The Government has announced changes that will extend the scope of the Pension Regulator's "moral hazard" powers introduced by the Pensions Act 2004 to protect the Pension Protection Fund.

In April this year, the Government proposed changes to the contribution notice and financial support direction powers of the Pensions Regulator.

Following consultation, the Government has announced the final form that the amendments will take:

1. A new power for the Regulator to issue a contribution notice where the effect of an act (or failure to act) was materially detrimental to the likelihood of a member receiving those benefits the rights to which he had accrued up to the time of the act (or failure to act). The Pensions Regulator will set out in a Code of Practice the circumstances in which it expects to use these powers. The draft content for this Code has been published and the expected circumstances are:

  • Transfer of the scheme out of UK jurisdiction.
  • Transfer of the sponsoring employer out of UK jurisdiction, where there is a material reduction in the level of employer support or legal or regulatory protection of members.
  • Transfer of liabilities to a scheme which does not have sufficient employer support or is insufficiently funded.
  • A business model or operation of the scheme which is designed to benefit the employer (or some other person), but fails to take adequate account of the members of the scheme.

Unsurprisingly, these are all very broad brush and the facts of each scenario would be critical. Codes of Practice are not law, so the Regulator could issue a contribution notice in circumstances which are not set out in the Code. However, if it did so, there may then be grounds for challenging the Regulator's decision on the basis that it was acting unreasonably.

There would also be a statutory defence requiring due diligence of whether the act (or failure to act) would result in material detriment and either action to eliminate or minimise the detrimental effect or reasonable conclusion that members would not be detrimentally affected. In practice, we expect that parties would seek clearance rather than rely on this defence.

2. At present, the Regulator can issue a contribution notice where, otherwise than in good faith, an employer prevents a section 75 debt becoming due, compromises or otherwise settles such a debt, or reduces the amount of such a debt which would otherwise become due. The "otherwise than in good faith" will be removed.

3. The Regulator's power to issue a financial support direction (FSD) where an employer is insufficiently resourced is to be amended so that an FSD can be issued where two or more group companies have sufficient resources to meet the difference between the resources of the employer and half the estimated section 75 debt. This will make it easier to meet the threshold for whether an FSD should be issued.

4. Where there has been a bulk transfer of members, the Regulator will be given the power to issue a contribution notice or FSD in relation to the receiving scheme, if the test for doing so would have been met against the transferring scheme. However, the contribution notice or financial support required would be issued in relation to the receiving scheme for the benefit of the members transferred. This appears to be clearly aimed at some of the new business models aimed at transferring pension liabilities away from the sponsoring employer, but which do not involve securing member benefits with an insurance policy.

5. The Government is also taking the opportunity to clarify that a contribution notice can be issued in relation to a series of events rather than a single event. This is not a significant change as it is likely that the courts would interpret the current legislation in this way.

The Government has also announced its intention to consult on the "lookback" period for an FSD. At present, an FSD can only be issued if the criteria is met in the 12 months ending with the Regulator's determination. However, the process for issuing an FSD is complex, and the Government is proposing a gradual increase to 24 months.

The Government is also going to consult on a simplification of the notifiable events regime. It is proposing that the following will no longer be notifiable events:

  • two or more changes of scheme actuary and auditor in the last 12 months;
  • any change in employer credit rating (or ceasing to have a rating); and
  • two or more changes of the employer's chief executive and finance director in the last 12 months.

The removal of notification of changes in credit rating - which was subject to directions from the Regulator limiting its scope - suggests that the Regulator is more comfortable with its own internal systems for identifying companies which may be failing.

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