DB White Paper response – new teeth for the pensions watchdog?

• United Kingdom

• Pensions

18-02-2019

Following the Work & Pensions Select Committee’s scrutiny and criticism of the role played by the Pensions Regulator (tPR) in the collapse of BHS and Carillion, the Government issued a White Paper on “Protecting Defined Benefit Pension Schemes” in March 2018, followed by a consultation in June 2018 on “A Stronger Pensions Regulator”. Amid a flurry of press headlines about jail terms for “reckless bosses” who mismanage pension funds, the Government’s response to the consultation was issued on 11 February 2019, and confirmed that the majority of the proposals will be taken forward - although much of the detail remains subject to further consultation.

Key proposals

The proposals cover the following main areas:

Penalties and offences

The most headline-grabbing element of the proposals were the new penalties and offences to be introduced, which include:

• Two new criminal offences (“wilful or reckless” behaviour in relation to a pension scheme and failure to comply with a contribution notice). The first of these will be punishable with up to 7 years in prison or unlimited fines; the second by unlimited fines only.
• A new civil penalty of up to £1m, which will apply to things such as a failure to comply with a financial support direction, knowingly or recklessly providing false information to the trustees or tPR, or failure to comply with the notifiable events regime. It will also apply to the new offences above, as an alternative to criminal proceedings.
• New fixed and escalating civil penalties for failure to comply with information requests.

Changes to the notifiable events regime

There will be two new notifiable events:

• Sale of a “material proportion” of a sponsoring employer’s business where the employer has “funding responsibility” for at least 20% of the scheme’s liabilities.
• Granting security on a debt to give it priority over the scheme.

In addition, the existing requirement to notify wrongful trading will be removed. However, other suggested changes to the list of notifiable events will not be pursued: in particular, there will be no extension to cover the payment of dividends.

The Government and tPR will consider with the pensions industry whether there is scope to bring forward the timing of employer-related notifiable events and whether this is an issue better dealt with via legislation or through guidance. In addition, tPR will consult on a revised notifiable events code of practice and update its associated guidance.

Declaration of intent

“Corporate transaction planners” (which can include not only sponsoring employers but also, for example, parent companies) will be required to make a statement in respect of the sale of a controlling interest in a sponsoring employer, or any transaction which is the subject of one of the two new notifiable events described above. This “declaration of intent” must be addressed to the trustees and shared with tPR. The Government plans to consider the content in more detail in consultation with the industry, and will work with tPR on the timing of the declaration.

Moral hazard

Several changes to contribution notices (CNs) outlined in the consultation paper will go ahead. These include:

• Amending the reasonableness test to take into account acts which have an impact on the value of scheme assets or liabilities when determining the amount to be paid under a CN.
• Adding two new limbs to the “material detriment” test, to clarify that it will be met where an act or omission materially reduces either the amount that the scheme would receive on a hypothetical insolvency or the “value” of an employer in relation to the scheme’s s75 liabilities.

There will also be a mechanism to uprate the value of a CN to the date of the determination.

In relation to financial support directions (FSDs), strong pushback has led to a decision to drop controversial proposals to allow FSDs to be issued to directors who are individuals, and (at least for the moment) to extend the look-back period to 6 years. However, in a move that must surely have been influenced in part by the BHS / Carillion sagas, individuals who are controlling shareholders of the sponsoring employer will become potential targets; and the Government appears determined to broaden the scope of those who may be the subject of enforcement action in respect of non-compliance with a FSD.

There will also be changes to:

• Streamline the FSD process into a single-stage process.
• Introduce a new scheme-focussed test to replace the current definition of when a sponsoring employer will be “insufficiently resourced” for the purposes of the FSD regime alongside a review of the definition of “service company” used in this test.
• Tighten up the forms that financial support must take (which will be limited to cash and joint / several liability for the pension scheme – though there is also a clear indication that other forms of voluntary mitigation may be acceptable in place of a formal FSD).

Other powers

TPR will be granted a standalone interview power. It is intended that this power would override an adviser’s duty of confidentiality to their clients, although legal professional privilege would continue to apply. There will also be wider inspection powers.

Timing

Although some of the above changes can be introduced through regulatory guidance and codes of practice, a fair amount will require legislation. The Government response concludes by saying that relevant legislation will be brought forward “as soon as Parliamentary time allows”. However it does not say when that might be, and with Brexit legislation continuing to dominate the legislative timetable, it is unlikely that any changes will reach the statute books in the very near future.

Comment

For all the media fanfare which accompanied the issue of the Government response, there is a fair degree of scepticism amongst industry professionals as to whether or not many of the most trumpeted changes – in particular, the new criminal offence of “wilful or reckless” behaviour – will actually have much effect, given the difficulty of satisfying the criminal burden of proof in relation to business decisions which will usually have been taken for genuine commercial reasons, albeit that in hindsight those decisions have turned out to be misjudged.

Some of the new powers to target CNs or FSDs at individuals may have a valuable deterrent effect, though unfortunately their effect may equally be to deter fresh investment in employers sponsoring DB schemes.

It is difficult not to sympathise with the views expressed by some commentators to the effect that the only sure way to get company board members to give due priority to the funding of DB schemes is for those board members’ own pensions to be part of those schemes, and thereby to force the board to have some “skin in the game” when decisions around scheme funding are on the agenda.