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The Pensions Regulator (TPR) has had a difficult couple of years, coming in for heavy criticism after a series of well-publicised corporate failures involving large pension schemes.
The recent consultation published by the Department for Work and Pensions (DWP) (a follow-up to the “Protecting Defined Benefit Pension Schemes” White Paper) is a blueprint for a new regulatory regime and a “clearer, quicker and tougher” Pensions Regulator. While steps to improve the security of defined benefit (DB) pensions are welcome, companies sponsoring DB schemes would do well to read the small print of this recent consultation.
Increased notification obligations
The main item of interest for DB scheme sponsors will be the proposal to expand the notification obligations in relation to corporate transactions. In particular, the DWP is proposing to add the following to the current notifiable events framework:
- the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities
- granting of security on a debt to give it priority over debt to the scheme
- significant restructuring of the employer’s board of directors and certain senior management appointments.
- sponsoring employer taking independent pre-appointment insolvency/restructuring advice
- deferral, amendment, or waiver of a banking covenant
In addition to this, the DWP is proposing that a Declaration of Intent will be required for the following events:
- sale of controlling interest in a scheme employer
- sale of the business or assets of a scheme employer
- granting of security in priority to scheme debt
This Declaration of Intent would be addressed to the trustees and would need to confirm that the company has appropriately considered and, where applicable, mitigated the impact on the DB pension scheme.
For these types of events, companies would be required to notify TPR “no later than when negotiations have led to agreement in principle of its main terms” – a more stringent requirement than the current regime, which requires the company to notify TPR of events “as soon as reasonably practicable after they have occurred”.
All in all, this significantly increases the administrative burden for DB scheme sponsors and could, in some cases, result in a constraint on certain types of corporate activity. An example of this is for a company wanting to push a transaction through quickly - the Declaration of Intent would be needed before the transaction goes ahead, so without engaging very early in the process, this could impede the progress of the transaction.
Another concern for certain companies will be the proposal to expand the notifiable event regime to include notifications relating to company debt. Structuring company debt and refinancing can be a complicated enough process for companies without the additional burden of needing to consider whether a particular change will result in a notification to TPR.
For most companies, the main concern will be keeping track of the number of different potential events that require communication to TPR. This is particularly true given the DWP’s proposal to increase the level of fines that can be dealt out for non-compliance with the regulatory regime (to a maximum of £1 million).
The deadline for responding to the DWP’s consultation was 21 August 2018. Companies should ensure that they are kept up-to-date in relation to any potential changes in the UK pension legislation framework.