Government issues response to consultation on strengthening The Pensions Regulator's powers

11 minute read
12 July 2021


The Government has considered the comments received in response to its consultation of earlier this year, which asked for feedback on two sets of draft regulations:

  • one set adding meat to the bones of how the new 'employer resources' test will operate in the context of the contribution notice regime; and
  • another set which strengthens The Pensions Regulator's information gathering powers.

The Government response provides more detail as to the Department for Work and Pensions' (DWP) understanding of how the new contribution notice tests and the stronger Regulator powers will work in practice.

In this article, our pensions experts take a look at the Government response to the consultation and highlight what employers and trustees need to know. 

Key points to note for employers and trustees

1. The consultation response is a helpful summary of the intention behind the new 'employer resources' test (contribution notices)

The Pensions Regulator already has the power to issue a contribution notice, requiring a target to pay cash to a pension scheme or to the Pension Protection Fund in two different situations.

  • One, where the 'main purpose' test has been satisfied, which applies in relation to an act or failure to act on or after 27 April 2004. In summary, this test is met if, in the Pension Regulator's opinion, the main purpose of an act or failure to act was to prevent the recovery of a section 75 debt, or to prevent that debt becoming due.
  • The second, the 'material detriment' test which applies in relation to an act or failure to act on or after 14 April 2008. In summary, this test is met if, in the Pensions Regulator's opinion, an act or failure to act has had a materially detrimental impact on the likelihood of accrued scheme benefits being received.

Two new grounds for the Pensions Regulator were introduced under the Pension Schemes Act 2021, in addition to the main purpose test and the material detriment test.

The first is the 'employer insolvency' test. This allows the Regulator to issue a contribution notice where it is of the opinion that:

  • immediately after an act/failure to act, the scheme had less assets than liabilities; and
  • if an employer debt (under section 75 of the Pensions Act 1995) had fallen due, that act or failure to act would have materially reduced the amount that could become recoverable.

The second is the 'employer resources' test. This allows the Regulator to issue a contribution notice where it is of the opinion that:

  • the act or failure to act reduced the value of the resources of the employer; and
  • the reduction was material relative to the amount of the estimated employer debt.

In broad terms therefore, the employer resources test allows the Pensions Regulator to establish whether there has been a material reduction in an employer's assets.

The intention behind these two new tests is to shift the focus so that the Pensions Regulator can assess the position by direct reference to the impact of the act/failure to act on the sponsoring employer. To date, the 'main purpose' and 'material detriment' tests have meant that it is evidentially challenging for the Regulator to correlate the employer related act with the impact on the scheme.

The new tests are also intended to create a snapshot of the employer's position at the time of the relevant act or failure to act. This is intended to make it easier – and quicker - for the Regulator to be able to impose contribution notices where it considers it appropriate to do so, rather than having to forecast the medium and long-term performance of the sponsoring employer.

Much of the focus of the spring consultation document on the two sets of regulations, and this Government response is on the employer resources test as expanded on in the draft regulations, and how it is intended to operate in practice.

2. The Government intends to stick to a profit before tax (PBT) means of measuring the employer's resources

A number of those responding to the consultation had questioned the proposed use of PBT as the option provisionally selected by the Government for assessing the employer's resources for the purposes of the new contribution notice test.

Concerns included that this was a too simplistic measure and possibly open to manipulation. Alternative suggestions included the Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) as a more suitable measure, as it, in some stakeholders' view, provides a better view of cash available to support the scheme.

Whilst taking into account the responses received during consultation, the Government intends to stick with PBT as the most appropriate measure of the employer's resources as it provides a picture of the net profits available to provide support for a defined benefit pension scheme.

In response to concerns that the PBT measure would not work for charities and not for profit organisations, the Government has committed to amend the regulations here to make clear how the new tests apply to those entities.

3. The Pensions Regulator intends to take a holistic approach to assessing whether a contribution notice should be imposed, notwithstanding some prescriptive aspects of the new tests

Notwithstanding concerns raised that the PBT measure of assessing the employer's resources was too simplistic a test, a key message in the consultation response is that the Regulator, when considering whether either of the new grounds for issuing a contribution notice are met, will assess each test in isolation. In other words, the new employer insolvency test might be met, even where the employer resources test isn't.

