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The Department for Work and Pensions (DWP) has published a response to its June 2018 consultation on the subject of building “a Stronger Pensions Regulator”.
The consultation itself followed publication of the Pensions White Paper in March 2018 in which the DWP mooted plans for new powers for The Pensions Regulator (TPR) and a series of new criminal and civil offences to be established in law – with big fines and jail terms targeted at those who behave in a “wilful and reckless” manner toward their pensions obligations.
Much of the detail is still to be consulted on – let alone legislation drafted – but the direction of travel is now quite clear.
Declaration of Intent
One of the DWP’s proposals which prompted much debate was that ‘Declarations of Intent’ would have to be produced at an early stage in company transactions such as takeovers and mergers. Despite there still being many details to hammer out in consultation with the industry, the DWP has confirmed these declarations will be required and will need to set out how corporate activity is expected to impact sponsors’ Defined Benefit (DB) pension schemes.
One aspect on which the DWP intends to consult further is the content and timing of the Declarations of Intent, as well as whether and how the declarations should be shared with scheme trustees and TPR. The DWP has however said it does not intend to specify the precise timing for sharing the declaration.
The Government is pressing ahead with plans to make “wilful or reckless behaviour” in relation to a pension scheme a criminal offence, with powers for courts to impose unlimited fines or custodial sentences of up to seven years for the worst offenders.
The DWP’s response also confirms new civil penalties - in particular providing further clarification on when a new maximum £1 million fine would be levied. For example:
|Offence||Maximum criminal sanction||Maximum civil penalty|
|Wilful or reckless behaviour in relation to a pension scheme||
|Failure to comply with a Contribution Notice||
|Failure to comply with Financial Support Notice||
|Non-compliance with Notifiable Events Framework||
|Not issuing a proper Declaration of Intent||-||£1 million|
|Knowingly providing false information to trustees or TPR||-||£1 million|
|Failure to comply with information requests from TPR||
|Fixed / escalating|
"TPR will in future have the power to call individuals to attend an interview – a power which could potentially override advisers’ duty of confidentiality towards clients."
TPR will in future have the power to call individuals to attend an interview – a power which could potentially override advisers’ duty of confidentiality towards clients (although it will not override legal privilege). TPR would be required to issue advance notice of the interview, including details of the interview subject.
The DWP has proposed amendments to the way Contribution Notices (CNs) will function, as well as confirming that Financial Support Directions (FSDs) are to be renamed Financial Support Notices (FSNs).
- The FSN process will become more streamlined and single-stage, enabling TPR to serve an “enforceable obligation” on a target company much earlier in the process.
- The definition of a ‘Service Company’ for the purposes of FSNs, as set out in legislation, will be reviewed.
- Acceptable forms of support to meet an FSN will initially be restricted to cash contributions or a statutory guarantee on a “joint and several liability” basis. However, there will be scope in certain circumstances to agree with TPR that the support will take another form.
- After issuing a FSN, TPR will be able to impose a CN on individuals (for example Company Directors) connected with the FSN recipient.
- In issuing a CN, TPR will take into account actions resulting in a “material reduction” in the amount recoverable on insolvency of the employer, of a material reduction in the employer’s value relative to the scheme’s ‘buyout’ deficit.
- The financial impact of an act (or failure to act) on a scheme’s assets or liabilities will be taken into account when deciding the amount of that CN.
- A more “scheme-focussed” test will be developed in further consultation with TPR to replace the existing Insufficiently Resourced test.
- CN amounts will be index-linked.
Although proposed in the consultation, the DWP is no longer minded to:
- allow TPR to issue a FSN after a scheme has transferred to the Pension Protection Fund (PPF)
- enable TPR to issue FSNs directly to individual company directors (although they will be able to impose CNs on individual directors); or
- extend the FSN look-back period to 6 years.
"The original consultation proposed two further notifiable events which have now been dropped on the grounds of practicality."
Whilst failure to comply with the Notifiable Events framework could result in a civil penalty of up to £1 million (see above), the DWP has decided against also making it a criminal offence. Two new notifiable events will however be fleshed out in consultations later this year:
- The sale of a ‘material proportion’ of an employer’s assets or business, where the company has funding responsibility for at least 20% of the Defined Benefit (DB) scheme liabilities.
- Granting of security on a corporate debt so as to give it higher priority than the DB scheme.
The original consultation proposed two further notifiable events which have now been dropped on the grounds of practicality (ie a significant restructuring of the board of directors / senior management; or the employer seeking ‘pre-insolvency’ advice).
Company Directors will no longer be subject to the ‘wrongful trading’ Notifiable Event – in particular because it was felt no directors would ordinarily be willing to personally incriminate themselves by admitting their company is wrongfully trading.
The DWP had also considered whether to expand the Notifiable Events regime to include notification where the sponsor of an underfunded DB scheme pays material dividends to shareholders. For now, this proposal has been parked. Instead TPR will monitor dividend payments as part of its overview of Scheme Funding submissions and will produce updated guidance and a revised Code of Practice in due course.
The Pensions Regulator is set to get a sharper set of teeth to sink into companies and individuals who are trying to shirk their DB pension scheme responsibilities. On the face of it, the proposed financial penalties and threat of prison in particular will become a major deterrent going forward.
However, there is much work still to be done, with several further consultations expected, and legislation to be enacted – all of which may mean it will be a number of years before TPR can actually put these powers to use. Furthermore there is very little detail at the moment about what wilfully reckless behaviour actually looks like and whilst more detail is promised, however robust the legal definition is it will inevitably be down to the courts to draw the line.