Paper, there is no current proposal to introduce a mandatory clearance regime. Instead, the DWP proposes to add to the existing notifiable events framework to include the following:
- The sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liabilities.
- The granting of security on a debt giving it priority over debt to the scheme.
- Significant restructuring of the employer’s board of directors and certain senior management appointments (such as appointment of a chief restructuring / transformation officer, appointment by an external party, or changes to at least two out of three of the chairman, CEO and CFO in the previous six months).
- A sponsoring employer taking independent pre-appointment insolvency / restructuring advice (such as an independent business review).
- Deferral, amendment, or waiver of a banking covenant.
Consideration is being given to the inclusion of dividends in the notifiable events regimes, but is not currently being proposed. As currently, certain events will only be notifiable where the scheme is underfunded on a prescribed basis. Reporting obligations may be extended to others, such as directors of the parent company.
At present, notifiable events only need to be reported as soon as reasonably practicable after the event. The DWP proposes that notification should be made when heads of terms are agreed for the following types of transaction (the Relevant Transactions):
- a sale of controlling interest in a sponsoring employer:
- a sale of the business or assets of a sponsoring employer; and
- the granting of security in priority to scheme debt.
Declaration of intent
The DWP proposes that for such Relevant Transactions and subject to a prescribed risk threshold, the sponsoring employer shall be required to issue a declaration of intent, before the transaction documents are signed, explaining the impact of the transaction and how the risks to the scheme are to be mitigated.
The DWP is proposing to introduce a new civil penalty and new criminal offences.
The proposed civil penalty will be capped at £1m (note the current cap is £5,000 for individuals and £50,000 for others).
The new civil penalty or criminal sanctions would apply to the following:
- Wilful or grossly reckless behaviour in relation to the pension scheme.
- Failure to comply with a CN.
- Failure to comply with the notifiable events framework.
The new civil penalty would also apply to the following proposed breaches:
- Deliberately providing false information to TPR.
- Deliberately providing false information or failing to provide required information to trustees.
- Non-compliance with elements of the DB funding code.
- Non-compliance with providing a declaration of intent.
The current civil fine regime would also apply to the following:
- Failure to provide a Chair’s Statement or failure to provide it on time, or providing a poor quality or misleading statement.
- Non-compliance with information requests (including inspections and interviews) and / or delays in providing information.
The DWP proposes to strengthen the CN and FSD regime as follows:
- When assessing the amount to be demanded under a CN, giving stronger focus in the “reasonableness” test to the loss or risk caused to a scheme by the ‘act’ and providing scope for consideration of the employer’s justification for the ‘act’.
- When quantifying the CN sum, prescribing a specific way to take into account the delay in payment (for instance by reference to an inflation index).
- Moving the date of the calculation of the cap on the CN from the date of the ‘act’ to a date closer to the final determination (either by TPR or a court).
- Adding an alternative basis for a CN based on the weakening of the employer covenant rather than the likelihood of scheme benefits being paid.
- Creating a single-stage FSD process that would include the imposition of a specific and enforceable obligation.
- Requiring a target to pay cash or enter into a statutory guarantee enforceable by the trustees.
- Amending or replacing the “insufficiently resourced” requirements.
- Allowing FSDs to be issued to individuals.
- Clarifying that the actions of a target in creating or increasing risk are a relevant (but not necessary) factor in the “reasonableness” test.
- Giving TPR the power to impose a CN on any person associated or connected with an FSD recipient.
- Considering extending the two-year lookback period.
- Giving TPR the power to issue FSDs after the scheme enters the PPF and enabling the PPF to enforce FSDs as cash payments.
The consultation closes on 21 August 2018.