The government is consulting on much anticipated draft regulations fleshing out the details of the new notifiable event requirements introduced by the Pension Schemes Act 2021.
The draft Pensions Regulator (Notifiable Events)(Amendment) Regulations 2021 (‘Draft Regulations’) make changes to the way in which certain events are to be notified to the Pensions Regulator (‘TPR’) under Part 1 of the Pensions Act 2004, and to the events which are notifiable in the first place.
The notifiable events regime
The existing regime is set out in section 69 of the Pensions Act 2004. It requires a so called ‘appropriate person’ (usually the trustees or sponsoring employer of the scheme depending on the nature of the event in question), to give TPR written notice of certain events as soon as reasonably practicable after becoming aware of them. The events which must be reported are set out in the Pensions Regulator (Notifiable Events) Regulations 2005 and, broadly speaking, are events which could be harmful to the scheme, for example paying a transfer value in excess of £1.5m, or the employer ceasing to carry on business in the UK.
At present, the legislation treats all of the notifiable events equally and the notification process is the same for each of them. However, this is set to change in the coming months under new section 69A of the Pensions Act 2004, which introduces a two-step notification procedure for certain notifiable events and comes into force on 1 October 2021. The notifiable events subject to this new procedure are set out in the Draft Regulations.
Two-step notification procedure
The Draft Regulations introduce two new notifiable events:
A decision in principle by the employer to sell a material proportion of its business or assets.
A decision in principle to by the employer to grant or extend a relevant security over its assets which would result in the secured creditor having priority over the scheme for debt recovery.
Importantly in relation to these new notifiable events, the obligation to notify TPR is not triggered by the event itself, but by the earlier decision in principle to proceed with it. The Draft Regulations also amend the existing notifiable event of relinquishment of control of the sponsoring employer company so that it is notifiable at the decision in principle stage.
For all three of these events, the requirement to notify TPR will fall sooner than is currently the case, and potentially significantly so, as the Draft Regulations define the ‘decision in principle’ as “a decision prior to any negotiations or agreements being entered into with another party”, which could occur very early on in the life of a transaction.
For these three notifiable events (but not the others), the notification procedure doesn’t end there. The written notice must be accompanied by a statement describing the event, the proposed terms of any deal in which the event arises, the adverse effects it might have on the scheme and any steps taken to mitigate any such impact. It must also describe any communications between the employer and the trustees (or managers) of the scheme about the event.
Section 69A of the Pensions Act 2004 also introduces and on-going reporting requirement, meaning that the person responsible for notifying TPR will need to make further notifications if there is a material change to the event in question or if it does not go ahead, as soon as reasonably practicable after they become aware of the change.
Applying the new requirements
The new requirements will not apply to the three affected notifiable events in all cases.
In the case of a decision to sell a material proportion of business or assets, the Draft Regulations provide that the proportion to be disposed will only be material if it accounts for more than 25% of the sponsoring employer’s annual revenue (for a business sale) or more than 25% of the gross value of its assets (excluding cash). In either case, the proportion must be calculated looking at the employer alone or where relevant, cumulatively with any other sales decided upon or completed on in the previous 12 months.
In the case of granting or extending security, the security will only be relevant if:
- It is granted by the sponsoring employer.
- It is granted by one or more subsidiary of the sponsoring employer and together those subsidiaries comprise more than 25% of the employer’s consolidated revenue or gross assets.
- It is fixed or floating charge over the employer’s assets (or those of the employer’s wider corporate group), or an all assets floating charge which gives the holder a right to appoint an administrator. In general, refinancing existing debts will not amount to relevant security, nor will security for specific chattels (or chattel mortgages) or financing company vehicles.
What does this mean?
The consultation on the Draft Regulations closes on 27 October 2021, so the position is not yet final. In the meantime, the Draft Regulations are likely to spark some debate, as section 69A of the Pensions Act 2004 will come into force before then, on 1 October 2021, leaving the industry in a somewhat unclear position in the short-term.
The Draft Regulations themselves contain a few uncertainties, in particular around timings. It could be difficult, for instance, for employers to determine the stage at which a decision in principle is made because the Draft Regulations do not prescribe who has the power to make such a decision or the degree of planning that can take place before negotiations can be said to have begun.
Equally it is not clear when the supporting statement must be provided. If the decision in principle takes place at an early stage thereby triggering the requirement to give notice to TPR, the employer is unlikely to have all the details necessary to provide the supporting statement, and the Draft Regulations do not address this. It could be that the employer would be required to provide further details later under the material change reporting obligation, but again, the Draft Regulations do not address materiality in this context.
Sponsoring employers as well as other parties connected with a proposed transaction or the day to day management of a defined benefit scheme will want to see clarity on these points, especially given the other Pension Scheme Act 2021 changes coming into force on 1 October. Under TPR’s new criminal powers, a person who does not comply new notifiable event requirements could find that they have unwittingly committed the offence of conduct risking accrued benefits under section 58B of the Pensions Act 2004, which does not require intent, which could lead to a criminal conviction or a potentially unlimited fine or both (which could be on top of the up to £1m fine for failing to comply with the notifiable events requirements).