The Government has published a response to its consultation on new tougher powers for the Pensions Regulator, confirming its intention to press ahead with many of the changes proposed in its June 2018 consultation (reported in our previous e-bulletin).
Changes to the notifiable events regime
The Government has confirmed that it intends to go ahead with two of the new notifiable events (ie events which have to be notified to the Pensions Regulator) proposed in its consultation, namely:
- 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 security on a debt to give it priority over debt to the pension scheme.
The maximum penalty for failure to comply with the notifiable events regime is to be increased to £1 million. There will be more consultation from the Government and Pensions Regulator on the detail of the changes.
However, the Government has decided not to proceed with its proposals to make the following notifiable events:
- restructuring of employer's board or senior management;
- the employment taking insolvency/restructuring advice; or
- banking covenant deferral, amendment or waiver.
The suggestion of bringing forward the notification deadline to when heads of terms are agreed has been dropped for now.
New "declaration of intent" requirement
The Government has confirmed its intention to legislate to require the "transaction's corporate planners" to make a "declaration of intent", addressed to the scheme trustees and shared with the Pensions Regulator, in the event of:
- sale of a controlling interest in the sponsoring employer;
- sale of the business or assets of a sponsoring employer (where this falls within the scope of the newly created notifiable event); and
- granting of security on a debt to give it priority over debt to the pension scheme.
The declaration of intent will include an explanation of the transaction, confirmation that the scheme trustees have been consulted and how any detriment to the scheme is to be mitigated. The Government says that the term "transaction's corporate planners" includes the scheme's sponsoring employer or parent company, but it is not clear who else would be caught, or how much detail would need to be included.
New criminal offences and civil penalties
The Government intends to introduce the following new criminal offences/civil penalties:
- a criminal offence of "wilful or reckless behaviour" in relation to a pension scheme for sponsoring employers and those associated or connected with them. The new offence will carry a prison sentence of up to seven years and/or unlimited fines. The Regulator will also have power to impose a civil penalty of up to £1 million;
- failure to comply with a contribution notice imposed by the Regulator under its "moral hazard" powers. This will be a criminal offence carrying an unlimited fine and could also be subject to a civil penalty of up to £1 million;
- failure to comply with a financial support direction imposed by the Regulator. This will carry a civil penalty of up to £1 million;
- failure to comply with the notifiable events framework, which will carry a civil penalty of up to £1 million;
- failure to comply with requirements for a declaration of intent, which will carry a civil penalty of up to £1 million;
- knowingly or recklessly providing false information to scheme trustees or the Regulator, which will carry a civil penalty of up to £1 million;
- non-compliance with requests for information by the Regulator under its statutory powers, which could attract a fixed or escalating civil fine at a rate yet to be decided;
- failure to comply with the new statutory requirements for a chair's statement, which will attract a civil penalty of up to £5000 for an individual or £50,000 in any other case;
- non-compliance with clearer scheme funding standards. (The consultation response does not spell out specific sanctions, but says that the Regulator's powers will be strengthened.)
Overhaul of Regulator's "moral hazard" powers
The Government has confirmed its intention to go ahead with a number of proposed changes to the Regulator's "moral hazard" powers which allow it to require scheme employers and persons "associated or connected" with them to make additional contributions into an under funded scheme or put in place additional financial support.
For contribution notices, the Government will amend the legislation:
- to make clear that the actual or potential impact of an act or omission on the scheme's assets and liabilities is a relevant factor when determining how much a party should be required to pay to the scheme under a contribution notice;
- to make clear that a contribution notice can be imposed if an act reduces the amount the scheme would have recovered on a hypothetical insolvency, or if it results in the value of the employer, providing materially less "coverage" of the scheme's "section 75 deficit" (ie its deficit as calculated under the relevant legislation).
The Government will also consider how the legislation which deals with the maximum amount which can be required under a contribution notice might be amended to allow for time lags in the contribution notice process.
For financial support directions (FSDs), the Government will amend the legislation to:
- put in place a single stage FSD process whereby the target of a FSD is required either to provide cash for the scheme or undertake joint and several liability for the sponsoring employer's liabilities;
- alter the test for imposing a FSD. Currently, this requires the employer to either fall within the statutory definition of "insufficiently resourced" (a potentially complex text) or be a service company. The Government intends to replace the "insufficiently resourced" test with a new "scheme-focussed" test and also to amend the definition of "service company";
- extend the scope of the FSD regime to capture individuals who are controlling shareholders of the sponsoring employer;
- change the name to "Financial Support Notice".
The Government does not currently intend to extend the two year "look back" period for determining whether a person is connected or associated with an employer, but says it will need to consider further whether it is appropriate in light of other changes such as moving to a single stage process for FSDs.
Information gathering powers
Prior to the consultation, the Government had already confirmed its intention to grant the Regulator a "stand alone" power to compel people to attend interviews, so this did not technically form part of the consultation. However, the consultation response provides some more details of the power, stating that the interview power will override an adviser's duty of confidentiality to a client, save where the information is protected from disclosure by section 311 of the Pensions Act 2004 which (broadly) protects legally privileged information.
The Government says it will bring forward legislation "as soon as Parliamentary time allows" without expanding on when that might be.
The planned changes broaden the duties of those involved in transactions which could potentially impact a defined benefit pension scheme, and also significantly increase the sanctions available to the Regulator when duties are not complied with. Although the Government has not committed to a timescale for implementing the changes, it has signalled a clear direction of travel towards more severe sanctions for those involved in corporate activity which adversely affects a pension scheme, even where there is no deliberate wrongdoing. That raises the possibility of the Pensions Regulator's current powers being applied using this principle even before these changes come into force. Those involved in corporate activity now should therefore consider whether their actions will withstand future scrutiny from the Pensions Regulator.