The Government re-emphasises (as it did in its spring 2021 consultation) that it wants to avoid a 'holistic' approach to the new grounds to issue a contribution notice, on the basis that this would create too many uncertainties. This is a key reason why PBT has been chosen to provide the snapshot indication of the employer's position for the purposes of the employer resources test.

That said, the Government also recognises that the snapshot approach introduced by the employer resources test requires the Regulator to take account of all relevant factors, which may include a broader assessment of the employer's strength.

The response makes this point to deal with concerns raised by some stakeholders that the Regulator's approach to the employer resources test would be too simplistic, or not create a sufficiently wide understanding of the employer's position – for example, in cases where an employer can draw on other sources of funding to support scheme contributions.

4. Some other points to note in relation to the contribution notice regime

The Government also confirms some other helpful points in the consultation response:

  • The new employer resources and employer insolvency tests will not have retrospective effect. They will only apply to acts or failures to act from 1 October 2021. We already understood this to be the case, but absolute clarity in the regulations will be helpful.
  • The Government anticipates that whilst there may be an upturn in clearance applications as a result of the introduction of the employer resources test, it is confident that the Pensions Regulator, having successfully shown a good degree of flexibility during the COVID-19 pandemic will be able to deal with any additional requests for clearance. It will be interesting to see whether clearance applications do increase in practice, as well as the Regulator's response to such applications.

5. The strengthened Regulator's information gathering powers

The Pensions Regulator's existing power to interview a person in relation to automatic enrolment or master trust matters will be broadened so that the Regulator has the power to require an interview in relation to the exercise of its functions more widely.

The Government response to the spring consultation considers stakeholder responses to the draft regulations which contain more detail on the Regulator's new information gathering powers. There is comparatively less detail in this part of the consultation response.

The response to the consultation confirms that:

  • The regulations will not be more prescriptive than already drafted as to why an individual is being called for an interview under section 72(A)(1) of the Pensions Act 2004. The intention is that this will be very clear in any notice from the Regulator. The Regulator also intends to issue policy guidance as to how it plans to use its information gathering powers.
  • The expectation is that the Pensions Regulator will generally expect to give at least 10 working days' notice of an interview, accepting that in some cases there may be an urgent need for an interview to take place sooner.
  • The fixed penalty for failure to comply with the Regulator's requests for information under section 72 Pensions Act 2004 will be aligned with the fixed penalty for failure to comply with similar information gathering requirements in relation to automatic enrolment (i.e. £400);
  • The escalating penalty will be aligned with the escalating penalty already in place in relation to ongoing non-compliance in relation to automatic enrolment matters (i.e. £200 per day);
  • A single, escalating scale of penalties (akin to the approach already in place for master trusts) will apply to all cases than an individual. This will mean an escalating penalty of £500 on the first day of application, with a cumulative increase on each subsequent day so that after 20 days the daily rate is £10,000.

What happens next?

The Pensions Regulator is considering whether there is a need for guidance, both in relation to the new tests and its power to issue contribution notices more generally. We can see the value of such guidance, given the shift in focus in the two new grounds to issue contribution notices (i.e. from the scheme to the employer's position), and our assumption that the Regulator may, as a result, look to impose such notices, or at least brandish the stick of a potential contribution notice more frequently than it has in the past.

The consultation response also indicates that the Regulator may formulate a single document which draws on its experience of considering and using its powers since the introduction of the Pensions Act 2004 in 2006, setting out its views and expectations. We can see this would be a potentially valuable tool for employers and trustees who are looking to understand whether the Regulator might look to exercise its anti-avoidance powers in any given context.

Meanwhile, the Regulator has launched its consultation on its associated revised code of practice for contribution notices (Code 12) which includes illustrative examples of different scenarios demonstrating how the different tests (including the new employer insolvency test and the employer resources test) would apply. Consultation on this closed on 8 July 2021.

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