Christopher Stiles
Partner
Article
18
The Government is planning for a tougher regulatory environment for workplace pensions. The Department of Works and Pensions' (DWP) response to its consultation (Protecting defined benefit pension schemes - a stronger Pensions Regulator) set out a range of new criminal and civil offences with tough penalties. But the Government's response goes further than simply tackling the reckless mismanagement of pension schemes.
We consider how the Government intends to change the regulatory regime for defined benefit pensions and explain what it means for trustees and employers.
The Government will legislate to introduce a range of new offences relating to workplace pensions. The penalties for these will be tougher than anything that is currently on the statute books. Wilful or reckless behaviour in relation to a pension scheme will carry a maximum criminal penalty of seven years' imprisonment and/or unlimited fines.
The Pensions Regulator (TPR) will gain a new power to require attendance at an interview. In addition, TPR's powers of inspection will be broadened to cover any premises where documents or records (including in electronic format) are kept which are relevant to the exercise of any of TPR's functions.
This will be achieved by broadening the notifiable event regime and requiring parties to issue Declarations of Intent in respect of certain transactions. TPR will also undertake a review of its voluntary clearance process.
The Government has confirmed that it will go ahead with plans to streamline and enhance the way that the Contribution Notice and Financial Support Direction processes work.
The DWP has confirmed that it will not go ahead with all of the proposals set out in the Consultation.
In the Consultation Response, the Government states that it intends to implement the new measures using primary and secondary legislation "as soon as Parliamentary time allows". It isn't likely that this will be during the current parliamentary session. Subject to Brexit, we expect legislation to feature in the Queen's Speech in June 2019.
The collapse of BHS highlighted the management of defined benefit (DB) pension schemes. The clamour for action intensified when Carillion declared insolvency. Against this backdrop, the Government issued a Green Paper in February 2017 to consider policy objectives (Defined benefit pension schemes: security and sustainability) followed by a White Paper in March 2018 setting out more detail on its proposals (Protecting Defined Benefit Pension Schemes).
In the White Paper, the Government stated that the existing regime is working well for the majority of DB pension schemes, members, trustees and sponsoring employers but that it could see ways in which the system could be improved. To that end, on 26 June 2018, the DWP launched a consultation setting out specific proposals (Protecting Defined Benefit Pension Schemes - A Stronger Pensions Regulator). The Government has now published its response to the comments received during the consultation period.
The Government will legislate to introduce a new system of criminal offences and tougher penalties for various offences relating to workplace pensions. These will include:
The potential targets of these sanctions will include sponsoring employers, trustees and persons/companies that are connected or associated with the employers.
In addition, the Government intends to introduce fixed and escalating civil fines as an alternative sanction for non-compliance with TPR information requests (also known as section 72 requests). These will cover inspections and interviews and also delays in providing information.
TPR is to get two new information-gathering powers in a bid to "harmonise and broaden" its powers and thereby enable it to conduct its investigations "in a more efficient way".
These powers extend to trustees, employers, and other relevant persons. They also extend to professional advisers, and will override the adviser's duty of confidentiality, except insofar as legally privileged material is concerned.
The DWP will legislate to increase TPR's oversight of corporate transactions. This will be achieved by broadening the notifiable event regime and introducing Declarations of Intent. Under the new regime for Declarations of Intent, sponsors will have to provide trustees and TPR with an explanation of the impact of a proposed transaction on a workplace pension scheme and set out any mitigating steps that are being proposed.
The Government will consult on regulations to introduce new employer-related notifiable events. These will be triggered on the:
The existing notifiable event of wrongful trading of the sponsoring employer will be removed (because a self-reporting obligation for wrongful trading is not very effective).
The Government has also committed to work with TPR and the pensions industry to identify where earlier notification could be beneficial in relation to each of the employer-related notification events. An assessment of the impact of the changes to the notifiable events framework on business will also be carried out by the DWP.
Despite opinion being divided over this proposal, the Government will introduce a requirement for 'corporate transaction planners' (which will include, among others, the scheme sponsor or parent company) to provide a Declaration of Intent to the trustee board and TPR. The need for a Declaration of Intent will be triggered by certain existing and new notifiable events, namely:
TPR will update its guidance and Code of Practice on notifiable events to set out the timing for sharing the Declaration of Intent. The consultation response notes that a 'flexible approach' needs to be developed which takes into account the particular circumstances of individual transactions and also commercial sensitivities.
The exact content of the Declaration of Intent is also still to be decided. It is expected that it will require an explanation of the transaction and how any resulting detriment to the scheme is to be mitigated. The idea is that this requirement should act as an early warning that would compel sponsors to engage with trustees on transactions that are likely to have a significant impact on the pension scheme.
TPR is to undertake a review of its guidance on the voluntary clearance process, which enables employers to obtain comfort from TPR that a cleared transaction will not subsequently be the subject of TPR's anti-avoidance powers. The review will focus on:
The "anti-avoidance regime" has several aspects but the most important are TPR's powers to issue "contribution notices" and "financial support directions". Broadly, contribution notices are a demand to pay a specified sum into a pension scheme, and financial support directions require the target to give financial support to the scheme, which can take various forms.
The practical effect of the regime is to impose pension liabilities on other persons or companies beyond the employers who have the direct legal obligations to the scheme under its deeds and the statutory scheme funding regime.
Contribution notices may be issued if an employer or a connected or associated person has acted, or failed to act, in a manner which had a "materially detrimental" effect on the pension scheme. They can also be issued if the action or failure had as one of its main purposes the reduction of a debt due to the scheme, or reduced recovery of such a debt.
The Government will change the way that Contribution Notices function. Proposals include the following:
The Government will consider whether an uprating mechanism to reflect the time between the act and the determination to issue a Contribution Notice needs to be set out in legislation.
FSDs can currently be issued if the employer in relation to a pension scheme is "insufficiently resourced" (defined broadly as having resources of less than 50% of the buy-out deficit) or is a service company.
The Government will work with TPR and the Pension Protection Fund (PPF) to streamline the FSD process to a single-stage process. FSDs will also be renamed as Financial Support Notices (FSNs).
FSD/FSN targets will be expanded to include controlling shareholders of the sponsoring employer (who are individuals) and the 'insufficiently resourced' test will be replaced with a new scheme-focused test, details of which have not yet been provided.
The forms of financial support that may be imposed under a FSD/FSN will be limited to cash and/or making the target of the FSD/FSN jointly and severally liable for the employer's obligation to the pension scheme.
There were various proposals floated in the consultation paper which the Government has said in its consultation response that it is not currently minded to take forwards.
The Government will not introduce criminal offences for failing to comply with the notifiable events framework. In addition, the penalty for the criminal offence of failing to comply with a Contribution Notice will not include imprisonment.
The Government will not change the notifiable event framework to:
In relation to FSDs/FSNs, the Government has decided not to:
The Government's intended direction of travel has been fairly clear since the publication of the White Paper in March 2018 and the Consultation in June 2018. Now we have a better idea of how that approach will work in practice.
In the Consultation Response, the Government states that it intends to implement the new measures using primary and secondary legislation "as soon as Parliamentary time allows". However, new primary legislation will not be forthcoming until the next Parliament. If all goes to plan on Brexit and there are no more surprises like a general election, or second referendum, the Queen's Speech is expected to be in June 2019. Of course, what actually happens could be very different.
There is no immediate action for scheme trustees or scheme sponsors, but it is useful to be aware of these developments and the Government's stated aims as regards the further protection of DB pensions and to understand the direction in which the regulation of this sector is moving.
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