Anti-avoidance: Material Detriment Test – the statutory defence

The Pensions Act 2008 enhanced TPR’s anti-avoidance powers by enabling it to impose a CN, in certain circumstances, where an act or failure to act has a materially detrimental effect on the likelihood of members’ benefits being received (“the material detriment test”).

As TPR’s power under the test is potentially very wide, safeguards were introduced, designed to ensure that the material detriment test is appropriately targeted. These included:

  • a requirement for TPR to publish a code of practice on the circumstances in which it expects to issue a CN based on the new material detriment test; and
  • a statutory defence.

The Defence

The statutory defence provides that a contribution notice must not be issued on grounds of material detriment if TPR is satisfied that the following conditions are met:

  • before becoming party to an act or failure, the person gave due consideration to the extent to which there may be a resulting material detriment to the likelihood that the pension scheme members would receive their accrued benefits;
  • where as a result of that consideration there was considered to be a potential detriment, that the person should take all reasonable steps to eliminate or minimise the potential detrimental effects that the act or failure might have on the likelihood that the pension scheme members would receive their accrued benefits; and
  • at the time of the act or failure the person, having regard to all the relevant circumstances prevailing at that time, could reasonably conclude that the act or failure would not detrimentally affect in a material way the likelihood of members’ accrued benefits being received.

TPR expects that the sorts of due diligence and discussions with trustees that are undertaken by responsible employers would in many cases be satisfactory for these purposes.