Key Dates

Consultation response issued on 11 February 2019.

Consultation issued on 26 June 2018.

White Paper, "Protecting Defined Benefit Pension Schemes", issued on 19 March 2018.

Summary

The DWP has issued a response to its consultation in June 2018 on strengthening the powers of the Pensions Regulator (tPR).  The government intends to legislate to implement its proposals "as soon as Parliamentary time allows".

Notifiable events framework: additional notifiable events

The range of notifiable employer-related events will be extended to include the following:

• sale of a material proportion of the business or assets of a sponsoring employer which has funding responsibility for at least 20% of the scheme's liabilities; and
• granting security on a debt to give it priority over debt to the pension trustees (according to the June 2018 consultation, this would not include security granted for specific chattels financing, such as hire purchase of company vehicles).

Wrongful trading of the sponsoring employer will cease to be a notifiable event, since experience has shown that wrongful trading is highly unlikely to be made public, regardless of any notification duty.

Following consultation, the government has decided against extending the notifiable events framework to include:

• significant restructuring of the employer's board of directors and certain senior management appointments;
• a sponsoring employer taking independent pre-appointment insolvency or restructuring advice (such as an independent business review);
• extension of the current notifiable event of breach of a banking covenant to include covenant deferral, amendment or waiver; or
• the payment of dividends (although the Regulator will consider whether the level of dividend payments is appropriate when reviewing a scheme's funding valuations).

The government will consult on details of the above changes to the notifiable events regime, plus on any changes to scheme-related notifiable events.  The Regulator is expected to update its guidance and to consult on a revised code of practice.

Notifiable events: timing of notification

Currently, tPR must be told of notifiable events as soon as reasonably practicable after they have occurred.  Following consultation, the DWP plans to work with the Regulator and industry to identify where earlier notification of notifiable events would be beneficial.

Declaration of intent

The government will legislate to introduce a "Declaration of Intent" requirement, triggered when one of the following occur:

• the sale of a controlling interest in a sponsoring employer (already a notifiable event);
• the sale of the business or assets of a sponsoring employer (a new notifiable event); or
• the granting of security on a debt to give it priority over debt to the scheme (a new notifiable event).

A declaration of intent will need to be addressed to the trustees from the transaction's corporate planners (usually the board of directors) and shared with tPR.  Further consideration will be given to the content of the declaration.  According to the June 2018 consultation documents, the declaration should:

• explain the nature of the planned transaction;
• confirm that the corporate planner has consulted on its terms with the trustees and confirm the trustees' agreement (or otherwise) to the transaction; and
• explain any detriment to the scheme and how this is to be mitigated.

Following consultation, the government intends to work with the Regulator to identify a flexible approach which takes account of the particular circumstances of individual transactions.  Expectations on timing for both notifiable events and the declaration of intent will be set out in guidance, and the government does not currently plan to legislate for when the declaration should be shared with trustees and the Regulator.

Voluntary clearance

The Regulator is expected to review its clearance guidance and to clarify or expand certain areas, including:

• the "material detriment" test, including how applicants and trustees should approach the test;
• the circumstances in which clearance is given in relation to financial support directions (FSDs); and
• how the clearance process works, including expectations around timing of applications.

The consultation response makes clear that there are no plans to replace clearance with the declaration of intent.

Sanctions

The DWP intends to legislate to widen the circumstances in which fines and criminal proceedings may be used, so that the Regulator or the courts will be able to impose the most appropriate penalty, including:

• a new criminal offence with up to seven years' imprisonment and/or unlimited fines for wilful or reckless behaviour in relation to a pension scheme;
• a new criminal offence with unlimited fines for failure to comply with a contribution notice;
• a new power to impose a civil penalty of up to £1m for more serious breaches, including:
• wilful or reckless behaviour in relation to a pension scheme;
• failure to comply with a contribution notice or financial support direction;
• failure to comply with the notifiable events framework;
• failure to comply with the declaration of intent requirements; or
• knowingly or recklessly providing false information to trustees or the Regulator.
• Non-compliance with information requests (including inspections and interviews) or delays in providing information will be punishable with fixed and escalating civil fines;
• The Regulator will have strengthened powers to act in relation to non-compliance with the proposed clearer funding standards;
• Failure to provide a chair's statement, failure to provide a statement in time, or providing a poor quality statement may be sanctioned under the existing civil penalty power in section 10 Pensions Act 1995.

