Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator
This is a consolidated version of the responses submitted to the DWP using its online survey
The DWP is seeking views on the first of the consultations promised by this year’s DB White Paper – Protecting defined benefit pension schemes – a stronger Pensions Regulator.
In this response
- General comments
- Notifiable events framework (section 2)
- Declaration of intent (section 2)
- Voluntary clearance (section 2)
- Improved Regulator powers (section 3)
- Anti-avoidance powers (section 4)
We welcome the opportunity to comment on the DWP’s proposals towards creating a stronger Pensions Regulator.
Under the Pensions Act 2004, the Pensions Regulator (TPR) already has a range of powers which can help it protect DB schemes and their members. The key, in our view, is to focus on ensuring that those powers are clear, and that they can be used quickly – both essential in ensuring that the regime can operate as intended.
References in this response are to sections and page numbers in the DWP’s consultation document (published 26 June 2018).
We think the key here is for any changes to enable better communication between employers, TPR and trustees. If legislation allowed trustees to require better information from employers more quickly, it is likely that schemes and TPR would have a better early warning system than exists now.
We can see the potential importance of the DWP’s proposals to introduce new notifiable events. We also agree with the DWP’s comments that the suggested improvements outlined in the consultation are likely to be more proportionate and less burdensome than the introduction of a mandatory clearance regime applying to all sponsoring employers.
Also, while we agree that a mandatory clearance system would be burdensome, we believe that TPR is more likely to get better engagement from employers if clearance is known to be available for a wide range of corporate transactions and restructuring – ie more widely available than it is now. However, we believe it is important to consider whether, while adding the particular notifiable events specified in the consultation would be likely to capture similar situations to recent high profile cases such as BHS and Carillion, this would necessarily provide a broader early warning system.
Clarifying the legislation
The legislation needs to be clear. For example, it is essential that regulations to expand the notifiable events regime (to be introduced under section 29 of the Pensions Act 2004), leave little or no room for argument as to whether or not an event falls within the scope of the legislation.
Taking the first proposed new notifiable event by way of example. In relation to the sale of a material proportion of a business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities (page 11), it is currently unclear how that 20% is intended to be calculated.
It is particularly important to have clarity if the penalties for non-compliance are to increase.
Timing of notifications
We note the DWP’s proposal that the timing of notifications is set to be accelerated, so that issues are raised “much earlier in the planning process” for a number of transactions (page 12). We agree that timing is key, and that early awareness gives trustees more scope to interact with their scheme sponsors before corporate plans affecting a scheme are implemented.
The consultation notes that the listed events should be notified “when a Heads of Terms agreement is first put in place”. We anticipate that this could be open to wide interpretation, primarily because there is no set way of agreeing Heads of Terms, nor definitive timing for them as part of the transaction process. It would therefore be open to debate as to when (if at all) Heads of Terms have been agreed. As noted in relation to the particulars of the notifiable events themselves, it will be important to ensure that the timeframe for notifications is put beyond doubt and debate.
Commercial transactions inevitably involve confidential and price sensitive information. We therefore understand that there will be concerns on the corporate side about sharing such information, particularly at an early stage in a transaction when all aspects of the transaction may be subject to change.
We note that TPR “maintains strict confidentiality with market sensitive information” (page 8). Likewise, it is common for trustees to enter into non-disclosure agreements with employers to protect information shared in these circumstances. Nevertheless, trustees can still struggle to get sufficient information to enable them to fully assess the risks to their scheme of any transaction in the pipeline. We would therefore welcome further thought being given to this aspect, so that information sharing by employers with trustees becomes a routine part of any transaction.
We note that BEIS is currently carrying out work on corporate governance (referred to on page 11), of which dividend payments are part. This will be an important aspect of the notifiable events process, and we would welcome further detail as to how this is intended to be integrated within the enhanced regulatory framework.
The consultation proposes that three types of corporate transaction should trigger the need for a declaration of intent by sponsoring employers or parent companies in consultation with trustees (page 14). We note that this requirement is intended to enable trustees to better engage with TPR, over concerns that such a transaction will put their scheme at risk.
As with the parameters for notifiable events, and particularly given the likely increase in penalties, the corporate transactions will need to be clearly defined with a view to minimising the scope for debate as to whether the requirement for a declaration applies, and prevent uncertainty as to when a declaration will be required.
Also, as with notifiable events, we think it is important to consider whether this will in fact provide the early warning desired. Ideally, this kind of information sharing should already happen as a matter of course, where possible within the restrictions on public company transactions. For schemes with open channels of communication between the trustees and scheme sponsor, it can be part of normal business behaviour. However, we envisage a risk that for some employers, the requirement to produce such a declaration would in practice be reduced to a box ticking compliance exercise. As such, trustees would be unable to give much weight to the declaration.
In our experience, it can be of value for trustees to raise any concerns directly with TPR. Where this is done, swift support from TPR can help address those concerns.
When the clearance regime was first introduced in April 2005, it was common for employers to apply to TPR for clearance ahead of many transactions. However, the practice of not clearing transactions where TPR does not consider clearance is needed has lead to employers rarely seeking clearance, and instead satisfying themselves that they have mitigated the impact for the pension scheme. While this can lead to perfectly good outcomes for schemes, this is not always the case and it does tend to lead to TPR not being given information as early as might be the case if a clearance application was being made.
