By David Brooks, Technical Director, Broadstone
This was a somewhat odd way to launch what is almost certain to be a well-read document across the industry, although I do not think there was anything sinister going on at DWP towers. More helpfully, a standard pdf is now available for those that wish to read it.
Primarily, the consultation looks at two areas: oversight of corporate transactions and activities and then fines and punishment.
The corporate transactions oversight involves a major review of the Pension Regulator’s radar and early warning system. This includes a review of notifiable events. The theme is to try and capture corporate sales and restructuring better, but rather than the Regulator being the last to know the emphasis is on informing them during the planning and advisory phase. This would be followed up with a new step - Declaration of Intent - prepared by the sponsoring employer, describing the implications the event could have on the pension scheme and how these may be mitigated.
The Pensions Regulator will be invited to review their guidance on the clearance process to clarify their expectation as to what employers and trustees should do.
Areas of the guidance that the Regulator expects to clarify and/or expand include:
1. The Material Detriment definition and how applicants and trustees should approach the test;
2. Revision of the definition of event types, including the circumstances in which clearance is given in relation to Financial Support Directions (given that Financial Support Directions are not an ‘act’ or transaction-based power); and
3. More information about how the clearance process works and what applicants and trustees can expect; to include expectations around timing of application (as early as possible).
The change in focus is understandable (and importantly, encourages management to discuss, consider and quantify the potential impact on the pension scheme) when you consider that on some occasions the Regulator has only been aware of a deal when it is announced in the press. Being a more responsive regulator is difficult if everybody else has a head start. However, the effectiveness and detail required in a compliant Declaration of Intent would need to be fully assessed and described.
The Government is clear it wants to be able to punish reckless behaviour and includes a reminder of the Regulator’s current powers.
There is a more comprehensive proposal to allow the Regulator to understand the specifics of each case before levelling a fine.
However, the main area of attention is that the Regulator will have the power to issue a civil penalty up to £1m. Criminal offences for courts to impose appropriate penalties will also be introduced.
When would £1m be levied? Broadly for failure to comply with many of the new requirements to be included as part of this review and on actions that have harmed the scheme or have the potential to do so.
When would there be criminal sanctions? The new offence of wilful or grossly reckless behaviour in relation to a DB scheme will be introduced. Non-compliance with a contribution notice or notifiable events framework will also be a criminal offence.
The document is clearly supposed to be the first of many salvos in a battle which has less to do with pensions and trustees and more to do with how pensions are treated at the highest level of benefits. £1m fines will attract attention, in a similar way that GDPR’s massive fines encourage attention and compliance. A re-boot of the system will ensure it sits on the agenda at board level of the trustee and sponsor. The Declaration of Intent is an important step but needs more regulatory interrogation of the statement otherwise it may get lip-service. Still unquantified is how the government will define “wilful or reckless behaviour” in such a way that it acts as the intended deterrent but isn’t so toothless as to be ignored. How that is resolved may be the marker for the success of this new framework.
This wide-ranging view of the Regulator’s powers was to be expected and is broadly in line with what was feasible and trailed with the White Paper. A toughening up of the notifiable events framework was crucial. This is on the Regulator’s radar and without it functioning as intended they will always be playing catch-up.
However, this is the hors d’oeuvre to the funding Code of Practice which the Pensions Regulator will be consulting on in 2019.
That’s when we’ll begin to understand the impact of the major funding shake up, and how brave the Regulator is feeling to push scheme funding negotiations into a narrower band of outcomes. This is also where key decisions will be made and the Regulator will be talking to interested stakeholders on the design of clearer funding standards, culminating in a formal consultation on a revised Defined Benefits Funding Code of Practice in 2019.
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