Potential targets would include all those with responsibility for a pension scheme, including directors, sponsoring employers, associated and connected persons and (in some circumstances) trustees.

Moral hazard powers

The government intends to take forward proposals to strengthen the contribution notice (CN) regime, including the following:

• amending the "reasonableness" test so that, when determining the amount to demand under a CN, there is a greater focus on the loss or risk caused to a scheme by the act or omission rather than on the relationship between the target and the sponsoring employer, or the benefit the target has received from the employer.
• Creating two additional limbs to the "material detriment" test, so that the test would be met if, using a snapshot funding approach, 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
• following the act, the employer's "value" provides materially less "coverage" of the scheme's section 75 deficit.
• Considering whether a specific uprating mechanism should be set out in legislation, so that delays in payment are reflected in the amount payable under a CN.
• Changing the date for calculating the cap on the level of a CN from the date of the act or omission to a date closer to the final determination.

The government intends to proceed with the following proposals to strengthen the financial support direction (FSD) regime:

• creating a single-stage process under which an FSD would create a specific and enforceable obligation on the target.
• Tightening the forms of financial support required, so that an FSD will require a cash payment and/or joint and several liability of the targets for the sponsoring employer's liabilities to the scheme. The consultation response makes clear that it will still be open to a target to negotiate an alternative form of support in a settlement outside the formal FSD process.
• Replacing the "insufficiently resourced" test with a new, scheme-focussed test, to be set out in secondary legislation, and amending the definition of "service company".
• Allowing FSDs to be imposed on individuals who are controlling shareholders of the sponsoring employer.
• Broadening the targets of FSD enforcement activity.
• Changing the name of the FSD regime to the Financial Support Notice (FSN) regime.

Following consultation, the government has decided not to take forward proposals to:

• give the Regulator power to issue an FSD after a scheme has entered the Pension Protection Fund (PPF);
• broaden the scope of FSD targets to include directors;
• amend the reasonableness test to clarify that a target's actions in creating or increasing risk are a relevant factor, in line with the regime for CNs; and
• increase the "lookback" period beyond the current two years.

Information gathering powers

Proposals concerning the Regulator's information gathering powers were not included in the June 2018 consultation paper, but are covered in the February 2019 consultation response.

Stand-alone interview power

The government has decided to proceed with granting the Regulator a stand-alone power to interview, not dependent on the prior issue of a notice under section 72 Pensions Act 2004. Points to note include the following:

• the person to be interviewed will be given prior written notice by the Regulator, explaining broadly the purpose of the interview and the recipient's rights and responsibilities.
• The Regulator will update its "compliance and enforcement policies" to include a statement on the legal context of when it would use the interview power.
• The existing protection against self-incrimination under the Pensions Act 2004 will apply to the interview power.
• The interview power will override an adviser's duty of confidentiality to their client.  However section 311 Pensions Act 2004, concerning legally privileged information and documents would continue to apply.

Inspection power

The government will proceed with the proposal to widen the Regulator's inspection power, so that it may enter any premises where documents or records are kept which are relevant to the exercise of any of the Regulator's functions.  At present, sections 73 and 74 Pensions Act 2004 give the Regulator power to inspect for the purpose of investigating whether certain provisions of pension legislation are being complied with, and in relation to an employer's obligations.

Fixed and escalating civil penalties

• Fixed and escalating civil penalties will be introduced as an alternative to criminal sanctions for non-compliance with a section 72 notice.  The penalties will be similar to existing penalties for breaches of a section 72 notice in relation to auto-enrolment or the master trust regime.
• The power to apply fixed and escalating penalties will be in primary legislation, with the levels of the penalties set out in secondary legislation.

Date Accessed: 28/05/2022