UK: Pensions White Paper - More Changes On The Horizon For Defined Benefit Scheme

Last Updated: 17 May 2018
Article by Mark Howard

As a response to the high profile BHS case, the Government intends to give more powers to the Pensions Regulator which could increase the burden on directors and officers of sponsoring employers.

The Government has concluded that there is no systemic problem in the regulatory and legislative framework that governs defined benefit pension schemes; but there are examples of sponsoring employers misusing the flexibility in scheme funding, so the proposed changes are aimed at supporting the Pensions Regulator's ambition to be clearer, quicker and tougher. The key proposals which will affect directors and officers are:

  • Fines and new criminal offence

    The Pensions Regulator currently has the power to issue a "contribution notice" where a sponsoring employer, or a connected person (such as a director), has carried out an act or omission which is materially detrimental to the defined benefit pension scheme. The Regulator is to be given an express power to issue penalties against the targets of a contribution notice. A new criminal offence will also be introduced "to punish wilful or grossly reckless behaviour of directors" in relation to a defined benefit pension scheme.

  • Changes to contribution notices and financial support directions

    The Government will review the Pension Regulator's powers to issue contribution notices and financial support directions more generally. This is in response to the Regulator identifying other ways in which the current powers "could be enhanced". However, the White Paper does not go into any detail.

  • Notifiable events framework

    The notifiable events framework requires the Pensions Regulator to be informed of certain events which might lead to a claim on the Pension Protection Fund. (For example, a sponsoring employer of a scheme has to give notice of a change in its controlling company.) This will be reviewed with the aim of ensuring that all relevant transactions are covered, and whether the timing of notification to the Regulator is adequate or should be brought forward. Failure to comply with the notifiable events framework can lead to penalties being issued and it seems likely the Regulator will be monitoring compliance more closely.

  • Declaration of impact

    A new requirement of a "declaration of impact" will be placed on sponsoring employers or parent companies, prior to "relevant business transactions" taking place (such as the sale or takeover of a sponsoring employer). This will be issued, in consultation with trustees of the scheme. This will mean that trustees will need to be fully consulted before a corporate transaction takes place - which is not always the case. The Government shied away from making Pensions Regulator clearance for corporate acquisitions mandatory – it would have been impossible for the Regulator to resource in any event – but this may mean that employers have to articulate their reasoning for not applying for clearance and will be a statement that the Regulator will undoubtedly refer back to if the actual impact on the scheme is significantly different.

  • Information gathering

    The Regulator's information gathering powers are being increased with the introduction of powers to compel a person to attend an interview with the Pensions Regulator: civil penalties for a failure to respond to section 72 notices for information (as an alternative to the existing criminal sanction), and an extension of the Regulator's existing inspection powers. The Government has decided against legislating for a "duty to co-operate" at this stage, but will give this matter further consideration as part of the wider discussions on a more proactive Regulator.

  • Director disqualification

    Although not new, the White Paper mentions the ability of the Insolvency Service to investigate and disqualify individuals from acting as directors. It might be expected that there will be more disqualifications based on the steps that former directors took (or omitted to take) in relation to defined benefit schemes. The Insolvency Service is looking to disqualify Dominic Chappell – who bought BHS – for 15 years.

The most headline grabbing change in the White Paper has been the proposals for a new criminal offence. But the most significant change for directors may be the declaration of impact: a statement which could be used to hold them to account if it all goes wrong at a later date.

As ever with pensions, the devil will be in the detail, and there will be further consultations to be carried out, but the changes are unlikely to come into force before 2020.

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.

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