Powers of The Pensions Regulator to be strengthened

The government is consulting on giving TPR the power to issue civil penalties of up to £1 million for the most serious wrongdoing, as well as new criminal offences of wilful or grossly reckless behaviour in relation to a DB pension scheme, non-compliance with a contribution notice, and failure to comply with the 'notifiable events' framework. The potential targets of some existing offences would be widened to include other persons connected to the pension scheme, including trustees in some circumstances.

The consultation also proposes new categories of 'notifiable event', which would require employers to inform TPR about more planned corporate transactions which could affect the pension scheme and at an earlier stage. A new requirement for employers to provide scheme trustees and TPR with a 'declaration of intent' to mitigate the potential adverse impacts of certain corporate transactions on the pension scheme is also included.

Changes to the regulator's anti-avoidance powers to issue contribution notices and financial support directions are also set out in the consultation. The government is also seeking views on how these should be enforced.

The consultation, which closes on 21 August 2018, builds on plans to strengthen DB scheme protections published by the government in March. The changes proposed are designed to enable TPR to intervene more effectively to protect the pensions of the approximately 10.5 million members of DB pension schemes.

"Beyond the headline-grabbing fines, this looks like an attempt to re-set the relationship between trustees and employers and make it more commercial in nature, harking back to previous suggestions that trustees should act like bankers," said pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com.

"In the short term, there's likely to be a change in behaviour, as trustees, employers and their advisers treat the new regime with caution. The real test will be whether that lasts, which may require The Pensions Regulator to be much more 'hands on' than in the past," he said.

The notifiable events framework is designed to ensure that TPR receives sufficient notice corporate transactions which have the potential to harm a pension scheme, for example by impacting on the employer covenant or increasing the chances of the sponsoring employer becoming insolvent. Employers are currently required to notify TPR "as soon as reasonably practical", which in practice has meant that it is sometimes not notified until after these events occur.

The consultation proposes adding four new notifiable events to the framework: sale of a material proportion of the business or assets of a sponsoring 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; and the taking of independent pre-appointment insolvency or restructuring advice. The current 'breach of banking covenant' notifiable event should be extended to include covenant deferral, amendment or waiver, giving TPR earlier oversight of a wider set of circumstances indicating that a sponsoring employer may be struggling.

The government has also proposed that TPR be notified of certain transactions earlier in the planning process than at present. It has proposed that notification of planned sale of controlling interest in a sponsoring employer, sale of the business or assets of a sponsoring employer and granting of security in priority to scheme debt should be made when heads of terms are first agreed, rather than as soon as practicable after the event.

Sponsoring employers and parent companies would also be subject to the new 'declaration of intent' requirement in respect of these three types of transaction, but only once there is greater certainty that the event is actually going ahead. The declaration would be addressed to the scheme trustees and shared with TPR. It must explain the nature of the planned transaction; confirm that the corporate planner has consulted with the trustees and confirm the trustees' agreement or otherwise; and explain any detriment to the scheme and how it is to be mitigated.

The consultation also proposes strengthening the contribution notice regime and financial support directions regime. The changes are designed to make it more efficient for the regulator to compel related companies to provide financial support to a scheme; and to allow TPR to seek financial support from a broader range of individuals associated with or connected to the sponsoring employer where other tests are met. TPR would also be able to issue financial support directions after a scheme has entered the Pension Protection Fund.

TPR said in a statement that the proposals "support the actions we are already taking to protect pension savers by being clearer, quicker and tougher".

"The proposal to enable us to apply a range of sanctions, from administrative penalties to high level fines and criminal charges, for different types of breaches, will provide TPR with a more flexible enforcement framework," it said. "It will also help act as a strong deterrent against risky and reckless behaviour which threatens the retirement incomes of workers."

"These measures, together with greater transparency for trustees and TPR over the potential detrimental impact of corporate transactions on pension schemes and improvements to our anti-avoidance powers, are a major step forward in the protection of members," it said.