The new guidelines, published just 48 hours before major changes to the rules came into force on 1st October, set out how TPR will use its enhanced powers to issue ‘Contribution Notices’ which force sponsors, company directors or connected parties to put money into their DB pension scheme.
Under the previous rules, a Contribution Notice could be issued where someone acted in a way that was ‘materially detrimental’ to the security of members’ benefits. In practice, very few such notices were ever issued.
In a bid to toughen the rules, the Pension Schemes Act 2021 provides for two new tests. If these tests are triggered, TPR can impose a contribution notice, if they think it is reasonable to do so.
In short, these tests are:
- Employer resources test: This is triggered where a business decision or other event has a negative impact on a sponsoring company’s profits, and that impact is material relative to the cost of passing the pension scheme to an insurer (which is usually a very prudent assessment of the deficit in a pension scheme)
- Employer insolvency test: This is triggered where a business decision or other event has a materially negative impact on the amount the pension scheme would get (towards filling its “insurance deficit”) following the hypothetical insolvency of the sponsoring employer
In addition to the financial impact of receiving a Contribution Notice, the whole process under which TPR investigates before deciding whether to use its powers can be damaging to a firm’s reputation and can involve a protracted and costly dispute if the recipient challenges the decision.
Under the previous regime, employers could seek ‘clearance’ from TPR before making a key business decision. Obtaining clearance means that TPR will not (based on the information provided) make use of its Contribution Notice powers in respect of the activity.
It was widely expected that TPR would introduce a similar ‘clearance’ process tailored for the two new Contribution Notice tests – indeed, there were concerns that TPR might be overwhelmed with clearance applications because so many routine business actions, such as dividend payments, borrowing more to invest in business opportunities and growth, could technically breach one of the new tests.
However, it is now clear that TPR is not offering an expanded Clearance framework that provides the opportunity for sponsors to clear business decisions before they are taken, even where there is a technical breach of one of the new tests. And TPR has also not provided any guidance on when it may consider it reasonable to impose a Contribution Notice that is triggered by a technical breach of one of the new tests.
LCP have expressed concern that the lack of a clearance process for the two new tests, and no substantive guidance from TPR on the approach that the Regulator will take in applying the new tests, means that even employers who want to do the right thing by their pension scheme will now be ‘left guessing’ as to whether something they are about to do could later lead to enforcement action by TPR.
Commenting, LCP partner Jonathan Camfield said: “Now that we know how TPR plans to operate its new powers it is clear that there is a regulatory gap. Sponsors will have to make some key business decisions, which could have an impact on their pension scheme, without any substantive guidance on whether TPR will seek to impose a Contribution Notice, and without having the option to seek Clearance. For example, an employer might make a routine dividend payment which technically breaches the new ‘insolvency test’, or another employer might borrow more money to invest in a growth opportunity. Both can argue that this is not materially detrimental to the scheme because the risk of insolvency is so low. But, without obvious overall material detriment to the scheme, it is now clear that Clearance is not an option for the sponsor and so directors could still be open to later regulatory challenge and the possible imposition of a Contribution Notice.
Whilst TPR cannot be expect to ‘sign off’ every decision made in Britain’s boardrooms, nor should firms find themselves in a position where they have no choice but to be left guessing. The current guidelines mean too many firms simply will not know where they stand”.
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