UK: Government Toughens Up Its Plans For A Stronger Pensions Regulator

The Government is planning for a tougher regulatory environment for workplace pensions. The Department of Works and Pensions' (DWP) response to its consultation (Protecting defined benefit pension schemes - a stronger Pensions Regulator) set out a range of new criminal and civil offences with tough penalties. But the Government's response goes further than simply tackling the reckless mismanagement of pension schemes.

We consider how the Government intends to change the regulatory regime for defined benefit pensions and explain what it means for trustees and employers.

Six key points on the Government's plans

1. New criminal offences and tougher penalties for offences relating to workplace pensions

The Government will legislate to introduce a range of new offences relating to workplace pensions. The penalties for these will be tougher than anything that is currently on the statute books. Wilful or reckless behaviour in relation to a pension scheme will carry a maximum criminal penalty of seven years' imprisonment and/or unlimited fines.

2. The Pensions Regulator's powers to gather information will be strengthened

The Pensions Regulator (TPR) will gain a new power to require attendance at an interview. In addition, TPR's powers of inspection will be broadened to cover any premises where documents or records (including in electronic format) are kept which are relevant to the exercise of any of TPR's functions.

3. The Pensions Regulator will have greater oversight of corporate transactions

This will be achieved by broadening the notifiable event regime and requiring parties to issue Declarations of Intent in respect of certain transactions. TPR will also undertake a review of its voluntary clearance process.

4. The Government will amend the anti-avoidance regime

The Government has confirmed that it will go ahead with plans to streamline and enhance the way that the Contribution Notice and Financial Support Direction processes work.

5. The Government will not go ahead with all of its proposals

The DWP has confirmed that it will not go ahead with all of the proposals set out in the Consultation.

6. The DWP will legislate "as soon as Parliamentary time allows"

In the Consultation Response, the Government states that it intends to implement the new measures using primary and secondary legislation "as soon as Parliamentary time allows". It isn't likely that this will be during the current parliamentary session. Subject to Brexit, we expect legislation to feature in the Queen's Speech in June 2019.

Why is the Government making these proposals?

The collapse of BHS highlighted the management of defined benefit (DB) pension schemes. The clamour for action intensified when Carillion declared insolvency. Against this backdrop, the Government issued a Green Paper in February 2017 to consider policy objectives (Defined benefit pension schemes: security and sustainability) followed by a White Paper in March 2018 setting out more detail on its proposals (Protecting Defined Benefit Pension Schemes).

In the White Paper, the Government stated that the existing regime is working well for the majority of DB pension schemes, members, trustees and sponsoring employers but that it could see ways in which the system could be improved. To that end, on 26 June 2018, the DWP launched a consultation setting out specific proposals (Protecting Defined Benefit Pension Schemes - A Stronger Pensions Regulator). The Government has now published its response to the comments received during the consultation period.

Which proposals is the Government going ahead with?

New offences and penalties

The Government will legislate to introduce a new system of criminal offences and tougher penalties for various offences relating to workplace pensions. These will include:

  • a maximum penalty of up to seven years' imprisonment and/or unlimited fines for wilful or reckless behaviour in relation to a pension scheme;
  • unlimited criminal fines or civil fines of up to £1 million for failing to comply with a contribution notice;
  • the introduction of new civil fines of up to £1 million for:
    • failing to comply with a financial support direction (FSD);
    • failing to comply with the notifiable events framework;
    • failing to comply with the requirements for a Declaration of Intent (see Greater information gathering powers for TPR below); and
    • knowingly or recklessly providing false information to trustees or to TPR.

The potential targets of these sanctions will include sponsoring employers, trustees and persons/companies that are connected or associated with the employers.

In addition, the Government intends to introduce fixed and escalating civil fines as an alternative sanction for non-compliance with TPR information requests (also known as section 72 requests). These will cover inspections and interviews and also delays in providing information.

Greater information-gathering powers for TPR

TPR is to get two new information-gathering powers in a bid to "harmonise and broaden" its powers and thereby enable it to conduct its investigations "in a more efficient way".

  1. Power to require attendance at an interview - the Government will legislate to introduce a power to require attendance at an interview. Such requests will be accompanied by a written notice along the lines of the notice currently issued to obtain information under section 72 of the Pensions Act 2004. It is intended that when issuing such a notice, TPR will explain broadly the purpose of the interview and set out the recipient's legal rights and responsibilities.
  2. Broadening the power of inspection - TPR's power to inspect premises will be expanded to cover any premises where documents or records (including in electronic format) are kept which are relevant to the exercise of any of TPR's functions.

These powers extend to trustees, employers, and other relevant persons. They also extend to professional advisers, and will override the adviser's duty of confidentiality, except insofar as legally privileged material is concerned.

Increasing TPR's oversight of corporate transactions

The DWP will legislate to increase TPR's oversight of corporate transactions. This will be achieved by broadening the notifiable event regime and introducing Declarations of Intent. Under the new regime for Declarations of Intent, sponsors will have to provide trustees and TPR with an explanation of the impact of a proposed transaction on a workplace pension scheme and set out any mitigating steps that are being proposed.

Changes to the notifiable events regime

The Government will consult on regulations to introduce new employer-related notifiable events. These will be triggered on the:

  • 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; and
  • granting of security on a debt to give it priority over debt to the pension scheme.

The existing notifiable event of wrongful trading of the sponsoring employer will be removed (because a self-reporting obligation for wrongful trading is not very effective).

The Government has also committed to work with TPR and the pensions industry to identify where earlier notification could be beneficial in relation to each of the employer-related notification events. An assessment of the impact of the changes to the notifiable events framework on business will also be carried out by the DWP.

