United Kingdom: Strengthening the Pensions Regulator's powers - further detail of notification requirements on corporate transactions published

In brief

The UK Government has launched a consultation on draft legislation implementing changes to the current notifiable events regime. The Government wants to give the Regulator and trustees earlier sight of a broader range of corporate transactions which could potentially be detrimental to defined benefit pensions schemes, as well as increasing the amount of information which the Regulator and pension scheme trustees receive. The proposals, if implemented in their current form, would make significant changes to the current notification regime, and will be relevant to corporates and trustees where certain M&A and financing activity is being undertaken.


Contents

Key takeaways

The consultation runs until 27 October 2021. The Government has not given a firm date for when the final form of the Regulations will become law but our expectation is that this will probably happen in April 2022.

The current proposals in relation to notifiable events form part of a package of measures designed to strengthen the Regulator's powers in order to protect accrued defined benefit (DB) pensions. The bulk of the Regulator's new powers, including the power to prosecute new criminal offences, new contribution notice tests and expanded information gathering powers are due to come into force from 1 October 2021. Further detail on the changes being made to the Regulator powers can be found here.

Whilst the headline changes in relation to notifiable events have been well trailed in previous consultations, and some of the legal framework has already been put in place (although is not yet in force), further detail in the form of secondary legislation is needed to fully implement this aspect of the Regulator's new powers.

In depth

The draft legislation would, if enacted in its current form, make a number of important changes to the current legal framework, under which certain corporate transactions have to be notified to the Regulator.

New notifiable events

Two types of transaction would need to be notified to the Regulator by companies, in addition to the transactions which currently have to be notified. Firstly, the sale of a "material proportion" of the business or assets of a scheme employer and, secondly, the granting of security on a debt to give it priority over debt to the pension scheme. 

In relation to an asset or business sale, "material proportion" is defined as 25% of annual revenue (in the case of a business disposal) or 25% gross assets (in the case of an asset disposal). The 25% threshold would be applied cumulatively - it would include disposals made or agreed in the 12 months prior to the notifiable event in question. 

The requirement to notify the Regulator in relation to these two new notifiable events would be triggered at the point a "decision in principle" had been reached. "Decision is principle" is defined as a "decision prior to any negotiations or agreements being entered into with another party". This is at an earlier stage than in relation to events which currently have to be notified to the Regulator, which in practice often take place after the event in question has happened. A share sale involving the relinquishing of control of a sponsoring employer, which is already a notifiable event in certain circumstances, will also have to be notified at this earlier "in principle" stage. 

New accompanying statement for three notifiable events

The following three notifiable events would give rise to more onerous notification requirements compared to other (existing) notifiable events:

  • the sale of a "material proportion" of the business or assets of a scheme employer (one of the new notifiable events)
  • the granting of security on a debt to give it priority over debt to the pension scheme (one of the new notifiable events)
  • where a controlling company relinquishes control of a scheme employer (already a notifiable event, subject to certain conditions being met). The current test for relinquishing control is also being amended.

Once initial (first stage) notification had been made to the Regulator at the "in principle" stage, a second notification to the Regulator and the trustees would be required at the point "main terms have been proposed". "Main terms" is not defined. 

In cases where a second notification was required, an accompanying statement would also need to be provided to the Regulator and the scheme's trustees. This would be provided at the same time as the second notification. The accompanying statement is intended to ensure that the Regulator and the trustees have relevant information about the transactions and would include details of:

  • any adverse effects of the event on the pension scheme
  • the employer's ability to meet its legal obligations to support the scheme
  • any steps taken to mitigate the adverse effects and
  • any communication with the trustees about the event.

Unlike the initial notification, which would need to be provided to the Regulator only, the second stage notification and accompanying statement would need to be provided to both the Regulator and the trustees. Currently, there is no legal requirement to inform trustees that a scheme employer is involved in a transaction, although in practice this does often happen. 

In addition to the second stage notification and accompanying statement, if there was any "material change" in relation to the event or in the expected effects of the event, a further notification to both the Regulator and the trustees would be required. "Material change" is defined as a change in the proposed main terms or a change in steps taken to mitigate any adverse effects of the event. A separate notification would also be required if the event was not going to take place.

The Government has said that its intention in relation to the more onerous notification requirements "is to balance the desirability of the Regulator and the trustees having the relevant information as early in the transaction as possible with the acknowledgment that full details of the transaction and any mitigation in respect of the scheme may not be available until nearer the end of the process."

As under the current notification regime, the receipt by the Regulator of information under the second stage notification and accompanying statement requirements would not give the Regulator the power to stop the transaction. It would, however, give the Regulator information on which it could potentially seek to exercise its strengthened anti-avoidance powers.

The more onerous requirements, including provision of the accompanying statement, would fall on the scheme employer, or someone connected or associated with the scheme employer. 

More stringent penalties for non-compliance - for both new and existing notifiable event requirements

The new civil penalties (up to GBP 1 million) which are being introduced in a number of new areas, will apply in cases where there is a breach of the notification requirements without reasonable excuse. The new civil penalties will apply where there is a breach in relation to the new requirements (e.g., a failure by a scheme employer to provide an accompanying statement), as well as a breach of existing notification requirements, including a breach by trustees of the current notification requirements which apply to them (e.g., a decision to take action which results in a section 75 debt not being paid in full). 

Separate criminal penalties could also apply to both trustees and employers in the context of notifiable events where false or misleading information has knowingly or recklessly been provided to the Regulator. In addition, failure to comply with the notification requirements could, in certain circumstances amount to behaviour falling within the scope of the new criminal offences (if, for example it was part of wider behaviour which risked accrued benefits). It is highly unlikely, however, that a failure to notify would, on its own, result in the Regulator pursuing criminal penalties. 

Comments

It is not clear how certain aspects of the new notifiable events regime will work in practice if implemented in the way the Government are currently proposing, particularly in the context of public M&A where the nature of the transaction process could mean that identifying when exactly a "decision in principle" and "main terms have been proposed" may not be obvious and where there are likely to be additional considerations to take into account under the Takeover Code.

More generally, the increased number of notifications and level of detail required, and the fact that trustees will be brought into the process, potentially at a much earlier stage than they are currently, will need to be factored into transaction planning by companies in due course. The Regulator too will need to adapt to the significantly increased volume of notifications which it will receive as a result of the changes. 

It is possible that we could see some changes to the Government's proposals following the consultation. Given the broader context into which the changes to the notifiable events are being made and previous statements from the Government about its policy, we think that any changes are likely to be fairly limited - for example, ensuring that certain transactions (e.g., public M&A) fit within the drafting. 

The consultation and draft legislation can be found here.


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