Strengthening The Pensions Regulator’s Powers: Notifiable Events (Amendments) Regulations 2021
Against the backdrop of PSA21, the DWP is consulting on changes to the notifiable events regime.
In this response
We welcome the opportunity to respond to this consultation. We have not sought to answer every question in the consultation but have limited our responses to those areas which are pertinent to our practice.
Q1. Do you think that the definitions capture the policy intention? If not, please explain why
The definition of “assets” does not include money. Whilst a disposal of money should not be treated in the same way as a disposal of other assets, for the purpose of amended regulation 2(i), would TPR want to be notified about a decision to grant or extend a relevant security over cash (for the purpose of amended regulation 2(j))? The current exclusion of money from the definition of assets would mean an employer could grant or extend security over cash without having to notify TPR. Is this in line with the policy intention?
“Decision in principle”
As drafted, this definition will trigger a notifiable event at a very early stage in any corporate activity. However, we are concerned that it will be difficult to interpret in practice.
Firstly, pinpointing exactly when a decision in principle is taken may prove problematic. This could give rise to numerous notification requirements. Also, it would be unusual for certain decisions, such as a decision to grant security, to be made prior to any negotiations taking place.
Secondly, the current drafting potentially allows employers to delay the requirement to notify by simply minuting that no decision has been taken. Conceivably, an employer could even circumvent the requirement to notify altogether since the obligation would effectively fall away as soon as negotiations commence or an agreement is entered into. This is because, by that point, it would no longer satisfy the prerequisite of a decision “prior to any negotiations or agreements being entered into”. As a consequence, it might be helpful to include a longstop by which the notification must have been made. It would appear consistent with the policy intention to make such a longstop the earliest point at which negotiations commence or any agreements are entered into, although even that might lead to uncertainty.
Whilst a definition of “sale” is included, a definition of “sell” is not. “Sell” is used in regulation 2(i). We suggest that the definitions are amended so that it reads: “sale” or “sell” includes the transfer of legal or beneficial ownership.
“Wider employer group”
Finally, there is no definition for “wider employer group”, used in regulation 2(4)(b)(i), so it is unclear which entities this is intended to capture. It would be helpful if this could be clarified in the final regulations or in accompanying guidance.
Q2. Can you see any unintended consequences of these amendments?
As described above, there is a risk that employers could circumvent the requirement to notify TPR on the basis that a “decision in principle” is never taken before negotiations commence.
Also, we understand that notification of the “decision of the principle” for the three events which later require a statement comes from the employer, whereas the notice and statement requirements under section 69A of the Pensions Act 2004 applies to both the employer and anyone associated or connected with it. There is a risk that an employer would not necessarily know of a “decision in principle” by its shareholder/ultimate parent company to sell a material proportion of its business or assets, resulting in no notification of the “decision in principle” being provided.
Q3. Are there any unintended consequences of this approach? What is the impact on multi-employer schemes and the employers? Is there a simple way of apportioning liabilities which would work for all multi-employer schemes?
As the consultation notes, the original proposal to apply a 20% threshold to multi-employer schemes was intended to “prevent unnecessary work for employers, schemes and TPR by not requiring the notification and statement where there was little likelihood of the transaction having a significant effect [on] the employer’s ability to support the scheme”.
We understand the concern that it would be challenging for some schemes and employers to establish whether a particular threshold of liabilities had been met regarding one of the scheme employers. However, there will also be many schemes where it would be sufficiently clear that certain employers are below the relevant threshold. Removing the threshold altogether would mean that such employers will be required to make notifications, thereby increasing TPR’s workload. We do not think this is justified simply on the basis that other schemes may find it challenging to establish whether certain employers are above or below the threshold.
We suggest that a more proportionate response would be to retain a threshold, and to make clear (perhaps in TPR guidance) that employers will be expected to treat themselves as being above the threshold if the position is unclear. In line with the DWP’s original intention, this approach would reduce unnecessary work for many employers, schemes and TPR.
If this approach is adopted, TPR might also consider providing guidance on the degree of certainty which it expects for these purposes, in order to reduce the risk that unnecessary notifications will be made out of an abundance of caution.
Q4. Do you agree that “when the main terms have been proposed” is an appropriate point for the notice and statement to be issued? Can you see any unintended consequences of using this definition? At what point would it be reasonable for employers to have discussions with the trustees about the intended transaction?
As with the definition of “decision in principle” (see our answer to Q1), we are concerned that the phrase “when the main terms have been proposed” could lead to uncertainty and problems in practice. Whilst we appreciate that the intention is for the trustees to be notified early on in the process, this may be too early for a notice and meaningful statement to be issued. For example, the terms proposed may have no reasonable prospect of agreement.
If this is interpreted as applying at an early stage in the overall transaction (e.g. when the main commercial terms are first proposed) the impact on the scheme and action to mitigate any detrimental effects may not have been properly considered, particularly if UK defined benefit pensions are not significant in the context of the transaction as a whole. The amount of detail included in the statement might therefore be quite limited, reducing its effectiveness.
