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On Monday, in its response to the consultation on protecting DB pension schemes and strengthening the Pensions Regulator, the Government confirmed its plans to:

  • introduce a new criminal offence of wilful or reckless behaviour in relation to a defined benefit (DB) pension scheme (aimed at company directors)
  • give the Pensions Regulator the power to issue fines of up to £1 million in these circumstances and for other breaches by corporate sponsors of their pensions obligations
  • require corporate sponsors to notify trustees and the Regulator about proposed corporate transactions and re-financing and how they plan to mitigate any detriment to the pension scheme, and
  • make changes to the Regulator's existing anti-avoidance powers to make it easier for the Regulator to impose Contribution Notices and Financial Support Directions on corporate sponsors and on connected and associated parties.

These changes come in response to high profile corporate failures involving the likes of BHS and Carillion. Corporate sponsors need to take note of these new powers and the new notification requirements, particularly as the Pensions Regulator is adopting a tougher and more proactive approach to its oversight of DB schemes and its enforcement activity against corporate sponsors.

New criminal and civil sanctions

The new criminal offence of wilful or reckless behaviour in relation to a DB scheme will carry a maximum sentence of 7 years imprisonment. It is targeted at directors of corporate sponsors and directors of connected and associated companies (such as parent companies) who seek to evade their obligations to a DB scheme or take action which undermines the value of the corporate entities supporting such schemes.

The Pensions Regulator will also be given the power to issue a new civil fine of up to £1 million in a range of circumstances including where a corporate sponsor or connected or associated party (which includes directors):

  • engage in wilful or reckless behaviour in relation to a DB pension scheme
  • fail to comply with a Contribution Notice or Financial Support Direction
  • fail to comply with the notifiable events framework or fail to issue a new Declaration of Intent when required to do so, or
  • knowingly or recklessly provides false information to their scheme's trustees or to the Pensions Regulator.

Failure to comply with a Contribution Notice will also be a criminal offence with the potential for the Regulator to impose an unlimited fine on those responsible.

In future, the Regulator will also be able to issue fixed and escalating fines for non-compliance with a request for information or delays in providing information requested by the Regulator.

Declaration of intent

The Government has also confirmed that it will press ahead with plans to introduce a new requirement for companies to issue a Declaration of Intent to the trustees of its DB scheme and the Pensions Regulator when they undertake the following corporate transactions:

  • the sale of a controlling interest in a scheme employer
  • the sale of the business or assets of a scheme employer, and
  • granting security in priority to the DB scheme.

In line with the existing requirements under the Takeover Code, in the Declaration of Intent, a company will be required to set out the nature of the proposed transaction, details of any detriment that may be caused to its DB scheme and how this will be mitigated and confirmation that the trustees have been consulted and whether they agree with the planned transaction.

The response does not make clear when the Declaration of Intent will need to be issued. This will be set out in an updated Code of Practice on notifiable events with the intention being that trustees and the Regulator will be given early warning of proposed transactions. The response indicates that the DWP will work with the Regulator to develop a flexible approach which takes account of the particular circumstances of individual transactions and complements any changes to the timing requirements under the notifiable events framework.

It is expected that a Declaration will not have to be provided where the DB scheme exceeds a prescribed funding threshold, which should also be set out in the new Code.

New notifiable events

The existing notifiable events framework will also be extended to cover:

  • the sale of a material proportion of a business or assets of a scheme employer responsible for at least 20% of a scheme's buy out deficit, and
  • the granting of security which has priority over the pension scheme.

However, the Government has decided not to introduce notifiable events connected with changes to a sponsor's board or with a sponsor taking pre-insolvency restructuring advice, on the basis that they would be difficult to operate in practice.

The Government has also confirmed that it does not intend to introduce a notifiable event relating to dividend payments at this stage. However, the response makes clear that the Regulator will continue to monitor the level of dividend payments when assessing the suitability of a scheme's funding arrangements. It also notes that the UK's framework relating to dividend payments is under review as set out in the Government's response to the consultation on Insolvency and Corporate Governance.

The Government has also decided against extending the existing notifiable event relating to the breach of a banking covenant to include covenant deferral, amendment or waiver for the same reason. The existing notifiable event relating to wrongful trading will also be withdrawn.

New Contribution Notice tests

The Pensions Regulator can currently issue a Contribution Notice on corporate sponsors or connected or associated persons (including directors) where (broadly speaking) action is taken to avoid a section 75 debt being paid to a DB scheme or where action is taken which is materially detrimental to the prospect of benefits under a DB scheme being paid in full.

The Government is planning to add two additional limbs to the material detriment test, which will extend the circumstances in which a Contribution Notice can be issued. This will mean that the test would be met if either:

  • the amount the scheme would have recovered on a hypothetical insolvency of an employer is materially reduced as a result of a relevant act, or
  • the "value" of an employer provides materially less 'coverage' of the scheme's buy out deficit following a relevant act.

This is likely to make it easier for the Regulator to issue a Contribution Notice where security has been granted which ranks above the scheme in the event of insolvency (for example, as a result of re-financing) or where material value is extracted from a business as a result of a business sale, group restructuring or excessive dividend payments.

The Government also plans to:

  • amend the current legislation to make clear that the actual or potential impact of an act, or failure to act, on the value of a scheme's assets or liabilities is a relevant consideration when determining the amount to be paid under a Contribution Notice, and
  • change the date on which the cap on the level of recovery under a Contribution Notice is set so that it is closer to the date of the final determination.

It is also still considering whether a specific uprating mechanism should be included in the legislation to protect the value of a Contribution Notice where recovery is delayed.

Changes to the FSD regime - and a new name

As set out in the consultation paper, the process for issuing a Financial Support Direction (FSD) will be streamlined moving from the current two-stage, to a one-stage process.

Alongside this, the Government intends to:

  • replace the current insufficiently resourced test with a new test which will be scheme-focused rather than focusing on the financial strength of a scheme's employers
  • amend the definition of a "service company"
  • limit the forms of financial support that a target may be required to provide under a FSD to cash or a guarantee (although it will still be possible for a party to agree alternative arrangements with the Regulator as part of a settlement outside of the FSD process), and
  • extend the scope of FSD targets to include individuals who are controlling shareholders of a sponsoring employer (although the Government has decided against including directors as well).

To reflect the changes to the FSD regime, FSDs will in future be called Financial Support Notices.

More detail needed

Although the consultation response confirms the headline changes much of the detail is "subject to further consideration". For example,

  • it is unclear in precisely what circumstances the Regulator would envisage using its new powers
  • the timing for issuing the Declaration of Intent and the content are still to be determined
  • it is unclear how the new Contribution Notice tests will be applied in practice, and
  • the changes to the tests for issuing Financial Support Notices have not been specified.

Therefore, sponsors will need to wait for the draft legislation and updated Regulator guidance for confirmation on how a number of the headline changes will be applied in practice.

When will these changes be made?

The consultation response does not make clear when these changes will come into force. Some of the proposals, such as the new criminal offence and civil fines, will require primary legislation meaning they are unlikely to come into force until Spring 2020 at the earliest.

A broader trend

The strengthening of the pensions regulatory regime reflects a global trend towards tighter regulation and individual accountability. Our financial services regulatory team explores these trends and the themes that we expect to be at the core of regulatory developments globally in the coming year in a recent blog.




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Michael Aherne

Partner, London

Michael Aherne

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Michael Aherne photo

Michael Aherne

Partner, London

Michael Aherne
Michael Aherne