Of interest to schemes providing defined benefits is the publication by the Work and Pensions Committee of the House of Commons (the Committee) of the submissions it has received for the purpose of its inquiry into the roles of the PPF and Pensions Regulator (TPR) in the regulation of such schemes. Submissions had been requested by 23 September 2016.
The published submissions include those made by the PPF and Regulator themselves, with both bodies seeking more interventionist powers.
The most notable proposal made by TPR is for tighter regulation, including a mandatory clearance regime for certain corporate transactions.
Seeking clearance is currently voluntary, but TPR suggests it may be appropriate to make clearance mandatory where a corporate action significantly weakens the scheme sponsor and the scheme is not sufficiently funded. As its anti-avoidance powers are designed to operate retrospectively to seek redress and although they act as a powerful deterrent, they cannot prevent avoidance activity on the part of employers prepared to take the risk. TPR notes that the proposed requirement for mandatory clearance in certain circumstances has the potential to be a significant burden on employers and to have an impact on corporate activity. As a result, it recognises that any such a proposal would require further discussion and engagement with stakeholders, following which it should only be taken forward in a targeted and proportionate way.
According to TPR, clear criteria as to when approval should be sought would be necessary. This could include circumstances where the action weakens the scheme sponsor, not just the sale/purchase of a business but in circumstances including where support (covenant) for the scheme is weakened through corporate activity such as dividend payments, change of control, share buy-backs and loans.
If the scheme is sufficiently well-funded, then the additional burden of requiring approval from TPR may be unnecessary. For such measures to work, TPR believes that enhanced requirements on employers to engage with trustees and provide them with the relevant information when required would also be needed. This would allow them time to come to an agreement over any required mitigation for the scheme.
Among other things, TPR also calls for:
- enhanced information-gathering and investigatory powers;
- greater flexibility in setting valuation periods (including requiring more frequent valuations for higher risk schemes); and
- clarification of the statutory funding regime to enable it to specify an appropriate level of funding in particular cases.
The PPF’s proposals
The PPF’s submission suggests that:
- additional restrictions may be needed on the permitted length of recovery plans in underfunded schemes, particularly where a sponsoring employer has a strong covenant, and to avoid plans that are “back-end loaded” where schemes have large deficits;
- there may be a case for TPR to be given additional powers to wind up schemes, at the request of the trustees or PPF; and
- the amounts specified in contribution notices and financial support directions issued by TPR could be substantially increased to include a “fine” element, and that the process for issuing these notices could be streamlined.
The Committee is currently continuing to hear oral evidence from a range of industry figures and pension professionals. We will report further as more evidence is published.
The possibility of the introduction of mandatory clearance is of some concern.
TPR has previously stated that it would be disproportionate to introduce a compulsory requirement for advance clearance to be sought in respect of all corporate activity, and we agree with this view. The introduction of a blanket clearance requirement could make it more difficult to complete transactions quickly where a defined benefit pension scheme is involved, which could have an adverse effect on the economy. In addition, although TPR acknowledges that the current system is imperfect, it simply does not have adequate resources to review every corporate transaction that takes place.