Originally published 24 April 2008
Last Monday, the Department for Work and Pensions announced an eight-week consultation on extending the powers of the Pensions Regulator.
The Pensions Act 2004 gives the Regulator various 'anti-avoidance' powers, which include the powers to issue contribution notices and financial support directions with a view to supporting defined benefit pension schemes and reducing calls on the Pension Protection Fund.
Contribution notices can require contributions to be paid to a pension scheme if there is or has been behaviour aimed at avoiding a debt payable to a pension scheme or preventing such a debt becoming due: this could extend to what some may view as innocuous corporate activities (e.g. returns of capital).
Financial support directions require a parent company or another person connected or associated with the scheme employer to put in place support for a pension scheme, if the employer is under-resourced or a service company.
While the DWP's view is that the current regulatory regime works well and that the Regulator's powers are an effective deterrent, it is conscious that, in light of experience, there are a number of areas in which the extension of the Regulator's powers might be helpful.
The proposed changes are:
- The Regulator will no longer need to demonstrate that the main purpose (or one of the main purposes) of the act in question was to avoid funding the scheme. Instead, it will be enough that the effect of an action or a course of action posed a materially detrimental risk to scheme benefits. However, it is recognised that it may not be appropriate to allow the new powers to be exercised if the likely consequences of the action could not reasonably have been foreseen;
- Withdrawing the provisions preventing contribution notices being issued if the party acted in good faith, notwithstanding that its actions have had the effect of preventing a debt becoming due;
- Ensuring that the Regulator's powers are not frustrated by the making of 'bulk transfers' between pension schemes, where the transfer is detrimental to members' interests. This is of potential relevance where an employer seeks to have a transfer undertaken for reasons of administrative efficiency and/or to reduce costs (e.g. merging a number of its schemes);
- Allowing the resources of the whole of an employer's group of companies to be taken into account when considering whether to issue a financial support direction (rather than having to identify a single party to which the direction is to be issued); and
- Allowing contribution notices to be issued based on a series of acts, rather than by reference to a single act.
The majority of the amendments are to take effect from 14 April 2008. However, the last of the changes noted is considered to be a clarification of existing statutory provisions and it is proposed that it will take effect from 27 April 2004.
It is currently possible to apply to the Regulator for clearance (i.e. confirmation that it will not issue contribution notices or financial support directions in relation to a proposed action) and there is no suggestion that this procedure will be withdrawn.
The majority of pension schemes and employers should not be affected by the proposed amendments, but, if a company operates a defined benefit occupational pension scheme and is proposing, say, a return of capital or the granting of additional security over its assets, consideration should be given to factoring the scheme into the proposal and whether clearance should be sought.
As ever, the actual impact of the proposed changes will depend on their detail and the manner in which the proposed new powers are applied. Although, like the existing provisions, the proposed extended powers will have the potential to impact on corporate activities (e.g. mergers, acquisitions and restructurings), it should be borne in mind that, despite initial concerns, the current powers have been applied in a manner that promotes pension scheme security but which has not unduly affected normal commercial activity. In addition, when welcoming the proposed changes, the Regulator's chief executive confirmed that it will continue to operate the clearance process in a pragmatic, proportionate and responsive manner, using its powers only as a last resort.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.