UK: The Pensions Act 2004: The New Regulator

The Pensions Act 2004 (the "Act") received Royal Assent on 19 November 2004. Its provisions are expected to come into force from April 2005. Amongst other matters, the Act has followed the advice of the Pickering Report to dissolve the Occupational Pensions Regulatory Authority ("OPRA") and replace it with a new Pensions Regulator (the "Regulator"). It is intended that the Regulator will be less concerned with minor administrative breaches and have greater powers to deal with schemes that are persistently poorly run. However, it is yet to be seen what the Regulator considers to be minor breaches. The purpose of this article is to set out a summary of the Regulator’s new powers and its duties under the Act.

The so-called "moral hazard clauses" allow the Regulator to issue a contribution notice to an employer who has taken any action or who has omitted to act with a main purpose of reducing or removing the debt on the employer of a scheme on its wind up. A notice can also be issued against group companies or substantial corporate shareholders.

The Regulator may also issue a financial support direction to require a group company or substantial shareholder to become financially liable for the obligations of the employer under the scheme. This may be issued if the Regulator believes that the employer is either a service company or is insufficiently resourced to meet pension scheme liabilities.

The Regulator will have the power to wind up the pension scheme when the employer is insolvent. It will also have a power to issue a freezing order which prevents benefits accruing under the scheme or the scheme winding up. The order may also specifically prevent other actions, such as the payment of benefits or transfers out of the scheme. Once a freezing order is in place, the Regulator will have time to assess whether it is appropriate to put the scheme into wind up or to use its other powers to protect the interests of members.

The Regulator will have the power, in particular:

• to prohibit a trustee from acting as trustee of any scheme, not just a particular scheme;

• to issue a prohibition order in relation to a trustee continuing to act whenever it sees fit;

• to suspend a trustee not only when proceedings have been instituted against him for an offence involving dishonesty or deception, but also when such proceedings are being considered.

The Regulator will keep a register of people who are prohibited from acting as trustees. This will not be made publicly available but it will be possible to obtain confirmation from the Regulator that a proposed trustee is not on the register.

On the employer’s insolvency, the Regulator has a number of new powers, in particular:

• the right to make a restoration order for the return of property which has been subject to a transaction at an undervalue which has taken place on or after 11 June 2003 and in the two years before the insolvency; and

• the power to apply to the court for restitution against the insolvent employer for actions when the scheme was underfunded prior to the insolvency, under section 423 of the Insolvency Act 1986 (Transactions defrauding creditors).

The Regulator will have the power to request information in relation to pension schemes from trustees and employers. In particular:

• the Regulator will take over OPRA’s task of managing the registry of occupational and personal pension schemes. However, it will require regular updates of the position of schemes and will send returns to schemes to provide this information; and

• the Act places an obligation on pension scheme trustees, employers and advisers to report to the Regulator any breach of pensions law by them or someone else in relation to the administration of the scheme, which is material to the Regulator. Under the previous rules, trustees and employers were able to report breaches to OPRA but were not under an obligation to do so. Following OPRA’s policy, the Pensions Regulator may well take a less aggressive line with those trustees and employers who have reported their own failings.

The Act includes a number of new powers for the Regulator to deal with situations where OPRA found its powers to be either insufficient or too extreme. These include:

• the right to issue an improvement notice, giving directions to a party that appears not to be complying with pensions legislation. A failure to comply with the notice would result in fines;

• a third party notice requiring a third party whose actions or inactions have resulted in the trustees or others involved in the scheme failing to comply with their obligations. A common example of this has been the inability of trustees to produce accounts due to delays by insurers providing fund information;

• the Regulator will be able to apply to court for injunctions to prevent the misuse of assets and restitution orders where such misuse has taken place;

• the Regulator may exercise the powers of the trustees of the pension scheme to collect overdue contributions from the employer.

The Regulator has been structured with more complexity than OPRA. It has a chairman, a chief executive and five other members. Alongside this is a non-executive committee and a determinations panel which exercises certain of the Regulator’s functions.

Most actions by the Regulator will allow the affected parties the opportunity to make representations. Even if this is not possible, there is a right to appeal any decision to the Pensions Regulator Tribunal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.