New Regulator
powers set to make sponsors and trustees considerably more cautious about DB schemes

Our viewpoint

This blog was originally published on 5 December 2019 and was updated on 8 January 2020 to reference the publication of the Pension Schemes Bill.

There have been no substantive amendments to the blog as the Pension Schemes Bill is very similar to the Bill previously published in October 2019. 

On 7 January 2020, the Pension Schemes Bill restarted its passage through Parliament. In response to cases such as BHS and Carillion, the Bill includes considerable new powers for the Pensions Regulator, including two new Contribution Notice triggers. It also introduces two new criminal offences. The way both are worded is much wider than many in the pensions industry expected from the Government’s White Paper. As a result, the Bill potentially impacts far more than just one-off events such as corporate transactions, for example potentially requiring close examination of regular dividend policy and other day to day business activities. In my view the new law is therefore likely to have a material impact on corporate sponsor and trustee behaviours.

New Contribution Notices

Contribution Notices are part of the current pension regime. They are one means by which the Regulator can require a company or a director to contribute to a pension scheme if they feel that money was inappropriately removed from the reach of trustees. It turns out that, according to information published alongside the Bill, the Pensions Regulator has only ever issued one Contribution Notice under the current rules! 

This is partly because the criteria for doing so, and the hoops to jump through, are challenging. However, to-date the existence of Contribution Notices has been effective in changing some more extreme corporate behaviours and thereby improving protections for pensions.

The new law will introduce two new Contribution Notices triggers, both of which are more mathematical in nature. They should therefore be easier for the Regulator to activate. For example, there is a new balance sheet test on whether an action by a company has materially reduced the amount of buyout deficit that could be recovered by a scheme if the company were to immediately become insolvent. This test could be triggered for example by a special dividend payment, or a series of dividend payments. Or perhaps by moving assets or debt around a group or restructuring a group.

The Bill provides for a “statutory defence” in relation to these two new Contribution Notice triggers. In essence it means that before the action took place the directors thought about the issue, took all reasonable steps to minimise the adverse effect on the pension scheme and so concluded that the trigger would not be set off. For many companies this should prompt an immediate review of governance processes, as some lawyers are saying that the new Contribution Notices can effectively be backdated, and so corporate actions being taken now should be considered against these new powers.

New criminal offences

Perhaps more disconcerting, the Bill also introduces two new criminal offences. They are punishable by a large fine, or a jail term, or both. These offences apply to anyone, not only directors of companies. This potentially includes trustees, shareholders, lenders, and advisers in some situations. The offences could also be interpreted widely by the Courts, and one of them appears to have been deliberately written so that it includes acts that had no malicious intent. This new “conduct risking accrued benefits” offence is worded in these terms:

“A person commits an offence if … the person does an act or engages in a course of conduct [including a failure to act] that detrimentally affects in a material way the likelihood of accrued scheme benefits being received … and the person either knew or ought to have known [this was the case] and … did not have a reasonable excuse”

This potentially draws in a wide range of activity, by all sorts of people, whether or not they are aware of the potential implications of their actions. For example, the following actions may be caught, unless pensions were actively considered and the pension scheme suitably protected:

  •  A Board that declares regular dividends that end up materially weakening the balance sheet over time
  • A UK director who transfers assets to an overseas group
  • A Chair of Trustees who fails to ask an appropriate question to spot that this has happened
  • Trustees who have an absolute contribution power, who fail to use it when appropriate to do so
  • Trustees who pursue an investment strategy that is not appropriate for the scheme and its circumstances
  • A private equity owner who increases the debt within a company that has some financial responsibility for the scheme
  • A bank lender who enforces security on a loan to a company that has some financial responsibility for the scheme

How may this impact corporate and trustee behaviour?

In the absence of amendments as the Bill journeys through Parliament, the Bill will become law in its current form. Therefore, directors, trustees, and everyone else involved with a DB pension scheme will need to be careful to consider the potential implications for the scheme of various corporate events. I would expect this is likely to lead to:

  • Pensions being considered more often at company board level, including in the context of BAU corporate activity like declaring regular dividends
  • Directors seeking more legal advice on whether actions are likely to fall foul of the new requirements (perhaps especially the criminal offences)
  • Companies and trustees having more discussions and negotiations about the implications of events and what mitigation is appropriate for the pension scheme, and for this to happen before the event occurs
  • More companies seeking “clearance” from the Regulator for their actions, to ensure the Regulator doesn’t subsequently issue a Contribution Notice
  • Shareholders and lending banks taking more advice on whether their actions might be a criminal offence

And in the long term, all this could lead to more cautious actions: more cautious for pension schemes, with companies supporting earlier de-risking, including passing the schemes to an insurance company; but also more cautious for companies, with some Boards perhaps being less willing to take commercial risk in order to seek to grow the business, in case this is shown to put the pension scheme at risk.

Whether you think this is a good thing may depend on your political persuasion, and whether you sit on the “company” or “trustee” side of the fence. But assuming the Bill is passed into law as drafted, companies and trustees will need to review governance procedures to mitigate a new set of pension risks. Let’s hope it has the effect of improving pension scheme security rather than snarling up business activity.

Jonathan Camfield is an actuary and partner at LCP – Jonathan is not a lawyer and this blog should not be relied upon as legal advice, but it has been based on conversations with specialists at two law firms.

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