The Department for Work and Pensions (DWP) has launched a consultation (the Consultation) setting out how it will advance some of the initial proposals put forward in the White Paper that was published earlier in the year. You can read our blog on the White Paper here.
The Consultation focuses on the following areas:
- corporate oversight;
- the sanctions system; and
- the power of the Pensions Regulator (the Regulator) to issue contribution notices (CNs) and financial support directions (FSDs).
The Consultation proposes to improve the notifiable events framework by expanding the range of events which employers must notify to the Regulator. The additional notifiable events proposed are:
- The sale of a material proportion of the business/assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities.
- Granting of security on a debt to give it priority over debt to the scheme.
- Significant restructuring of the employer’s board of directors and certain senior management appointments.
- The sponsoring employer taking independent pre-appointment insolvency/restructuring advice.
The White Paper introduced the idea of a declaration of intent for certain corporate transactions. The DWP has expanded on this and proposes that the following corporate transactions should trigger the need for a declaration of intent:
- Sale of a controlling interest in a scheme employer.
- Sale of the business or assets of a scheme employer.
- Granting of security in priority to scheme debt.
The declaration of intent would explain to the trustees the nature of the planned transaction, any detriment the transaction would cause to the scheme and how this would be mitigated.
Currently, the Regulator can impose a civil fine of up to £5,000 for individuals and £50,000 for corporate trustees. The DWP proposes to raise the civil penalty maximum to £1 million for more serious breaches and introduce new criminal offences to punish the following offences:
- Wilful or grossly reckless behaviour in relation to a Defined Benefit (DB) pension scheme.
- Non-compliance with a CN.
- Failure to comply with the notifiable events framework.
Legislation currently gives the Regulator the power to issue:
- CNs which set out an amount to be paid to the scheme; or
- FSDs which require the target to set out how it intends to support the scheme.
In respect of CNs, some of the measures suggested by the DWP include:
- Changing the factors which can be taken into account by the Regulator when deciding whether it would be reasonable to issue a CN so that the Regulator can focus more on the loss or risk caused to a scheme by the “act” when assessing the amount to be demanded under a CN.
- Providing a mechanism to allow the delay in payment to be reflected in the sum.
- Changing the date so that the cap on the level of a CN will be calculated at a date closer to the final determination (by the Determinations Panel) rather than the date of the “act”.
In relation to FSDs, amongst other things, the DWP proposes to:
- Create a single-stage process so that an enforceable obligation is created on the target at an earlier date.
- Firm up the forms of financial support so that the target is required to make a cash payment or impose a form of statutory guarantee. Obligations of the guarantee will be directly enforceable by the trustees.
- Allow FSDs to be issued to a broader range of individuals. The intention is to mirror the scope of CNs which may be issued to a person “connected with, or an associate of, the employer”.
This is the first of a series of consultations flowing from the White Paper. There are some significant changes proposed which is unsurprising given the scrutiny the Regulator has faced in recent years. The approach that the DWP appears to be taking will support the Regulator in its ambitions to become clearer, quicker and tougher. If the proposals go ahead, this may increase the pressure on employers with DB pension schemes during corporate transactions. The increased fines and criminal proceedings will require primary legislation so if these proposals proceed, they will not come into force for some time.
The Consultation also confirms that over the coming months, the Regulator will be talking to “interested stakeholders” on the design of clearer funding standards. The Consultation closes on 21 August 2018. You are able to view the Consultation by clicking here.
This blog post was written by paralegal Patricia Bailey. For further information please contact:
Michael Collins, partner, Pensions
T: 0121 234 0236