We believe that TPR’s review of the existing clearance regime should look at how to make the regime simpler and easier to use. It would also be helpful to include, as part of the clearance guidance, a section for trustees on issues to consider / steps to consider taking, on receipt of a declaration of intent (assuming this measure is introduced).
Information gathering and inspection powers
In our view, the ability for TPR and trustees to have relevant information in a timely fashion, is a crucial element towards protecting DB schemes. However, we recognise this can be difficult to police.
In terms of existing powers to obtain disclosure of corporate information, The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/1715), for example, impose a duty on sponsoring employers (and their auditors and actuaries) to disclose on request, “such information as is reasonably required for the performance of the duties of trustees or managers or professional advisers” (regulation 6(1)(a)). The regulations also impose a duty on employers to disclose the occurrence of any event relating to the employer which they have “reasonable cause to believe will be of material significance in the exercise by the trustees or managers or professional advisers of any of their functions”.
Our experience in practice, is that the wide scope of this provision tends to mean that it is not fully utilised. We therefore consider that more specific disclosure powers, supported by the proposed new offences, could help strengthen trustees’ position when seeking information from employers. An effective power for trustees is to be able to require information in order to carry out an effective covenant review, so that when they are then informed of a likely transaction, the trustees’ ability to negotiate with employers is improved.
In relation to changes that potentially impact on the employer covenant, such as, dividend payments and restructurings, it would be helpful for trustees to have the ability to require underlying information before such events take place.
New offences and penalties
The DWP puts forward potential new offences of deliberately providing false information to TPR, and deliberately providing false information or failing to provide required information to trustees. We consider that any new fines would need to be in addition to the existing penalty regime, in order to have the desired deterrent effect.
The threat of fines for non-compliance can potentially help to ensure that trustees are brought up to speed earlier in the process. But as with the corporate measures, the new offences will need to be clearly defined.
In our experience, requests for information made under TPR’s current information gathering powers (under section 72 of the Pensions Act 2004) can be wide in scope, to the extent that parties can disagree as to whether the terms of a request have been complied with. We anticipate that the power in the White Paper for TPR to compel individuals to attend interviews may help here, with a view to ensuring that information requests are appropriately targeted. In this regard, we note it is proposed that TPR will have powers to award fixed and escalating fines in relation to information gathering, and consider that alongside the new interview power, this could work effectively to help ensure that targeted information is shared. However, again, if the penalties are to increase, the clarity as to when TPR’s powers are to be used also needs to be improved.
In the automatic enrolment sphere, TPR’s approach is generally effective, because it tends to be clear cut as to whether an employer’s obligations have been met or not. By contrast, in relation to DB scheme funding, the extent to which employers are meeting their obligations is much less clear. For example, different approaches to calculating assets and liabilities, and the difficulties in assessing different stages of corporate activity, mean that non-compliance will often not be immediately evident, and that further investigation is required. As such, more detail as to how these new powers are intended to operate in relation to DB schemes would be welcomed.
We note that one proposed new criminal sanction is to punish “wilful or grossly reckless behaviour” in relation to a DB pension scheme. As with the corporate measures, getting the detail, and definitions, right will be key to ensuring that this and the other proposed sanctions operate as effective deterrents.
Who will be penalised?
We note that the proposed powers are primarily intended to help TPR ensure compliance, and as such TPR will have discretion about how it will exercise these powers, depending on the case at hand. We support the ability for TPR to have discretion here.
TPR already has wide scope in terms of its existing anti-avoidance powers, to seek payments to schemes where an employer’s actions have caused loss or detriment, or for employer support for a scheme where it is reasonable to impose this. We are conscious that these powers have been rarely used, and if there are specific difficulties for TPR in using these powers, it seems sensible to address these in amended legislation.
However, we consider that to some extent the legislation needs to remain broadly drafted to operate fairly and effectively in different circumstances. What is “reasonable” will depend on the circumstances, and will be determined by testing the powers in different situations. We do not believe this should stop TPR testing its powers just because the outcome is uncertain.
In our experience, it is helpful for TPR to engage with the parties involved to make clear at an early stage what it considers an appropriate outcome for a scheme would be.
It will also be helpful for TPR to consider a scheme’s resources when anti-avoidance action is being considered. This is because the analysis required by schemes, particularly smaller schemes, can prohibit them being more proactive.
We believe the processes would benefit from being simplified, and that it would be useful for consideration to be given as to where steps could be cut out of the process. This could help with faster implementation.
We agree that consideration should be given to making Financial Support Directions (FSDs) a one stage process. More direction from TPR earlier in the process, but still with an opportunity for the employer and trustees to challenge this in the particular circumstances of the scheme, would be helpful.
Financial support directions
We recognise that the “insufficiently resourced” test is used as a gateway by TPR for determining whether the award of an FSD is potentially in scope. However, in practice the test can be difficult to understand and operate, with scope for considerable disappointment. For example, it is not always clear what behaviours TPR will focus on. We therefore welcome efforts by the DWP towards simplifying this test, or replacing it with something more scheme focused, such as the scheme’s funding position.
We also think it is worth using TPR’s power to determine contribution rates as part of its anti-avoidance powers. Making these clearer for TPR to operate should enable TPR to have greater influence on a form of financial support setting as part of the ongoing cycle of scheme funding.