By Tyron Potts, FIA, Associate and Head of Pensions Research, Barnett Waddingham
Following the White Paper in March this year, the Department for Work and Pensions (DWP) has issued a consultation on stronger powers which is hoped will support TPR’s ambition to be “clearer, quicker and tougher” (or maybe “harder, better, faster, stronger” as Daft Punk once put it, though I have my doubts they were talking about regulating corporate pensions).
The DWP’s proposals are, according to Pensions Minister Esther McVey, not expected to result in “fundamental changes” to the existing regulatory system and so “responsible employers” who are fully engaged with DB scheme trustees are likely only to see a “limited” impact. Nevertheless, there will be a timing effect on well-intentioned corporate transactions and so the Regulator will have to make sure it responds efficiently and proportionately to avoid causing undue delays.
Notifiable events
Under the proposals, TPR’s ‘Notifiable Events’ framework will be expanded so that employers are obliged to report the sale of a “material proportion” of the business where it has funding responsibility for at least 20% of a DB scheme’s liabilities.
In addition, TPR will expect to be informed when:
a sponsoring company offers security on a debt that ranks above obligations to the pension scheme
the company’s board or senior management are significantly restructured
an employer takes independent advice on insolvency or restructuring (prior to any appointment of an insolvency practitioner); or
banks’ or bondholders’ formal covenant assessments are deferred, amended or waived.
Declaration of intent
Where a sponsoring employer is expected to enter a “relevant business transaction” (for example sale or takeover, or granting of security ahead of pension scheme debt) then a formal “statement of intent” will have to be agreed with trustees and submitted to TPR.
The statement will confirm that the company has appropriately considered and, where applicable, mitigated the impact on the DB pension scheme.
Whilst the declaration could be made after the Notifiable Event report, it will still be required before the transaction is formalised. Therefore, in a few cases, this could result in insurmountable delays to the process leading to fewer deals being completed unless, as is hoped, trustees and employers learn to engage very early in the process.
Penalties
The DWP has said it wants TPR and the courts to have additional powers to impose penalties of up to £1 million for non-compliance or for misleading the Regulator.
Whilst one would not imagine such huge fines being handed out for seemingly minor transgressions, trustees may worry that the DWP is proposing the new civil fines could be imposed for “non-compliance with elements of the DB funding code [of practice]”. As for which elements this would cover, we await the outcome of the consultation - and the promised further consultations on clearer funding standards and the Scheme Funding Code of Practice – due in 2019.
Financial Support Directions (FSD) and Contribution Notices (CN)
TPR could get expanded powers to issue more Contribution Notices – and for larger amounts – if the proposed changes go ahead.
Furthermore, the government wants the Regulator to be able FSDs to individuals as well as corporates, and for the FSD process to be faster, more streamlined and create a “specific and enforceable” obligation on the target.
In conclusion
The DWP is proposing that TPR will have greater ability to act retrospectively (for example issuing FSDs after a scheme has entered PPF assessment) as well as being able to step in before corporate transactions create problems for DB schemes.
Such expanded capabilities – if used properly – will positively enable TPR to discourage the handful of “rogue employers” who don’t want to do the right thing. Just as long as the focus doesn’t shift too far away from encouraging the majority of other sponsors to carry on engaging effectively.
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