UK: Protecting Defined Benefit Pension Schemes – proposals for a stronger Pensions Regulator

Last Updated: 20 August 2018
Article by Mark Howard
Most Read Contributor in UK, November 2018

Following on from the March 2018 White Paper - Protecting Defined Benefit Pension Schemes - the Government has issued the first of its promised further consultation papers considering in more detail the proposed changes to the Pension Regulator's powers.

The proposals in the consultation are designed to improve the Pensions Regulator's powers so that the Regulator:

  • can be more proactive and get involved earlier where employers make changes which could affect the pension scheme;
  • can obtain the right information about a scheme from its sponsoring employer; and
  • are able to gain redress when things go wrong.

Our commentary on the March 2018 White Paper is available here.

Notifiable Events

The notifiable events framework requires trustees and employers to inform the Pensions Regulator of certain events to give advance warning of circumstances which could lead to insolvency and a claim on the PPF. The White Paper had identified this as an area for reform, both in terms of the events to be notified and when the notification should be given.

The proposal is for a broader range of employer-related events which require notification. To balance improved transparency for the Pensions Regulator with the additional burden on businesses, it is envisaged that only transactions exceeding a certain risk threshold should be notified. This threshold would be determined by the Pensions Regulator.

The new notifiable events being proposed are:

  • Sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme's liabilities. It is not clear what measure of scheme liabilities will be adopted for this purpose.
  • Granting security on a debt to give it priority over debt to the scheme.
  • Significant restructuring of the employer's board of directors. This would encompass an appointment of a "chief restructuring officer" or "chief transformation officer" (or similar) and changes to two out of three of the chairman, chief executive office (or equivalent) or chief finance officer (or equivalent) in a six month period.
  • Sponsoring employer taking independent pre-appointment insolvency / restructuring advice. The current notifiable event of "wrongful trading of the sponsoring employer" will be removed as experience has shown that an employer wrongfully trading is unlikely to admit it by reporting to the Pensions Regulator.
  • The current notifiable event of "breach of a banking covenant" will be widened to include covenant deferral, amendment or waiver. This could have a significant impact as covenant deferral, amendments or waivers are not uncommon. It is also unclear how the widened notifiable event will interact with loan agreements which allow a borrower to cure a default by injecting more cash into the business or where a breach of a financial covenant only gives rise to an event of default if it is breached on consecutive testing days.

Declaration of Intent

A declaration of intent will be required at a later point in a corporate transaction than a notifiable event, where there is greater certainty as to whether the transaction is going ahead. This will be after due diligence and transaction financing has been finalised, but before the sale and purchase contract has been signed.

The declaration of intent will oblige companies to think about the effect of corporate decisions on pension schemes and at an appropriately early point in the transaction. It is intended to form part of an enhanced "early warning system" as all parties will be aware of concerns and proposed mitigations earlier than is currently the case.

Declarations of intent will apply to:

  • sale of controlling interest in a scheme employer;
  • sale of the business or assets of a scheme employer; and
  • granting of security in priority to scheme debt.

The declaration of intent would be addressed to the trustees from the transaction's corporate planners (usually the Board of the company) and would be shared with the Pensions Regulator. It would:

  • explain the nature of the planned transaction;
  • confirm that the trustees have been consulted with and confirm the trustees' agreement (or otherwise) to the planned transaction; and
  • explain any detriment to the scheme and how this is to be mitigated.

Contribution Notices, Financial Support Directions and Clearance

Contribution Notices can be imposed where employers or connected parties act in a way which is materially detrimental to the scheme. A number of changes are proposed:

  • Amending the "reasonableness test" so that there is a stronger focus on the loss or risk caused to the scheme.
  • Changing the date on which the cap on the level of the contribution notice (the section 75 debt) is determined, so it is closer to the date of the final determination than the date on which the "act" attracting the contribution notice occurs. This is aimed at mitigating the risk that the deficit increases during the time it takes the Regulator to take enforcement action. A mechanism will be introduced so that the contribution notice sum can reflect the impact of a delay in payment.
  • Amending the material detriment test so that is can be assessed by reference to the weakening of the employer strength.

Financial Support Directions (FSDs) can require a company associated with a sponsoring employer to provide financial support for a scheme. Proposed changes to the FSD powers are:

  • Creating a single stage process under which the FSD is imposed with a specific and enforceable obligation on the target.At present the FSD is imposed and the target must then agree the support with the Pensions Regulator, failing which a contribution notice is imposed. The aim is to make the process of obtaining the financial support quicker once the FSD is imposed.
  • Financial support is to be provided in the form of either cash or a statutory guarantee.
  • Reviewing the "insufficiently resourced" criteria for whether an FSD should be imposed.
  • Allowing FSDs to be imposed on a broader range of individuals.
  • Allowing the actions of a target in creating or increasing risk for the scheme to be taken into account when assessing whether an FSD should be imposed.
  • Providing the Regulator with the power to impose a contribution notice on any person connected or associated with an FSD recipient.
  • Increasing the "lookback" period for imposing an FSD beyond the current two years.
  • Allowing an FSD to be imposed after a scheme has transferred to the PPF.

Employers can apply to the Pensions Regulator for clearance for a particular transaction. This is a voluntary process and, if granted, is a formal confirmation from the Pensions Regulator that it will not use its Contribution Notice and /or Financial Support Direction powers in relation to that transaction. The Pensions Regulator will be reviewing its clearance guidance in light of the proposed changes, but no changes to the legislation governing clearance are envisaged.

Improved Regulator Powers

Primary legislation will be introduced to widen the circumstances in which fines and criminal proceedings can be used, so that the Pensions Regulator has a comprehensive suite of powers to use in varying circumstances:

  • The existing civil penalties of up to £5,000 for an individual or £50,000 for a company for low-level non-compliance will be maintained.
  • A new civil penalty – of up to £1 million – will be introduced to deter behaviours which are more serious and which result in actual harm to a pension scheme (or have the potential to do so if left unchallenged). This could be applied for non-compliance with the updated Code of Practice for defined benefit funding.
  • New criminal offences for "wilful or grossly reckless behaviour in relation to a defined benefit pension scheme", non-compliance with a contribution notice and a failure to comply with the notifiable events framework.

Clyde & Co Comment

The changes to the notifiable events framework – backed up by the new civil penalty or criminal sanctions – and the declaration of intent will have a significant effect on corporate activity where there is a defined benefit pension scheme. It will force companies to engage with trustees at an early stage in a transaction (something which surprisingly still does not always happen). It is also unclear whether members will be able to see the declaration of intent. Whilst a transaction is on-going there would be an understandable reluctance due to commercial sensitivity. But if it proceeds, members might argue that they have a right to see how the security of their pension was taken into account.

The application of the new larger civil penalty– and the prospect that it could be applied to sponsoring employers for failing to comply with the defined benefit funding Code of Practice - is also a significant change to the Regulator's powers and ability to take action against sponsoring employers over scheme funding.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark Howard
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions