The government has published its response to its consultation on the pensions White Paper (Protecting Defined Benefit Pension Schemes).
A summary of some of the key proposals can be found here. Many across the pensions industry thought that the current regulatory regime was largely fit for purpose and the solution was to ensure that the Pensions Regulator (“tPR”) is equipped to exercise its current range of regulatory powers. However, there seemed to be a clear political impetus behind the White Paper, particularly in the wake of high-profile company collapses such as BHS and Carillion.
This update summarises the government’s proposed action points, as detailed in its response to the consultation. Many of the proposals will require primary legislation so it is unlikely that we will see any legislation before 2020.
Notifiable events framework
The government proposes the introduction of two new employer-related notifiable events:
- Sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities; and
- Granting of security on a debt to give it priority over debt to the scheme.
It is also intended that the existing notifiable event of "wrongful trading of the sponsoring employer" be removed.
The government confirmed that it would not include the payment of dividends as a notifiable event but that it will continue to work with BEIS in relation to strengthening the UK's framework relating to dividend payments. Instead, the Pensions Regulator will consider dividend payments as part of their review scheme valuations that are submitted to them.
Declaration of intent
Whilst the government agreed that early engagement would be beneficial where corporate activity may impact on a pension scheme, it recognises that there are concerns around commercial sensitivity and confidentiality.
It therefore has no current plans to legislate in this area. Instead it plans to work with the regulator to review its guidance setting out expectations, and to ensure the Notifiable Events Code of Practice and supporting guidance makes clear the importance of collaboration between employers and trustees. Further detail regarding the content and timing of such a declaration is awaited.
Improved regulator powers
The consultation looked at how best to deter and punish reckless behaviours towards DB pensions schemes, including proposals to introduce a new civil penalty of up to £1 million and three criminal offences.
The government intends to introduce two new criminal offences targeting those who wilfully or recklessly mishandle pension schemes and also for failure to comply with a Contribution Notice (“CN”). The civil penalties framework will also be amended so that, in future, penalties of up to £1m could be awarded.
The consultation looked at proposals to strengthen, clarify and improve TPR’s anti-avoidance powers, specifically considering CNs and Financial Support Directions.
The government proposes the following changes in relation to CNs:
- Amendment of the reasonableness test as set out in section 38(7) of the Pensions Act 2004 to reflect that the actual or potential impact of the act, or failure to act, on the value of the scheme’s assets or liabilities, would be a relevant consideration when determining the amount to be paid under a CN; and
- Addition of two further limbs to the material detriment test (as set out in section 38A(4) of the Pensions Act 2004) in order to clarify the legislation. A snapshot funding approach is proposed in both new limbs, and the test would be met if either:
- The amount the scheme would have recovered on a hypothetical insolvency of the employer is materially reduced as a result of the act; or
- The “value” of the employer provides materially less ‘coverage’ of the scheme’s section 75 deficit following the “act”.
The government agrees that uprating, including the use of inflation indices or other suitable investment market indices, is an appropriate way to protect the value of the CN. It will consider whether an uprating mechanism should be incorporated into legislation and to consider further ways uprating can be incorporated into CN legislation.
The government proposes changing the calculation date at which the cap on the level of recovery under a contribution notice is calculated to a date closer to the final determination.
In respect of Financial Support Directions:
- The government intends to proceed with the streamlining proposal, and will work with TPR and the PPF to amend the process to a single-stage process. The name of the regime will also be changed to Financial Support Notice;
- The current 'insufficiently resourced' test will be replaced with a new test which will be scheme-focussed, and the government will continue to work with TPR on the detail of the new test. The current definition of a service company (in relation to the service company test) will also be amended in due course although the response did not contain any detail on this point;
- The government intends to tighten up the forms of financial support the target of a FSD is required to provide to cash and/or joint and several liability (the targets being made jointly and severally liable for the sponsoring employer's liabilities in relation to their pension scheme). It was also noted that there should still be scope for a target to agree an alternative form of support outside the formal FSD process;
- The FSD lookback period will not be increased at this time, but further consideration will be given to whether an increase is appropriate in light of other changes (such as the move to a single-stage process).
The government’s response to the consultation does not contain any real surprises.
The devil does of course continue to be in the detail. In due course, we expect to see the draft legislation and supporting regulatory material. At that point, it will be easier to see exactly how the government proposals are to be implemented.