NEWSLETTER   |   Trustees    |    September 15, 2020

The Pension Schemes Bill 2019-21: [The Pensions Regulator finally ‘grows a pair’…of new grounds for issuing Contribution Notices]

Following the high profile collapses of BHS and Carillion, the Pensions Regulator was subjected to a sustained period of ferocious (and sometimes gleeful) criticism – a ‘pile on’ in internet parlance.  The Regulator had, it was suggested, stood on the sidelines while the interests of shareholders and directors were plainly (and recklessly) prioritised at the expense of pension scheme members.

While the criticism (and media coverage) was characterised by mistakes of fact and of law and often blurred the distinction between undesirable and unlawful behaviour, a consensus quickly emerged; the Regulator needed more and/or sharper “teeth”. The Government was therefore charged with developing legislation which would ‘walk the line’ – sufficiently draconian to deter the egregious behaviour of so called ‘bad actors’ while not unduly stifling corporate activity.

The Pensions Schemes Bill 2019-21 gives the Regulator a suite of new or extended powers to protect defined benefit schemes in the context of corporate activity. These include:

  • new criminal offences, including two (avoidance of employer debt, the offence of “conduct risking accrued scheme benefits”) which, where committed without reasonable excuse, may result in up to seven years’ imprisonment and/or an unlimited fine;
  • two new grounds for contribution notices (the ‘employer insolvency test’ and the ‘employer resources test’) which are non-fault tests intended to capture acts/omissions which materially reduce the employer covenant supporting a scheme or otherwise result in a material reduction in the recovery of the pension scheme on a hypothetical insolvency;
  • a requirement for scheme employers and other related parties to prepare a “declaration of intent” in relation to certain transactions (which will also be notifiable events) setting out the nature of the proposed transaction and the implications for the scheme which must be shared with the trustees and the Pensions Regulator, expected to be: (i) the sale of a controlling interest in an employer; (ii) the sale of a material proportion of the business or assets of an employer where the employer has funding responsibility for at least 20% of the scheme’s liabilities; and (iii) the granting of security on a debt to give it priority over the debt owed to the pension scheme; and
  • civil penalties of up to £1m which may be levied in a wide range of circumstances including on breach of the notifiable events framework and failure to provide a declaration of intent.

Comment: The proposed new powers are significantly wider than many in the industry expected (or lobbied for).  In particular, the offence of “conduct risking accrued scheme benefits” which represents a departure from the original offence of “wilful or reckless behaviour in relation to a pension scheme” which was proposed in an earlier iteration of the Bill appears problematic.  While the evidential hurdle of establishing recklessness was probably viewed as undesirable, in dropping this requirement, it leaves the way open for ordinary corporate activity e.g. paying dividends or granting security to be criminalised, with no clear guidance on what may amount to a “reasonable excuse” (or therefore a defence) in practice.

DN: Doesn’t look like any prospect of that.The requirement for corporate planners to provide information to the Regulator and trustees  where transactions involve DB schemes will mean that the pensions aspects of transactions require more forward planning and also earlier engagement with trustees –  the days of bringing trustees in at the eleventh hour appear to be over. It will also require a more considered assessment of the pension implications of a transaction which may, in turn, inform more realistic views on mitigation, where detriment is identified.

It remains to be seen whether a combination of uncertainty regarding the scope of the Regulator’s new powers (and the prospect of directors or lenders being vulnerable to criminal sanctions) and the additional due diligence required will drive a renewed interest in seeking formal clearance as a ‘safe harbour’ pending regulatory guidance which establishes the new boundaries (particularly as much of the ‘leg work’ required for clearance will already have been done when satisfying the new disclosure requirements).

Following its second reading in the House of Commons on 7 October 2020, the Bill is scheduled to proceed to the Commons Committee stage on 3 November 2020 (concluding 5 November 2020). It remains unclear how the new insolvency regime ushered in by The Corporate Insolvency and Governance Act 2020 (in force June 2020) will interact with the Pensions Schemes Bill and whether the two pieces of legislation will dovetail neatly or amount to the pensions equivalent of a pushmi-pullyu.

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