- The Pensions Regulator (TPR) has been taking a more assertive, interventionist approach to its engagement with sponsors and trustees of defined benefit (DB) pension schemes in the face of high profile corporate failures that have impacted on the security of accrued benefits in DB schemes.
- New powers have been given to TPR under the Pension Schemes Act 2021 (PSA 2021) which will bolster TPR’s ability to scrutinise, engage with, and ultimately penalise corporates and individuals whom TPR considers to be undermining the pension scheme’s position.
- The PSA 2021 contains significant, widely drawn offences that are intended to sanction parties in cases of serious breaches and/or conduct risking DB scheme benefits, including:
- three new criminal offences (the most serious of which has a maximum penalty of up to seven years’ imprisonment and/or unlimited fines); and
- a range of civil offences with fines of up to £1 million.
- The PSA 2021 also includes two new grounds on which TPR can issue a contribution notice.
- TPR will also have new, wider ranging information-gathering powers.
The Pension Regulator’s new powers in more detail
The PSA 2021 introduces significant criminal and financial penalties for actions relating to defined benefit pension schemes. The new offences are punishable by unlimited fines, and, in, the most serious criminal cases, prison sentences of up to seven years. In addition, TPR now has the power to impose a civil penalty of up to £1 million in across a range of breaches. Taken together, this represents a material step up in TPR’s powers.
In addition, the PSA 2021 expands the circumstances in which TPR can issue a contribution notice requiring the target of that notice to pay cash to a pension scheme. These powers will be extended by the PSA 2021 to scenarios where action or inaction results in a weakening of the sponsor’s covenant supporting the scheme, specifically, the new ’employer solvency test’ and the new ’employer resources test’.
TPR will also be given increased powers to gather information, to summon for interview relevant persons involved with DB schemes and to inspect premises without notice.
Finally, secondary legislation is expected in 2021, placing new notification obligations on parties where certain corporate transactions involving DB pension schemes are proposed, as an extension of the existing notifiable events framework.
More of the detail sitting behind these bolstered TPR powers is expected to be clarified in secondary legislation, and accompanying TPR guidance. Both the secondary legislation and guidance will be important for trustees and employers to understand how the provisions will work in practice and which scenarios TPR intends to focus its attention on.
What does this mean for scheme sponsors?
- Whilst the government’s stated intention for introducing the new powers is to target unscrupulous directors and corporates, the legislation is widely drafted and could catch day to day corporate activities where they impact on DB pension schemes, including mergers and acquisitions, making dividend payments, or the granting of intra-group loans or security.
- Corporates will need to factor in more time to assess, and take advice on, the implications of decision-making where their decisions affect DB pension schemes.
- Corporates should also expect more management time and costs spent in engaging with trustees of occupational pension schemes, and TPR, as a result of the new powers, and TPR’s more assertive approach.
- It is also possible (depending on the secondary legislation and accompanying TPR guidance, that corporates may also become more likely to consider applying to TPR for clearance before proceeding with certain corporate activities (such as intra and extra group reorganisations).
What does this mean for trustees?
- Because the new regulatory powers are so widely drafted, trustees of DB schemes will also need to understand the remit of the provisions to ensure that they are ready to engage with both scheme sponsors and, potentially, TPR where corporate decisions and activity impact on the DB scheme.
- Trustees will need to engage with their advisors to take account of TPR’s new powers and factor that into their ongoing conversations with DB scheme employers.