Consultation document from the DWP on protecting defined benefits schemes invites comments

Following on from the government's recent White Paper in connection with defined benefit pension schemes, the Department for Work and Pensions has issued a consultation document.

This is entitled "Protecting defined benefit pension schemes - a stronger Pensions Regulator" and proposes changes to the existing notifiable events regime, a new DB fines system and amendments to the anti-avoidance powers of the Pension Regulator (TRP).

The DWP is inviting comments via its website until 21 August 2018. We fully intend to respond to that consultation and give Shoosmiths' views. In the meantime we have been considering our response and set out our initial thoughts below. For those of our clients who have comments but would rather not respond directly we would be happy to include those within our response. Please either contact Lynette Lewis or your usual pensions contact.

Whilst we do not think it necessary to fully summarise the DWP's proposals as the consultation document itself is very readable, some of the main changes in more detail include introducing the concept of declarations of intent which will sit alongside the notifiable events framework, amending TPR's guidance relating to the voluntary clearance process, amending the material detriment test which is used in assessing whether a contribution notice is reasonable or not, and strengthening both the contribution notice and financial support direction regimes.

Clearly, much of this is a reaction to headline grabbing stories relating to various business failures across the UK including, amongst others, BHS, Carillion and Toys R Us. Although many of the proposals look sensible to us and are clearly aimed at protecting members' benefits there clearly will be 'some devil in the detail'.

We have some concern from an employer's perspective that some of the proposals are far reaching and broad and will catch actions that will not necessarily be detrimental to a defined benefit pension scheme. We think the notifiable events regime should operate in the context that not all actions undertaken by corporates are designed to catch the pension scheme out and many actions are taken which directors reasonably feel will improve the prospects of their business. As always, it will be employers who are less inclined to support their schemes who will try and avoid full compliance and therefore we welcome the proposed new penalties and the recognition that wilful and reckless behaviour should be penalised the most. For instance, we think simply missing a deadline unintentionally should be low on TPR's list when compared to deliberately misleading trustees regarding corporate activity.

Although this is not an exhaustive list, we have the following comments regarding the DWP's proposals:

• Extension of the notifiable events regime to the granting of security on a debt to give it priority over debt to the scheme - On the whole, we agree that the granting of security to a third party is likely to prejudice the pension scheme particularly where it does not involve any new monies being provided to the employer. However, the draft legislation needs to ensure that some degree of materiality is built into the test. For instance, there will be circumstances where an employer may well grant security to a third party over a specific piece of equipment which would be immaterial to the general leverage structure of the employer or detrimental in any material way to the scheme;
• Changing the notifiable events regime such that significant restructuring of the employer's board of directors would need to be notified - Again, we are of the view that this is generally a sensible move, but the drafting would need to be clear so that new appointments cannot simply be made using different terminology to avoid the need to notify. Additionally, not all restructuring appointments will be bad news. Sometimes, they can actually lead to improvement in the covenant of the employer. Likewise, just because a debt or equity funder appoints a member of the board doesn't mean that the employer is in a bad way. These appointments are often made to protect the relevant funder's interests;
• Amending the notifiable events regime such that the taking of pre-appointment insolvency or restructuring advice needs to be notified - Again there are circumstances where this will be appropriate. However, the legislation must be sufficiently well drafted such that it doesn't catch tax restructuring papers which would not necessarily be bad news to the pension scheme;
• Extending the breach of banking covenant notifiable event - We think that this gives rise to some practical difficulties as banks do not always defer, amend or waive covenants in stressed situations. For instance, one of our banking lawyers has recently been involved in the extension of a financial covenant where the employer in question has been awarded a major new contract and needs to undertake some initial capital expenditure in order to set up the business to take on that work. Although this will need a revision to an existing banking covenant, it is seen by the bank as being good news. Likewise any pension scheme should see the award of a blue chip contract as beneficial. Again, the devil will be in the detail here as some covenants being amended may just be as a result of practical changes within the business and not because of poor performance;
• We have also considered the DWP's comments around the timing of making a notifiable event report. Clearly the regime needs to operate in the commercial world - just because heads of agreement have been entered into doesn't mean that a transaction will always take place. Heads of agreement are never legally binding within England and Wales. In any event, well intentioned, informed and advised employers will already be entering into early discussions with trustees and what we would not want to see happen is for this natural sharing of information to be impeded by the requirement to notify the TPR. Confidentiality can clearly be key in some circumstances;
• Extension of the notifiable events regime to the sale of a material proportion of business and assets - Again, this will depend upon what is ultimately happening with the proceeds of sale. If these are to be used by the same entity to improve ongoing business or intra group and the trustees will retain direct recourse to the relevant new entity then consideration should be given to carving this out from the regime;
• Creation of an additional limb to the material detriment test to be assessed by reference to the weakening of the employer - We are unsure exactly how this would be tested. Would it be by reference to an immediate but short lived weakening, or would it be by reference to a long term weakening? To some extent, it is very likely that most circumstances are already covered by the material detriment test. Likewise, directors already have a duty to shareholders and creditors to not undertake actions to weaken the position of the employer. This should be taken into account when the legislation is drafted;
• Broadening the scope of financial support directions to allow them to be issued to a greater range of individuals - This is likely to be acceptable, but only provided the reasonableness test continues to apply. Otherwise why should a party that is neither connected or associated be liable to make contributions to a scheme of which they are not involved?

To summarise, we welcome the DWP's suggestion of strengthening TPR's powers but do think that the legislation needs to be carefully drafted and not restrict employers in the commercial world. Allowing directors to focus on the best ways to improve an employer's business is surely the best way to promote a stronger covenant available to defined benefit trustees.