Last November the Pensions team issued an alert 'Moral hazard changes on the horizon' about proposed changes to the moral hazard laws, which included an additional ground upon which the Pensions Regulator could issue a contribution notice (CN): the material detriment ground. The Regulator has now published its response to the consultation paper on this and anticipates the code of practice coming into effect this summer. The amended powers will be retrospective to 14 April 2008.
The Regulator describes itself as "pragmatic and proportionate" and does not expect "any undue impact upon routine business". While it has listened to some concerns raised about the wording of the draft code, resulting in tighter drafting, the basic position remains much the same as that initially put forward. Employers looking for comfort are directed towards the statutory defence and the clearance procedure, with the emphasis firmly placed on the code's status as supplementary to the legislation.
It's important to bear in mind that this is not the final position. Further guidance, a "high-level overview for employers" and a final set of illustrative examples are planned for this summer, at the same time as the code comes into operation. It would be fair to say that issuing this additional information before the code comes into effect would have been a more helpful approach.
What the code says
The code of practice is supposed to set out the circumstances in which the Regulator expects to issue a CN. The circumstances listed in the revised code are set out further in this alert.
The Regulator is keen to point out that:
- the code only applies if all the conditions for a CN set out in the legislation are met and the statutory defence is not available; but
- in "exceptional circumstances" a CN could still be issued outside of the situations listed in the code, in which event the Regulator would need to "demonstrate why it was reasonable for it to be acting outside the code". No examples are given of when this might be the case.
It is perhaps not ideal that the "business model" circumstance (see point 5 below) has been kept, the terms of which could still be interpreted very widely. The Regulator says that the new CN powers are not there to capture "routine business transactions" and points to the legislation, illustrative examples and future guidance as sources of comfort to those concerned about this. Many employers will be looking to measure their comfort levels against how this pans out in practice, so it's likely that there will continue to be some uncertainty, at least for a while.
Draft illustrative examples
The Regulator's response also sets out some draft illustrative examples, all of which are couched in terms that produce no surprises (for example, making a routine annual dividend where the scheme deficit is being addressed by an appropriate recovery plan will not be caught by the "material detriment" test).
One thing to bear in mind is that the examples given are situations in isolation, so the Regulator points out that "some of the situations ... taken together, with other acts or failures to act, may constitute a series which could be materially detrimental".
Circumstances listed in the revised code
The revised code covers the following circumstances:
1.The transfer of the occupational pension scheme out of the UK.
2.The transfer of the sponsoring employer out of the UK or the replacement of the sponsoring employer with an entity that does not fall within the UK.
3.Sponsor support* is removed, substantially reduced or becomes nominal.
4.The transfer of liabilities of the occupational pension scheme to another pension scheme or arrangement which leads to a significant reduction of the:
sponsor support* in respect of these liabilities; or
funding to cover these liabilities.
5.A business model or the operation of the occupational pension scheme which creates from the scheme, or which is designed to do so, a financial benefit for:
the employer; or
some other person,
where proper account has not been taken of the interests of the scheme members, including where risks to members are increased.
*Sponsor support means the:
- scheme obligations of the employer, or anyone else; and
- likelihood of recovery in full for the occupational pension scheme under the scheme obligations.
Scheme obligation means a liability or other obligation (including one that is contingent or otherwise might fall due) to make payment, or transfer an asset, to:
- the occupational pension scheme; or
- any work-based pension scheme (defined as an occupational pension scheme and certain aspects of a stakeholder and personal pension scheme), to which accrued occupational pension scheme benefits have been transferred, in respect of anyone who was a member of the occupational pension scheme before the act or failure to act.