The Pension Schemes Bill – a company director’s perspective

Introduction

The Pension Schemes Bill proposes a number of changes to different areas of pensions law. It proposes significant strengthening of the powers of the Pensions Regulator ('tPR'). Although the Bill fell last year ahead of the general election on 12 December 2019, it had cross-party support and has now been brought forward in materially the same form.

It is currently progressing through the House of Lords where its wide application has, amongst other aspects (including that much of the detail is currently proposed to be in subordinate legislation), received some criticism.

This briefing considers two main areas for company directors to note:

• new and stronger powers for tPR; and
• a new funding and investment strategy.

Proposed new powers for tPR

Overview Summary

Whilst new powers for tPR were largely expected, the proposed new powers are perhaps wider than many in the industry had anticipated. If enacted in their current form, the changes are likely to impact on a wide range of corporate business activity.

If you are a director of a company sponsoring a DB scheme, or if you are involved in financing a transaction involving such a sponsor, we recommend you consider the proposals now on the deals you are currently doing. It would be wise to bear in mind the themes of reporting and transparency and to be sure you have mitigated the risk of criminal offences.

New criminal offences and civil penalties

The Bill creates three new criminal offences, all of which attract either a fine, imprisonment or both:

1. Avoiding an employer debt – taking action to (e.g.) avoid paying a s75 debt will be punishable by an unlimited fine and/or up to seven years in prison.
2. Conduct that risks accrued benefits – taking action that detrimentally affects in a material way the likelihood of benefits accrued under a DB scheme being received (where the person knew or ought to have known the effect of their actions) will be punishable by an unlimited fine and/or up to seven years in prison. This offence is drafted very widely and has the potential to catch routine and standard business transactions.
3. Failure to comply with a contribution notice (which is basically a tPR order to make a contribution to a scheme) without reasonable excuse – a failure to comply will be punishable by an unlimited fine.

tPR will also have the power to impose a civil penalty in a range of circumstances (including in respect of any of the offences mentioned above), up to £1 million. This can include knowingly or recklessly providing tPR (or the trustees) with false or misleading information.

Extended information gathering powers

tPR’s information gathering powers have also been expanded to include:

• a power to summon individuals to interview
• a power to inspect premises
• an extension of the notifiable events regime (under which various events – including some corporate activity such as mergers and acquisitions or (re)financing transactions must be notified to tPR)
• a new 'declaration of intent' requiring those involved with corporate transactions to declare their intent to the trustees in advance
• tougher sanctions for non-compliance with existing information requirements.

Two new grounds on which a contribution notice may be issued

The Bill introduces two new tests for issuing contribution notices:

1. the Employer Insolvency test: this will be met where an act (or failure to act) would materially reduce the amount of a section 75 debt likely to be recovered on insolvency (had a s75 debt fallen due and if the scheme is in deficit on a buy-out basis); or
2. the Employer Resources test: this will be met where an act (or failure to act) reduces the resources of the employer and this is material relative to the scheme’s estimated s75 debt.

Statutory defences to these tests are only available in limited circumstances (mainly based on the reasonableness of the conduct and any mitigation attempts).

A new funding and investment strategy

Overview Summary

The other key area of the Bill for company directors to note is the requirement for DB trustees to produce a new (long-term) funding and investment strategy. The scheme’s technical provisions will have to be set consistent with the strategy and the Employer’s agreement to the strategy will be required.

Company directors or scheme sponsors should be aware of the continual shifting focus towards long-term flight planning. Sponsors of schemes with current or upcoming valuations might want to be prepared for the trustees to raise long term planning in valuation discussions (and to discuss the meaning of 'consistent with').

As well as simply setting a strategy, the trustee chair will have to send tPR a statement setting out how the strategy is being implemented and how the scheme is doing against it (including any remedial steps where the scheme is off-course, identified risks and appropriate mitigation and reflections on lessons learned).

This will become a very important document for DB trustees each year. 

Conclusion

The Bill will have a significant impact on sponsors of DB occupational pension schemes. Any company director responsible for their company’s DB pension scheme ought to start considering the new requirements. If you want to find out more about the Pension Schemes Bill and how this could affect your company, please contact Chris Brown, Partner, or your usual Burges Salmon pensions contact.

This article was written by Chris Brown, Partner in Burges Salmon’s Pensions Team.