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End of Round One for TPR?

The pension schemes bill has been issued, giving The Pensions Regulator (TPR) stronger powers, but its passage through parliament is far from over.

The new bill legislates for “collective money purchase benefits” and the pensions dashboard, it amends the scheme funding provisions of the Pensions Act 2004 and introduces changes to the individual transfer regime (in a bid to make pension liberation schemes less effective). It strengthens the powers of TPR and it also amends rules around the Pension Protection Fund to make retrospective the requirement that all of a member’s benefits in a scheme (including those transferred in) would be subject to the same cap.

In this blog we highlight some of the new powers being introduced for TPR, covering:

  • Changes to the contribution notice regime

  • New penalties available to TPR

  • Notifiable events and the new declaration of intent

  • New information gathering powers for TPR

Contribution Notices

The pension schemes bill introduces two new tests (in addition to the existing material detriment test) in connection with TPR’s powers to issue a contribution notice. These new tests are call the employer insolvency test and the employer resources test.

The employer insolvency test would be met if TPR is of the opinion that immediately after the relevant time (a) the scheme assets are less than the liabilities and (b) if a section 75 debt had fallen due from the employer the act or failure to act would have materially reduced the amount of the debt likely to be recovered by the scheme. TPR will assess the value of the scheme’s assets and liabilities and will decide whether there is a deficit in the scheme, rather than this being determined by the scheme actuary.

The employer resources test would be met if TPR is of the opinion that an act or failure to act reduced the value of the resources of the employer and that reduction was a material reduction relative to the amount of the estimated section 75 debt in relation to the scheme. What constitutes the resources of the employer, and a method for calculating the value of those resources, would be set out in regulations.

For both tests, a defence would be available. Broadly speaking, a defence would be available where the proposed recipient of a contribution notice could show that they did consider the likely impact on the scheme before acting or failing to act and either decided that there would be no impact, or took appropriate steps to mitigate or eliminate the potential impact.

The timing for calculating the amount payable under a contribution notice will also change. At the moment, TPR takes account of the scheme deficit at the time at which an act or failure to act occurred. Under the pension schemes bill, TPR would calculate the amount payable under a contribution notice by reference to the end of the scheme year occurring before the day on which TPR issues its determination notice. This will allow TPR to target a greater amount if scheme funding has deteriorated since the occurrence of the act or omission that is the subject of the contribution notice.

To date, TPR has tended to reach agreement with the parties concerned rather than needing to rely on its powers to issue a contribution notice. A freedom of information request response revealed that as at 15 August 2018 TPR had only issued two contribution notices since its inception. It will be interesting to see whether the new tests result in an increase in contribution notices being issued, or whether they merely provide additional support to TPR when negotiating the payment of a contribution into a scheme.

Failing to comply with a contribution notice could constitute a criminal offence under the new provisions.

In its outcome of consultation in relation to the White Paper on protecting defined benefits, the DWP said that it would also make changes to the financial support direction regime. The proposal was to make the regime a single stage process and to require financial support to be made in the form of either a guarantee or a cash payment. These proposed amendments have not made their way into the current version of the pension schemes bill, so it remains to be seen whether they will form part of any amendment to the bill.

New Penalties

The accountancy profession must have been in charge of drafting this section of the paper, as it appears they have misplaced a decimal point…..”

This is what Frank Field thought of the proposal in the government’s White Paper to give the Pensions Regulator (TPR) power to levy civil penalties of up to £1 million. Whether he is right that a potential fine of up to £1 million would not act as a sufficient deterrent remains to be seen. The bill does enable regulations to specify a higher maximum amount, so perhaps the draftsman has taken this comment on board.

The pension schemes bill introduces two new offences of “avoidance of employer debt” and “conduct risking accrued schemes benefits”. These two new offences seem to replace the intention stated in the White Paper of having an offence of “wilful and reckless behaviour” in relation to a pension scheme. The change is welcome. The new offences provide a more factual basis for assessment and fit better with the language used elsewhere in the Pensions Act 2004. The offence of avoiding an employer debt, for example, includes where a debt is avoided, prevented from becoming due and/or is otherwise compromised or settled. Pension trustees, as well as employers, could therefore fall foul of this offence. Most trustees would already be aware of the perils of acting in such a manner, given that most will be aware that the compromise of a debt could lead to a scheme ceasing to be eligible for PPF assistance.

The two new offences will carry a penalty of up to seven years’ imprisonment and an unlimited fine. Alternatively, TPR could issue a civil penalty without prosecution of up to £1 million.

The new civil penalty of up to £1 million will also be available to TPR in other circumstances, such as failure to comply with the notifiable events regime, failure to comply with a contribution notice, failure to comply with the requirements for a declaration of intent (more on this later) and knowingly or recklessly providing false information to TPR or pension trustees.

Notifiable Events and Declaration of Intent

The pension schemes bill expands the notifiable events regime. There is no mention of the two new notifiable events that were proposed in the White Paper response ((1) sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of a scheme’s liabilities and (2) the granting of priority security on a debt). It is likely, however, that these would be introduced by way of an amendment to the existing notifiable events regulations.

The pension schemes bill paves the way for a change to the timing of the making of certain notifiable events, so that they might be required to be made before the notifiable event occurs rather than as soon as reasonably practicable after the event has occurred. The bill also introduces the concept of a declaration of intent, although it is not referred to as such in the bill.

In the White Paper the declaration of intent was a statement that the planner of certain types of corporate transactions would be required to provide to trustees. The pension schemes bill provides more clarity around this. The detail will be set out in regulations but the statement would cover the nature of the corporate transaction being undertaken, a description of any adverse effects on the pension scheme, details of the mitigation being provided and a description of any communications with the trustees about the transaction. Interestingly, there has been a reversal of the notification requirement. The declaration of intent would be required to be given to TPR with a copy provided to the pension trustees, rather than it being provided to the pension trustees and shared with TPR.

Information Gathering Powers

Currently, TPR can only require people to attend for interview in connection with its information gathering powers in certain specified circumstances. The pension schemes bill introduces a much wider power for TPR to require any person to attend for interview in relation to any matters that are relevant to the exercise of any of the Regulator’s functions. This could extend to where TPR is considering issuing a contribution notice, for example, and it wishes to ask questions of an employer’s advisers. The power would override an adviser’s duty of confidentiality, but would not override legal privilege between a lawyer and client.

Finally, the bill also extends the circumstances in which TPR can enter and inspect premises.

If passed, the pension schemes bill will give TPR a new suite of powers to assist it in the supervision and regulation of UK pension schemes. It is to be hoped that these will have a positive impact on the running and governance of pension schemes and that the new penalty regime, in particular, does not cause good trustees to decide that the potential risk of increased personal liability outweighs the benefit of volunteering in what is for many an unpaid role.

Seconds out! Ready for the next round in Parliament.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Catherine McKenna, Pension Attorney, Squire Patton Boggs Law Firm
Partner

Catherine McKenna leads our Pensions practice group . Her particular expertise is in providing advice to companies and trustees on all aspects of pensions law, including advice on managing pension risk and developing creative solutions to assist with funding shortfalls. She deals with pension plan restructuring, governance, and the pensions issues arising on corporate activity. Catherine also specialises in Pension Regulator applications and intervention, pension disputes and negotiating all types of pension fund investment management, custody and other third party...

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