As far back as February 2019, I blogged that plans were afoot to strengthen the powers of The Pensions Regulator (TPR). The Pension Schemes Act 2021 (PSA21) has been a long time in the making. It was enacted some two years later, in February of this year and many of the proposed measures, which I considered back in February 2019, will come into force on 1 October 2021. It’s not quite your average tomato sauce (remember that advert – good things come to those who wait?), and it won’t bring good things to everyone, but it is designed to enable TPR to act with more speed and with more impact for the good of pension schemes generally.
So, what measures am I talking about? Well, if you are a trustee, it’s inevitable that you will have been hearing about TPR’s new powers at trustee meetings for the last year at least. If, however, you are an employer of a defined benefit pension scheme, chances are you have been busy with other more pressing issues over the last 18 months or so.
For those of you who aren’t quite up to speed, here is a recap of what will (and won’t!) be coming into force on 1 October.
New Criminal Offences
First (and generating the most headlines) are the two new offences of “avoidance of employer debt” and “conduct risking accrued scheme benefits”. They carry a maximum criminal penalty of up to seven years in prison or an unlimited fine. Alternatively, TPR could impose a financial sanction of £1 million. These two new offences could have far reaching implications, and not just for individuals and companies directly involved with a defined benefit pension scheme. Conduct risking accrued scheme benefits could, for example, capture the scenario where a supplier significantly hikes prices, impacting the cash flow of a pension scheme employer. Could the supplier fall foul of these new offences? This, of course, is an extreme example and there are protections and defences available. The example does illustrate, however, that more thought might need to be given by corporates and their directors, in particular, to the likely impact that any legitimate changes within a business, such as entering into a new refinancing package, might have on their defined benefit pension scheme.
TPR and the government have been at pains to say that they do not intend that the new measures introduced by the PSA21 should stifle legitimate corporate activity. This is also confirmed in TPR’s new policy on how it will use its new criminal powers to prosecute those who put savers’ pensions at risk, which it issued yesterday. Instead, TPR will have greater powers to act where there is inappropriate behaviour. Additionally, the new measures are not designed to be retrospective. It is worth noting, however, that TPR says in its new policy for using the new criminal offences, “The new criminal offences do not have retrospective effect, which means that we can only prosecute people for acts that took place on or after 1 October 2021. However, we may take into account facts from before that date as part of our investigations, and those we’re investigating may wish to rely on those facts in their defence.”
It is also worth noting that the clearance process, which is available in relation to the contribution notice regime, is not available in relation to these new offences.
Finally, bear in mind that it is unlikely that directors and officers liability insurance would cover any financial penalties levied by TPR – they would be payable by the corporate or the individuals concerned.
TPR currently has the power to issue a contribution notice to a pension scheme employer or connected and/or associated persons (including other group companies and directors) in certain circumstances, if it considers it reasonable to do so. The recipient of the contribution notice can be required to contribute to the pension scheme any amount up to the full section 75 debt in the pension scheme. The new powers will expand upon the factors that TPR should take into account when determining whether it would be reasonable to issue a contribution notice. They will also introduce two additional tests, which TPR could use, for determining whether relevant grounds have been met in order to issue a contribution notice. These new tests are called the “employer insolvency test” and the “employer resources test”. These tests will make it easier for TPR to issue a contribution notice going forward.
Previously, TPR could issue a contribution notice up to an amount equivalent to what would be the scheme’s section 75 debt as at the date the ‘offending’ event occurred. From 1 October, the calculation date will be closer to the date when the contribution notice is actually issued, meaning it could be for a significantly higher amount.
The two new tests, in particular, mean that more corporate activity is likely to more easily fall within the scope of a contribution notice. The number of corporates seeking clearance in relation to corporate transactions has fallen away over the years but it might be advisable going forward, in light of the expanded contribution notice regime, to give some thought to whether making a clearance application might be desirable before undertaking a new transaction.
Failure to comply with a contribution notice, once issued could, from 1 October, risk (1) a criminal penalty of an unlimited fine or (2) a financial (not criminal) penalty of up to £1 million. Which brings us onto…….
New Financial Penalties Regime
There will also be a new financial penalties regime, allowing TPR to issue a fine of up to £1 million for certain acts/failures to act, including providing TPR or pension trustees with false or misleading information. Finance directors, in particular, will need to be mindful of these new provisions when providing information for a covenant review. It may be wise to ensure that any information supplied to TPR or the pension trustees is peer reviewed, to be on the safe side.
Likewise, failure to report a notifiable event, such as a decision to sell a controlling interest in a company, where that company is a defined benefit pension scheme employer, will incur new financial penalties of up to £1 million. Corporates might want to make sure they have a checklist of events that constitute notifiable events, along with nominating a person to have responsibility for notifying such events, so that they can act quickly and avoid penalties in the event that a notifiable event occurs.
Finally, there will be enhanced interview powers for TPR, meaning that TPR will be able to require pretty much anyone to attend for interview. These new powers will be accompanied by enhanced powers to inspect premises, along with fixed and escalating penalties for failing to attend for interview, produce documents, and/or allow inspection of premises. It is important that corporates have appropriate safeguards in place to ensure that any notices arriving at the company from TPR are quickly passed to a senior person to be dealt with promptly.
What Is Not Included in the 1 October Start Date?
The new “super” notifiable events regime, including the giving of “declarations of intent” will not be brought in until April next year. The government is currently consulting on draft regulations introducing these new measures, which will require corporates to notify TPR and trustees of defined benefit pension schemes (and provide mitigation where appropriate) in advance of completing certain corporate transactions and/or refinancing projects.
There’s certainly plenty for trustees and corporates to be putting on their board agendas over the next few months, whether or not they consider the new measures to be good! We can help with training, further information or advice – just ask!