The government has responded to high profile corporate failures such as BHS and Carillion by tabling new legislation to bolster The Pensions Regulator’s powers and discourage corporate and individual behaviours that may be detrimental to pension schemes.
The Pension Schemes Bill proposes sweeping changes to strengthen the existing regulatory framework. This will make life more challenging for employers and former employers of DB schemes, and persons associated or connected with them. To avoid liability, anyone operating in a DB scheme environment, including at a subsidiary level, should familiarise themselves with the new regime.
The regulator already has the power to require persons associated or connected with a DB scheme employer to contribute to the scheme via a contribution notice (CN). Dominic Chappell was recently ordered to pay £9.5m for knowingly assisting in a series of acts which were detrimental to the BHS pension schemes.
The bill proposes two new grounds for a CN to be issued, both aimed at situations where there is a reduction in scheme support and which might be triggered by otherwise ‘normal’ corporate activity.
The first ground, the new employer resources test, is triggered by an act or omission that materially reduces the resources of an employer of the DB scheme, such as the payment of a dividend.
The second ground, the employer insolvency test, is triggered by an act or omission that would have resulted in a DB scheme recovering a lower amount from the employer, had the employer suffered an insolvency event immediately after that act. For example, something that reduces the covenant strength of a group company that has guaranteed the employer’s obligations to the scheme.
A statutory defence is available if a person can show they gave due consideration to the potential impact on the scheme and took all reasonable steps to eliminate or minimise any detrimental effect. Decision makers should be taking steps now to consider proposed actions against the new tests. They should ensure that they have a defensible position and that this is appropriately documented.
The bill introduces an enhanced notification regime referred to as “declarations of intent”. This requires employers and persons associated or connected with the employer, for example, parent companies, to notify both TPR and DB scheme trustees before key events. These include the sale of a controlling interest in a sponsoring employer, the sale of the business or assets of a sponsoring employer, and the granting of security in priority to the scheme. This may lead to earlier focus on, and resolution of, the pension issues.
Confidentiality will not be an excuse for non-compliance, expect in the case of some legally privileged information.
Providing false or misleading information to the regulator is already a criminal offence. The bill introduces an alternative civil penalty of up to £1 million for providing false or misleading information to the regulator or to the scheme trustees.
To complete the regulator’s new armoury, the bill proposes new criminal offences which could be committed by anyone, not just those connected with an employer. Trustees, advisers, restructuring professionals, are all potentially in scope. There is a limited exclusion for insolvency practitioners.
Where there is criminal liability the penalty is an unlimited fine or up to seven years in prison. Alternatively there are equivalent civil offences with penalties of up to £1 million.
The first new offence is avoidance of an employer debt – an act, or course of conduct, that prevents some or all of an employer’s statutory debt to a scheme being recovered, or becoming due, for example, structuring a corporate disposal to avoid a debt to the scheme falling due.
The second new offence is conduct risking accrued scheme benefits without reasonable excuse. Widely drawn, this has the potential to catch a wide range of activity where there is a DB scheme in the group and benefits are put at risk. Failure to pay a CN also becomes a criminal offence.
So what next? Amendments to the bill are still being tabled, including a Government-backed proposal requiring schemes to report their climate change strategies.
Current conduct may be caught. To avoid liability, it is advisable to educate decision-makers now.
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