20th Feb 2019

A summary of new Regulator powers

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Ever since the controversial end to BHS and its defined benefit (DB) pension scheme in 2017, which was then exacerbated by the demise of Carillion, the government has been looking at how it can toughen up the Pension Regulator’s (the Regulator) powers. In particular, the focus has been on the powers to both monitor and track corporate activity and the potential negative impact on DB pension schemes, and how to punish those that make business decisions to the detriment of members’ benefits.

This began with a White Paper and then a consultation in the summer of 2018. The government has now responded to that consultation detailing how they will provide more powers to the Regulator. The consultation response can be read here

The key areas of focus are around:

  • Corporate transaction oversight
  • Improved Regulator powers (including increased fines and criminal penalties)
  • Anti-avoidance powers
  • Information gathering powers

Corporate transaction oversight

Notifiable events framework

There has long been a framework which required Trustees and sponsors to report certain activities, where the DB scheme is underfunded. However, this is to be expanded with two new employer related events that will need to be reported:

  • 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; and
  • The granting of security on a debt to give it priority over the scheme

The original list proposed in the consultation document was much longer so many employers will see this as getting off lightly. On balance the government felt the risk of stifling legitimate business activities too great.

The Regulator will be updating its guidance and there may also be changes/clarification to when and how quickly the events are reported.

Declaration of Intent

This will require sponsors to consider the potential impact of their decisions (and the planning for decisions) on the DB scheme at a very early stage. A declaration will need to be shared by the “corporate planners” with the Trustees and the Regulator. It will need to provide enough detail for the recipients to understand the implications the transaction will have on the scheme.

The detail remains outstanding on this potentially controversial area and the precise content and timing will be fleshed out in the legislation.

Voluntary clearance

There will be a review of the voluntary clearance process and how it integrates with the additions to the notifiable events framework and declarations of intent. The Regulator will update its guidance in due course.

 

Improved Regulator powers

This is where the most headlines have been and are major revamp of the powers the Regulator has to punish transgressions. The current powers allow fines up to £5,000 (on an individual) or £50,000 (on a corporate body). The new penalties are:

  • £1 million for a serious breach which has or has the potential to cause serious harm to the scheme. For example, failure to comply with:
    • Declaration of intent framework
    • Financial Support Direction
    • Contribution Notice
    • Notifiable Events Framework
  • Criminal offence with up to 7 years imprisonment/unlimited fine for “wilful or reckless behaviour” in relation to a DB scheme
  • Unlimited fine for failure to comply with a contribution notice

These penalties could fall on sponsors (and connected persons) and even trustees.

 

Anti-avoidance powers

Technical changes to the way Contribution Notices (CN) and Financial Support Directions also work are laid out.

  • The government will amend the reasonableness test to reflect that the actual or potential impact of the act, or failure to act, on the value of the scheme’s assets or liabilities, would be a relevant consideration when determining the amount to be paid under a CN; and
  • The government will add two additional limbs to the material detriment test in order to clarify the legislation. Proposing that a snapshot funding approach should be used in both new limbs, and that the test would be met if either:
    • The amount the scheme would have recovered on a hypothetical insolvency of the employer is materially reduced as a result of the act; or
    • The “value” of the employer provides materially less ‘coverage’ of the scheme’s Section 75 deficit following the “act”.
  • The government will proceed to tighten the forms of financial support to cash and/or joint and several liability – by which we mean where the targets are jointly and severally liable for the sponsoring employer’s liabilities in relation to their pension scheme.
  • Financial Support Directions will be renamed “Financial Support Notices” (FSN).

 

Information gathering powers

Interview Power – this will be legislated for to allow the Regulator to call individuals into interview and would override the adviser’s duty of confidentiality to their client

Inspection power – the powers of inspection will be expanded but would only be used where necessary

Fixed and escalating penalties are also being introduced to expand and increase the levels of fines for non-compliance.

New schedule of fines and penalties

Below is a table (as produced in the document) of the new offences, penalties and the intended target.

New offence New penalty Target
Wilful or reckless behaviour in relation to a pension scheme Criminal offence: up to 7 years’ imprisonment and/or unlimited fines and/or new civil penalty: up to a maximum of £1 million Sponsoring employers and others associated or connected
Failure to comply with a Contribution Notice Criminal offence: unlimited fines and/or new civil penalty: up to a maximum of £1 million Sponsoring employers and others associated or connected
Failure to comply with a Financial Support Direction 14 New civil penalty: up to a maximum of £1 million Sponsoring employers and others associated or connected (not individuals with the exception of controlling shareholders who are individuals)
Failure to comply with the Notifiable Events Framework New civil penalty: up to a maximum of £1 million Sponsoring employers and Trustees
Failure to comply with requirements for a Declaration of Intent New civil penalty: up to a maximum of £1 million Sponsoring employers and others associated or connected
Knowingly or recklessly providing false information to Trustees New civil penalty: up to a maximum of £1 million Any person who is required to provide information to Trustees as prescribed
Non-compliance with information requests (including inspections and interviews) or delays in providing informationFixed and escalating civil fine. The government will develop the levels of fines as part of its secondary legislation package.Any person targeted by the Regulator under section 72 to 75 of the Pensions Act 2004
Knowingly or recklessly providing false information to the RegulatorNew civil penalty: up to a maximum of £1 millionAny person who is required to provide information to the Regulator as prescribed
Non-compliance with clearer funding standardsStrengthened section 231 (Powers of the Regulator) scheme funding power and existing powers (such as improvement notices) of the Pensions Act 2004Trustees and sponsoring employers
Failure to provide a Chair’s Statement, failure to provide on time or providing a poor quality statementExisting civil penalty under section 10 of the Pensions Act 1995Trustees and sponsoring employers

Conclusion

It is clear the aim of this is to allow a more proactive regulator to head off issues in DB schemes. It was clearly concerning when it had to admit to learning of the BHS sale in the financial press.

The increased penalties for non-compliance, and possible imprisonment, are clearly eye-catching. However, it is possible that we will never see a conviction under the rules around imprisonment and £1m fines, especially since it is highly unlikely that any actions taken by employers to date would fall foul of these rules. The new penalties appear to be driven as much by political reasons as by good governance. Trustees and employers looking to undertake corporate transactions would do well to familiarise themselves when the details rules are unveiled. What is clear is that Trustees and sponsors will take note of the potential penalties and will tread more cautiously around these transactions.

Ultimately, that’s the point.

 

Next steps

There is very little in the consultation response to give a hint to timescales when the legislation will be drafted and further consulted on so we’ll be keeping a look out for the detail.