Pushing up pension powers

Boris Johnson’s announcement that his (at the time of writing) government will deliver its first Queen’s Speech on 14 October has ramped up speculation that we could see a whole raft of new legislation announced ahead of Brexit.

This news is a strong sign that a long-awaited pensions bill will finally make its appearance. This has been on the cards since March last year, when the government followed up on its manifesto promises by publishing a white paper that outlined ways to improve regulation and introduce a tougher approach to those who make “irresponsible decisions” concerning their defined-benefits (ie salary-related) pension schemes. At the same time, the Department for Business, Energy and Industrial Strategy issued a consultation paper on insolvency and corporate governance, with a strong pensions focus. 

In the wake of Halcrow, BHS, Carillion and Interserve, defined-benefits pension schemes have attracted a huge amount of attention as the schemes continue to face significant funding shortfalls, which means that ever larger financial demands are made on their sponsoring employers to support them. The pensions bill will therefore set out legislation to strengthen the powers of the Pensions Regulator, add to the circumstances in which it can investigate group corporate activity, and significantly increase the penalties and sanctions it can impose.

In practice, this will mean that companies operating in the construction sector (where defined-benefits schemes are fairly common, even if no longer open to new members or accrual of benefits) will have to be aware of new circumstances in which they ought to be engaging with the Pensions Regulator in relation to particular corporate events.

New notifiable events

The bill is expected to contain two new notifiable events, which are statutory requirements to inform the Pensions Regulator about certain corporate activity. These notifications operate as an early warning system to help the regulator determine whether it ought to investigate a matter further and/or use its statutory powers, for example to require money to be paid into the scheme.

The first new notifiable event is the sale of a material part of the business of any company participating in a defined-benefits scheme where that company has funding responsibility for at least 20% of its liabilities. The second is the granting of security giving priority over the pension scheme as a creditor (and usually any security will do this). 

Change of control of a scheme employer continues to be notifiable under current law, but while it was proposed in consultation that dividend payments should be notifiable to the regulator, this has not survived the white paper and therefore we will not see any obligation to inform the regulator about dividend payments in the pensions bill. That said, the regulator is on record as stating in relation to dividend payments that it wants to ensure the equitable treatment of schemes, as a key financial stakeholder, relative to shareholders.

Declaration of intent

The bill will also provide that where a group intends to sell a controlling interest in a scheme employer or either of the two new notifiable events occurs, the corporate decision-maker (which may be the parent company of the scheme employer) must issue a declaration of intent to the pension trustees as early as possible, copied to the regulator. This reflects current best practice of voluntarily engaging with trustees in advance to agree any mitigation needed as a result of corporate activity, but the bill – once enacted as law – will turn good practice into a legal requirement.

Greater penalties

The regulator will also be given a number of new weapons to deter wrongdoing, including increased investigatory powers and the ability to issue civil penalties of up to £1m for failure to notify specified events or to issue a declaration of intent. There will also be new criminal offences punishable by up to seven years in prison for wilful or reckless behaviour in relation to a defined-benefits pension scheme, as well as failure to comply with a contribution notice (ie a statutory demand issued by the regulator against any group company worldwide requiring it to pay money into the UK defined-benefits scheme in question). 

In addition, the circumstances in which the regulator can issue a contribution notice will be widened; if the scheme employer is materially weaker after a particular corporate event and/or the recovery to the pension scheme on the employer’s hypothetical insolvency is materially reduced, then the regulator will be able to issue a contribution notice to any connected group company, if reasonable to do so.

The regulator has, to date, been reluctant to use its existing statutory powers, but the new legislation is likely to result in it being more prepared to use its expanded range of powers. We can also expect the regulator to have more engagement with more schemes so that it can address emerging risk more quickly, in particular where that risk arises from the impact of corporate activity on the ability of the employer to support the scheme. 

Anne-Marie Winton is a partner of Arc Pensions Law