The news that Brexit could be delayed until Halloween has alleviated one headache for those sitting in construction boardrooms across the country. But another looms in shape of a new Pensions Bill.

Defined-benefit (ie, salary-related) pension schemes have attracted a huge amount of overdue attention in the construction sector following the collapse of Carillion.

These schemes are sometimes described as ‘balance of cost’ schemes; the employer ultimately is required to fund the original promises to employees if the scheme’s assets (including contributions paid) are insufficient to do so.

Construction-sector companies have typically made these types of pension promises to their staff, but by their very nature, such promises represent very long-term liabilities.

The security of the promise depends on both the assets in the scheme and the ability of the employer to continue to fund it.

As to whether an employer’s covenant is ‘strong’ or ‘weak’, or somewhere between the two at any point in time, requires professional expert analysis and can include substantive subjective judgements, such as the value placed on goodwill in Carillion’s case.

In March 2018, the Department for Work and Pensions published the white paper, Protecting Defined Benefit Pension Schemes, outlining ways to improve the regulatory system under which defined-benefit schemes operate, but also to set out a tougher approach for “those few whose irresponsible decisions impact on their pension scheme”.

In the same month, the Department for Business, Energy and Industrial Strategy issued a consultation on insolvency and corporate governance (as a result of the same high-profile corporate failures that had led to the DWP’s white paper), setting out proposals aimed at reducing the risk of corporate failure through governance shortcomings.

The end result for pensions and the construction sector is that we will shortly get a Pensions Bill setting out legislation to strengthen the powers of the Pensions Regulator, and to significantly increase the penalties and sanctions it can impose (including new criminal offences).

We expect to see the draft bill at the end of May, but already have a good idea of what it will contain.

Deterring wrongdoing

There will be two new ‘notifiable events’ – these are requirements formally to notify the Pensions Regulator of specified corporate activity.

The first event is the sale of a material part of the business of any company participating in a defined-benefit scheme that has funding responsibility for at least 20 per cent of its liabilities.

The second is the granting of security giving priority over the pension scheme as a creditor.

There is no requirement to notify payment of dividends, but the regulator may take dividend history into account in deciding whether the funding agreement negotiated every three years between the employer and scheme trustee is appropriate – or not.

Where a group intends to sell a controlling interest in an employer participating in the pension scheme, or either of the two new notifiable events occurs, the employer or its parent company must issue a ‘declaration of intent’ to the trustees as early as possible, copied to the Pensions Regulator.

The aim of the declaration is to open the door to a negotiation with the trustees – ie, before it is too late – over any mitigation that needs to be put in place to support the pension scheme following the transaction.

To deter wrongdoing, the regulator will be given wider powers of investigation and will be able to issue civil penalties of up to £1m, for example, for failure to issue a declaration of intent or submit a notifiable event form.

There will also be new criminal offences, punishable by up to seven years in prison, for willful or reckless behaviour in relation to a pension scheme and/or for failure to comply with the issue of a Contribution Notice (a statutory demand issued by the Pensions Regulator against any group company worldwide, requiring it to pay money into the UK pension scheme).

And the circumstances in which the Pension Regulators 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 the regulator can come looking for money from any group company connected with the scheme employer.

Its investigations can be made public if the Pensions Regulator considers this appropriate, raising the risk of reputational damage.

There is one final sting in the tail. It is possible these new powers will become law retrospectively to the date of the bill.

This means that construction-sector companies should adopt a general approach of engaging with the pension-scheme trustees and the Pensions Regulator if there is any possibility that any corporate activity, group-wide, could detrimentally affect the ability of the scheme employers to meet their liabilities, which is likely to be far safer than keeping these stakeholders at arm’s length.

Partner Anne-Marie Winton

Read Anne-Marie’s article in Construction News