Faster, higher, stronger: new powers for TPR

United KingdomScotland

The Government has issued “A Stronger Pensions Regulator”, the first of its promised consultations on defined benefit pensions following the issue of its White Paper in March.

The consultation proposes potentially significant changes to the existing notifiable events and anti-avoidance regimes, as well as increasing the range of civil and criminal sanctions available to The Pensions Regulator (TPR). The aim is that, where appropriate, TPR will be able to respond more quickly, impose higher penalties and take firmer action.

Corporate transactions

In its White Paper, the Government drew back from introducing a compulsory ‘clearance' regime. Nevertheless, it plans extensive changes which will require employers to engage more closely with TPR and trustees, both before and after transactions occur.

Employers will have to notify TPR of the sale of a material proportion of the business of a scheme employer responsible for funding at least 20% of scheme liabilities; the granting of security in priority to scheme debt; significant restructurings of the employer board; and if the sponsoring employer takes independent pre-appointment insolvency or restructuring advice.

For the first time, employers will also have to notify TPR of certain events in advance. They must tell TPR when heads of terms are agreed for the sale of the controlling interest in a sponsoring employer, the sale of its business or assets, or the grant of security described above. However, despite the headlines generated by the ‘excessive’ dividend payments in the BHS and Carillion cases, there is no proposal yet to require the reporting of dividend payments.

In addition, if certain criteria are met, the sale of the controlling interest in an employer, the sale of its business or assets or the grant of security will trigger the need for an employer to produce a Declaration of Intent before signature of the relevant transaction. This statement, addressed to the trustees, must explain the nature of the transaction, the consultation that has taken place with the trustees and how any detriment to the scheme will be mitigated.

Civil and criminal penalties

The Government proposes to open up the civil penalty regime so that while “low level” non-compliance will continue to attract relatively modest fines under existing law, serious failures to comply could be punished with fines of up to £1m, for example where they have caused actual harm to the scheme.

In addition, there will be new criminal offences (to be deployed in the most serious cases of wrongdoing) of wilful or grossly reckless behaviour in relation to a DB scheme, non-compliance with a contribution notice and failure to comply with the expanded notifiable events framework.

More detail on the enhanced penalty approach is set out in the consultation document.

TPR’s “moral hazard” powers

The Government also intends to make the most significant changes for a decade to the moral hazard regime (TPR’s powers to issue contribution notices or financial support directions against entities connected or associated with a DB pension scheme, where it considers it reasonable to do so).

Changes to the contribution notice rules would focus the “reasonableness” test on loss or risk to the scheme, rather than the target company’s relationship with the scheme; and the existing process for financial support directions will be streamlined so that TPR can make a specific direction as to the financial support to be provided, enforceable by the trustees. DWP will also explore whether the “lookback period” for connection or association in financial support direction cases could be increased beyond the current two years. A full list of reforms is provided in the consultation document.

Conclusions and next steps

This consultation will interest corporate and insolvency practitioners just as much as those involved in running DB schemes. If implemented as described, the changes would give a clear boost to TPR’s armoury. However, the consultation is seeking views widely, so we would encourage trustees and employers to engage before these proposals are set in stone.

The timing of the final changes is not made clear, but the White Paper suggested legislation only when Parliamentary time allowed. Many of the proposals will require primary legislation, which may not now appear until the 2019/20 Parliamentary session.

The consultation closes on 21 August and can be found here.