Pensions: A summary on the Government Response to the Consultation of Protecting Defined Benefit Pension Schemes

The UK Government has issued a response to the consultation on protecting Defined Benefit Pension Schemes. This brings about quite a few changes as the Government wishes to strengthen the Pension Regulator’s power. The stronger Pensions Regulator will mean: monitoring of relevant corporate events; deterring and punishing wilful or reckless conduct that impacts negatively on pension schemes; and updating and improving powers to gather information and combat avoidance.

Due to this, there is a new civil penalty of up to £1 million for those who:

1. Fail to comply with a contribution notice or financial support direction;
2. Fail to comply with notifiable events framework or requirements for a Declaration of Intent (a Declaration of Intent, made by the corporate transaction planner, explains the transaction taking place and confirms the consultation of pension scheme trustees and how any detriment to the scheme is to be mitigated);
3. Wilful or reckless conduct in relation to a pension scheme; and
4. Knowingly or recklessly provide false information to trustees or to the Pensions Regulator.

In addition to the penalty, there will also be both a fixed civil fine and escalating civil fine for not complying with information requests on time.

The Government will introduce two new criminal offences for those who:

1. Wilfully or recklessly mishandle pension schemes through mismanagement of the business, allowing unsustainable deficits to build up or taking major investment risks. These will carry seven years of imprisonment or an unlimited fine; and
2. Don’t comply with contribution notices. They will face an unlimited fine in addition to a new civil penalty of up to 1 million.

The response also states that events notifiable to the Pensions Regulator will be extended to cover:

1. 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;
2. Granting of security on a debt to give it priority over debt to the scheme.

Wrongful trading of the employer will be removed as a notifiable event as too subjective.

The current existing notifiable events by the employer are:

1. Any decision by the employer to take action intended to avoid payment of a pension scheme debt;
2. The employer’s decision to cease to carry on business in the UK
3. Wrongful trading;
4. Breach of a banking covenant;
5. A decision by a controlling company to relinquish control of the employer and conviction of an individual for dishonesty where the person was a director or partner of the employer.

There is also an introduction of a Declaration of Intent by the transaction’s corporate planners that will be shared with the trustees. The Declaration of Intent is made by the corporate transaction planner such as the Group Finance Director or Chief Executive, to include explaining the proposed transaction, confirming that pension scheme trustees have been consulted and how any detriment to the scheme is to be mitigated. For example, where the new holding company has a weaker financial covenant than the seller’s holding company, mitigation could be offered in the form of a cash injection into the scheme or the trustees of the pension scheme being given a charge over company property etc.

Such a Declaration of Intent is required in the case of:

1. The sale of controlling interest in a sponsoring employer of a defined benefit pension scheme
2. The sale of business or assets of a sponsoring employer, and
3. The granting of security in priority to the scheme on a debt, to give it priority over debt to the pension scheme.

The purpose of the Declaration of Intent is to make sure that the impact of the corporate transaction is fully understood as early as possible and mitigation is put into effect with the support of the Pensions Regulator, as well as to ensure collaboration between the trustees and the employer. This would help avoid another BHS situation arising.

A current positive to the goings-on of Brexit is that the above legislation won’t be introduced until after Parliament has dealt with Brexit, which may be a while yet.

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If you have any queries on how these changes will impact your client’s business, contact our team on +44(0)203 051 5711 or contact us.