30th May 2019 Extension of the Pension Regulator’s powers
In July 2018 the Department of Work and Pensions was tasked with carrying out a “light touch” review of the Pensions Regulator (TPR) as a public body, focusing in particular on areas where there have been significant changes in the scope of its work. The outcome of that review has just been published with a series of recommendations. TPR has also been under heavy scrutiny in the couple of years from the Work and Pensions Select Committee as part of its investigations into the high profile corporate collapses of BHS and Carillion. This resulted in a White Paper on protecting defined benefits schemes, which in turn will give rise to new pensions legislation expanding TPR’s powers later this year. So how is the behaviour of TPR expected to change?
The DWP is broadly satisfied with TPR’s operations and activities (not least as it supports DWP’s strategic objective to “ensure financial security for current and future pensioners”). But there are some suggested areas for improvement aligned to TPR’s stated aim to be “clearer, quicker, tougher”. And there is an inherent tension in the Regulator’s statutory objective to protect members’ benefits (and exercising its powers accordingly), whilst also being tasked with minimising any adverse impact on the sustainable growth of an employer when regulating the statutory scheme funding requirements.
One new recommendation from the DWP is that TPR is given the ability to be more responsive to changes in the pensions sector, without having to wait for changes to the law to give it the new powers to do so. It was suggested that TPR is given the ability to create its own rules governing what information it needs from schemes to help it be more proactive. But this proposal overlaps with the expected contents of the new Pensions Bill which will set out draft legislation to increase TPR’s statutory powers – including its information gathering and investigation powers.
The Pensions Bill will contain two new notifiable events, which are statutory requirements to inform TPR about certain corporate activity. This notification system operates as an early warning system to help TPR determine whether it ought to investigate a matter further and/or use its statutory powers.
The first new notifiable event is the sale of a material part of the business of any company participating in a defined benefit scheme where that company has funding responsibility for at least 20% of its liabilities. The second is the granting of security giving priority over the pension scheme as a creditor. Change of control of a scheme employer continues to be notifiable under current law, but whilst proposed in consultation, there will be no requirement to notify payment of dividends to TPR. However, TPR is concerned to ensure the equitable treatment of schemes, as a key financial stakeholder, relative to shareholders.
The Bill will also provide that where a group intends to sell a controlling interest in a scheme employer or either of the two new notifiable events occurs, the corporate decision maker must issue a declaration of interest to the pension trustees as early as possible, copied to TPR. This reflects current best practice of voluntarily engaging with trustees to agree any mitigation needed as a result of corporate activity, but the Bill will turn good practice into a legal requirement.
What is clear is that going forward, TPR is expecting to have more engagement with more schemes. The aim is to put TPR in the position that it can address emerging risk more quickly, in particular where that risk arises from the impact of corporate activity on the ability of the employer to support the scheme.
The Bill will also provide for new criminal offences punishable by up to seven years in prison of wilful or reckless behaviour in relation to a defined benefit pension scheme, as well as failure to comply with a contribution notice (a statutory demand issued by TPR against any group company worldwide requiring it to pay money into the scheme). And the circumstances in which TPR can issue a contribution notice will be widened. If the scheme employer is materially weaker after a particular corporate event and/or the recovery to the pension scheme on the employer’s hypothetical insolvency is materially reduced, then TPR will be able to issue a contribution notice, if reasonable to do so.
TPR historically has been reluctant to use its existing statutory powers, but the DWP’s review and the new legislation are likely to result in it being tough and having a Regulator that is prepared to use all of its expanded range of powers should ultimately benefit industry. It is only through challenge in the courts that the scope of its powers can properly be tested, defined and understood.
Partner Anne-Marie Winton
Read Anne-Marie’s article in Acquisition Daily
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.