Why the changes?
The Pensions Regulator has, since 2005, had the power to impose substantial financial penalties on parties to a transaction — and other group companies and potentially directors and others — where the transaction materially weakens employer support for a defined benefit (DB) pension plan. These powers have been rarely used and recent corporate collapses have convinced the Government of the need to bolster them and to punish individuals who put DB pension benefits at risk. These changes will accompany the "clearer, quicker, tougher" approach to DB regulation that the Regulator is now adopting.
Key powers now in force
Easier for the Regulator to impose obligations via a contribution notice
- A contribution notice imposes pension obligations on other group companies.
- Regulator may issue a contribution notice based on a reduction in a company's assets
- Increases DB pension risk on transactions - there may be more clearance applications to the Regulator.
- Purchases may be more reluctant to acquire DB pension plans.
- Directors must assess the new tests before taking corporate actions which could weaken employer support for a DB pension plan, e.g., paying out dividends or creating additional security.
Tougher enforcement powers for the Regulator
- New criminal offences relating to pension plans.
- Maximum 7 year custodial sentence and/or an unlimited fine.
- Punitive (civil) penalties of up to GBP 1 million for serious breaches of pensions legislation.
- In cases where pensions concerns have been properly addressed, the risk of criminal penalties being imposed is likely to be low - these powers, whilst severe, are aimed at serious misconduct.
- The potential for personal consequences may, however, lead directors and others involved in making business decisions which impact DB schemes to take a more conservative approach to pension plan risk.
- Trustees, whilst in scope of the new powers, are unlikely to be the Regulator's main focus in most cases.
Enhanced information gathering powers for the Regulator
- Enhanced powers to require individuals to attend an interview and inspect premises.
- New civil penalties (up to GBP 1 million) for providing false or misleading information to either the Regulator or trustees.
- Companies can expect increased requests for information from the Regulator.
What will the Regulator's approach be in practice?
Now that the Regulator has an expanded suite of regulatory tools at its disposal, the big question is how it will use them. The Regulator has consistently sought to reassure those within the ambit of the new powers that it will reserve its power to prosecute the new criminal offences for the most serious cases where companies or individuals are seeking to avoid their pension obligations. The final form of its policy on how it will investigate and prosecute the new criminal offences, which was published on 29 September, provides some additional reassurance to that provided in the draft policy, although the Regulator has continued to be careful not to tie its hands too much for the future.
Further clarity on other aspects of the new regime are expected to emerge in the New Year, including how the Regulator will choose between using its criminal or civil powers where both options are available in relation to the same behaviour, more detail on the level of fines it is likely to impose in particular situations, and how the Regulator will use its expanded information, inspection and interview powers. The Regulator issued a consultation on these draft policies on 29 September. The Regulator has also indicated that it will consider publishing further guidance on how it will use its expanded contribution notice power in the future. In the meantime, in relation to contribution notices, the final version of the updated Code of Practice 12: “Circumstances in relation to the material detriment test, the employer insolvency test and the employer resources test”, and the associated Code related guidance, has been published.
Even once the numerous, policies and guidance has been finalised, there will continue to be some uncertainty about how the Regulator will use its new powers until the new regime beds in and we see how the Regulator operates its powers in practice.
Future changes: extended notifiable events regime - April 2022?
In due course, companies will be required to notify transactions to the Regulator in a wider range of circumstances and at an earlier stage than at present. In addition, companies will be required to give a statement to the Regulator and trustees outlining the implications of certain transactions on the pension scheme. The Government is currently consulting on the secondary legislation containing the detail of how the new notification will be implemented, with the changes expected to be brought into force in April 2022. More detail on this aspect of the changes can be found in our alert.