On June 26, 2018 the Department for Work and Pensions (DWP) published a consultation paper setting out proposals to improve the Pensions Regulator’s powers in relation to defined benefit pension schemes. The aims of the proposals are to ensure that the Pensions Regulator can be more proactive and get involved earlier when employers make changes which could impact the company’s pension scheme, and to ensure that the Pensions Regulator can obtain the right information about a scheme and its sponsoring employer and is able to gain redress when things go wrong.
The proposals in the consultation paper include the following:
Notifiable events framework
The DWP believes that the current notifiable events framework can be improved by including a broader range of employer-related events within it. It is proposed that the following be added as notifiable events:
- the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liability;
- granting of security on a debt to give it priority over debt to the scheme;
- significant restructuring of the employer’s board of directors and certain management appointments; and
- the sponsoring employer taking independent pre-appointment insolvency/restructuring advice (such as an independent business review).
The DWP also proposes extending the current “breach of banking covenant” notifiable event to include covenant deferral, and amendment or waiver. In addition, where the following transactions are proposed, the Pensions Regulator should be made aware of the planned transaction when a heads of terms agreement is first put in place (so earlier than in the current process) since this is the point at which it believes scheme trustees should be made aware of what is planned:
- sale of a controlling interest in a sponsoring employer;
- sale of the business or assets of a sponsoring employer; and
- granting of security in priority to scheme debt.
Declaration of Intent
In connection with the sale of a controlling interest in a scheme employer, or the sale of the business or assets of a scheme employer or the granting of security in priority to scheme debt, the DWP proposes requiring the employer to issue a Declaration of Intent setting out the implications of the transaction for the pension scheme and how any risks will be mitigated. The Declaration of Intent would be required after the parties have completed due diligence and once transaction financing has been finalised but before signature of the sale and purchase agreement. It would be addressed to the trustees from the transaction’s corporate planners (usually the board of the company) and be shared with the Pensions Regulator. It would explain the nature of the planned transaction, confirm that the trustees of the pension scheme have been consulted and agreed (or otherwise) to the planned transaction, and explain any detriment to the scheme and how this is to be mitigated.
Improved powers for the Pensions Regulator
The DWP wants to complement the existing penalty regime with new penalties that can be imposed, as appropriate, for both low-level compliance breaches and more serious offences such as in the event of reckless behaviour in relation to pension scheme liabilities. The Pensions Regulator will be able to vary the level of penalty depending on the seriousness of the breach and the following suite of options is proposed:
- existing civil penalties for low-level non-compliance;
- a new power to issue a civil penalty of up to £1 million for more serious breaches which have resulted in actual harm to the pension scheme or have the potential to do so if left unchallenged; and
- criminal sanctions which would allow the courts to impose appropriate penalties which could include unlimited fines and/or custodial sentences. These sanctions would be used where there has been wilful or grossly reckless behaviour in relation to a defined benefit pension scheme, non-compliance with a Contribution Notice and failure to comply with the notifiable events framework.
It is suggested that the range of possible targets should include all of those who have responsibility to the pension scheme, which will include directors, sponsoring employers and any associated or connected persons and, in some circumstances, trustees.
The consultation paper also sets out proposals to strengthen the existing Contribution Notice regime and proposals to strengthen and improve the way Financial Support Directions work.
The consultation paper includes an online survey and responses are requested by August 21, 2018.
(DWP, Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator, 26.06.18)