“We’re coming for you”: new powers for The Pensions Regulator

United Kingdom

The Government has announced an extensive package of measures to strengthen the powers of The Pensions Regulator (TPR). TPR’s new powers may concentrate the minds of businesses with defined benefit schemes who are involved in corporate activity.

Background

The proposed regime follows on from last summer’s consultation, “A Stronger Pensions Regulator”, itself issued in the wake of DWP’s White Paper on defined benefit pensions in March 2018. The Government has been keenly aware of the substantial impact on pensions of corporate collapses or restructurings such as those involving BHS, Carillion and British Steel in recent years. It is therefore looking to impose reforms which can nip future scandals in the bud.

The Government’s proposals for change

The Government’s plans fall into the following categories:

New criminal offences: A new offence of “wilful & reckless behaviour in relation to a pension scheme” will carry a maximum custodial sentence of 7 years’ imprisonment. It will also become an offence, punishable with an unlimited fine, to fail to comply with a Contribution Notice (CN) issued by TPR.

‘Early warning’ system: The existing employer notifiable events regime will be extended. Employers will have to notify TPR of the sale of a material proportion of the business or assets of any pension scheme employer with funding responsibility for 20% or more of the scheme’s liabilities; and the granting of security on a debt to give it priority over debt to the scheme. The Government will also require a Declaration of Intent explaining the transaction - addressed to the trustees, and shared with TPR - on either of these events occurring. However, DWP is not now taking forward the proposed notifiable events it canvassed last year of taking independent pre-appointment insolvency / restructuring advice; or the deferral, amendment or waiver of banking covenants.

New penalties: TPR will be granted powers to issue much tougher civil penalties in defined circumstances, with a maximum £1m fine for the most serious breaches such as failure to comply with the notifiable events framework or the Declaration of Intent proposals; or knowingly and recklessly providing false information to trustees. There will also be an enhancement of the existing regime which allows TPR to take action in relation to trustee or employer failure to comply with scheme funding standards.

Moral hazard powers: We will see the most significant changes for a decade to the moral hazard regime, which covers TPR’s powers to issue CNs or financial support directions (FSDs) against entities connected or associated with a DB pension scheme, where it considers it reasonable to do so. These include streamlining the FSD process into a single stage and replacing the current “insufficiently resourced” test with a new, ‘scheme-focussed’ test. This may mean that FSDs are used (and threatened) more frequently than has been the case to date. More detail on the review of moral hazard powers is set out in the consultation response.

Other TPR powers: The Government is to proceed with its plans to expand TPR’s power to inspect premises, and to allow it to apply fixed and escalating penalties much more widely. These reforms build on the successful application of such powers in the context of enforcing auto-enrolment.

Summary and next steps

The Work and Pensions Secretary promised in the Sunday newspapers that the Government is “coming for” reckless executives who saddle pension funds with debt. However, behind the headline-grabbing, there are a range of changes which will enhance TPR’s civil powers and support day-to-day regulation of the sector. TPR has welcomed the proposals, saying they will enable it to identify problems at an earlier stage, and to act more effectively.

The Government commits to no specific timescale for the reforms, which are expected to form the backbone of a Pensions Bill to be published in early summer. It has also accepted that there will need to be further industry dialogue and, in some cases, consultation on the detail.

Please speak to your usual CMS contact if you require more information.

The response to consultation can be found here.