Introduction of Declarations of Intent

Despite opinion being divided over this proposal, the Government will introduce a requirement for 'corporate transaction planners' (which will include, among others, the scheme sponsor or parent company) to provide a Declaration of Intent to the trustee board and TPR. The need for a Declaration of Intent will be triggered by certain existing and new notifiable events, namely:

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

TPR will update its guidance and Code of Practice on notifiable events to set out the timing for sharing the Declaration of Intent. The consultation response notes that a 'flexible approach' needs to be developed which takes into account the particular circumstances of individual transactions and also commercial sensitivities.

The exact content of the Declaration of Intent is also still to be decided. It is expected that it will require an explanation of the transaction and how any resulting detriment to the scheme is to be mitigated. The idea is that this requirement should act as an early warning that would compel sponsors to engage with trustees on transactions that are likely to have a significant impact on the pension scheme.

Voluntary clearance

TPR is to undertake a review of its guidance on the voluntary clearance process, which enables employers to obtain comfort from TPR that a cleared transaction will not subsequently be the subject of TPR's anti-avoidance powers. The review will focus on:

  • how "material detriment" (one of the conditions for TPR issuing a contribution notice) should be defined;
  • the types of events to which clearance is particularly relevant; and
  • information about the clearance process.

Amending the anti-avoidance regime

The "anti-avoidance regime" has several aspects but the most important are TPR's powers to issue "contribution notices" and "financial support directions". Broadly, contribution notices are a demand to pay a specified sum into a pension scheme, and financial support directions require the target to give financial support to the scheme, which can take various forms.

The practical effect of the regime is to impose pension liabilities on other persons or companies beyond the employers who have the direct legal obligations to the scheme under its deeds and the statutory scheme funding regime.

Contribution Notices

Contribution notices may be issued if an employer or a connected or associated person has acted, or failed to act, in a manner which had a "materially detrimental" effect on the pension scheme. They can also be issued if the action or failure had as one of its main purposes the reduction of a debt due to the scheme, or reduced recovery of such a debt.

The Government will change the way that Contribution Notices function. Proposals include the following:

  • The Regulator can only issue a contribution notice if it considers it reasonable to do so, and there is a prescribed list of factors to consider in assessing reasonableness. The Government proposes to add to this list the actual or potential impact of the act (or failure to act) on the scheme's assets or liabilities.
  • The effect of the act (or failure) on the value of the assets or liabilities already forms part of the test for material detriment (as do numerous other things), but the Government proposes to add two additional limbs to the material detriment test. This would enable the test to be met if an act (or failure) reduces the potential insolvency dividend of the scheme and/or reduces the level of "cover" available to support a statutory debt to the pension scheme if one were to be triggered. This would give TPR more scope to issue contribution notices.

The Government will consider whether an uprating mechanism to reflect the time between the act and the determination to issue a Contribution Notice needs to be set out in legislation.

Financial support directions (FSDs)

FSDs can currently be issued if the employer in relation to a pension scheme is "insufficiently resourced" (defined broadly as having resources of less than 50% of the buy-out deficit) or is a service company.

The Government will work with TPR and the Pension Protection Fund (PPF) to streamline the FSD process to a single-stage process. FSDs will also be renamed as Financial Support Notices (FSNs).

FSD/FSN targets will be expanded to include controlling shareholders of the sponsoring employer (who are individuals) and the 'insufficiently resourced' test will be replaced with a new scheme-focused test, details of which have not yet been provided.

The forms of financial support that may be imposed under a FSD/FSN will be limited to cash and/or making the target of the FSD/FSN jointly and severally liable for the employer's obligation to the pension scheme.

Which proposals will the Government not take further at this time?

There were various proposals floated in the consultation paper which the Government has said in its consultation response that it is not currently minded to take forwards.

New offences and penalties

The Government will not introduce criminal offences for failing to comply with the notifiable events framework. In addition, the penalty for the criminal offence of failing to comply with a Contribution Notice will not include imprisonment.

Corporate transaction oversight

The Government will not change the notifiable event framework to:

  • include new notifiable events on the significant restructuring of the employer's board of directors and certain senior management appointment and sponsoring employer taking independent pre-appointment insolvency or restructuring advice;
  • extend the existing notifiable event on the breach of banking covenant to include covenant deferral, amendment or waiver; or
  • extend the notifiable events framework to cover the payment of dividends.

Anti-avoidance regime

In relation to FSDs/FSNs, the Government has decided not to:

  • progress with the proposal to enable TPR to issue an FSD once a scheme has transferred to the PPF;
  • pursue the amendment to the reasonableness test to make clear that the actions of a target in creating or increasing risk would be a relevant factor;
  • broaden the scope of FSD targets to include directors; or
  • increase the lookback period but may come back to look at whether this remains appropriate in light of other changes (e.g. moving to a single-stage process for FSDs).

What's next for trustees and employers?

The Government's intended direction of travel has been fairly clear since the publication of the White Paper in March 2018 and the Consultation in June 2018. Now we have a better idea of how that approach will work in practice.

In the Consultation Response, the Government states that it intends to implement the new measures using primary and secondary legislation "as soon as Parliamentary time allows". However, new primary legislation will not be forthcoming until the next Parliament. If all goes to plan on Brexit and there are no more surprises like a general election, or second referendum, the Queen's Speech is expected to be in June 2019. Of course, what actually happens could be very different.

There is no immediate action for scheme trustees or scheme sponsors, but it is useful to be aware of these developments and the Government's stated aims as regards the further protection of DB pensions and to understand the direction in which the regulation of this sector is moving.

Read the original article on GowlingWLG.com.

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
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
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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