On the other hand, the current drafting could be interpreted as allowing transacting parties to avoid giving the notice and statement until after the terms have been largely decided, thereby limiting the trustees’ potential influence on those terms. For this reason, it might also be helpful to include a longstop here, by which point the notice and statement must have been given.
For example, an appropriate point for the notice and statement to be issued might be when the principal terms relating to and/or reasonably likely to impact on the scheme have been proposed, and there is a reasonable prospect of agreement and/or there is an intention to proceed. But, in any event, notification must be made in sufficient time to allow TPR and/or the trustees to make representations prior to the parties entering into binding obligations which may impact on the scheme. At this juncture, the impact on the scheme and action to mitigate any detrimental effects will be better understood.
Q5. Does the definition of relevant security meet the intention that it will apply to granting of security which may affect the employer’s ability to support the scheme? Are there any unintended consequences? Should other specific types of security be included or excluded? Is it appropriate to specify a 25% threshold by reference to revenues or assets as proposed?
Regulation 2(3)(b) refers to “the intended granting or extending of a relevant security by the employer over its assets, where the grant or extension would result in the secured creditor being ranked above the scheme in the order of priority for debt recovery, in respect of which the main terms have been proposed”. However, where that creditor already holds a higher ranking, technically speaking, extending the security would not in and of itself “result” in the security ranking above the scheme. In other words, it is likely that the section 69A(2) duty to give notices and statements to TPR would not be triggered. We assume that this is something the DWP will wish to clarify by, for example, making reference to an increase in the amount that the secured creditor could claim in priority to the scheme.
Regulation 2(4)(a)(ii) covers the scenario where multiple subsidiaries of the employer, comprising more than 25% of either the employer’s consolidated revenue or its gross assets, grant or extend security. Based on the current drafting, it would be possible to bypass the section 69A(2) duty by granting/extending multiple connected securities over an extended timeframe, rather than as a one-off. Is the intention to include an obligation where the aggregate grants/extensions of security over a set timeframe exceed the 25% threshold?
We note that, on 13 October 2021, the DWP updated the way that “relevant security” is described in the consultation document accompanying the draft regulations so that now, under ‘Meaning of relevant security’, it states as follows:
“New paragraph (4) explains that a relevant security is a security granted or extended by the employer, or one or more subsidiaries of the employer, comprising more than 25% of either the employer’s consolidated revenues or its gross assets.”
In our view, even with this update, the drafting of the consultation still does not exactly match the draft regulations, which make clear that they apply to any grant of security by the employer, with the 25% threshold applying only to subsidiaries.
In relation to the threshold, we think the drafting should be clarified to make clear whether the 25% applies to the security granted or to the subsidiary. In other words, is it meant to catch a grant of security for over 25% no matter the size of the subsidiary in relation to the employer, or is it meant to catch any grant of security by a subsidiary where that subsidiary comprises more than 25% of the employer’s consolidated revenues or gross assets?
On the exclusion for “the refinancing of an existing debt except where this entails the granting of a security”, this would mean that TPR would not be notified in the case of a refinancing where the amount secured by the existing security was increased (thereby further subordinating the pension scheme) or the date for expiry of the security extended (thereby subordinating the scheme’s claim for longer). Both of these could happen as part of a refinancing using existing security. We note that, if the secured facilities were increased materially then market practice is such that new security would be likely to be granted so a notification would be given, although this would not be necessary where a lender already had all monies security. If the policy intention is that TPR is notified of any grant of security by the employer then it seems to us that TPR should also be notified of any increases to the amounts secured, or extension of duration, under existing security.
Although not in the definition of “relevant security” itself, we note that the underlying notifiable event refers to “the intended granting or extending of a relevant security [which] would result in the secured creditor being ranked above the scheme in the order of priority for debt recovery” (our emphasis). We suspect that the policy intention is that it should refer specifically to the order of priority for debt recovery in relation to the assets that are the subject of the relevant security. If, for example, the trustees already have a fixed charge over one asset and the employer grants a fixed charge over a different asset to a third party, the current drafting might arguably not be engaged because the third party would rank alongside the trustees in the employer’s order of priorities (i.e. both are fixed charge holders) but granting security to the third party will nevertheless result in the trustees ranking behind the third party in respect of the relevant assets.
Finally, the position of sponsoring employers which are financial institutions needs careful consideration. As things stand, the regulations apply to any grant of security by a financial institution as the employer. This would catch activities that financial institutions undertake in the ordinary course of their business, such as granting security in relation to derivatives, stock lending, repos, synthetic securitisations and secured debt programmes. This could lead to numerous and onerous notification requirements on financial institution employers. We do not believe that this is consistent with seeking to capture grants of security that may affect the employer’s ability to support the scheme, given that the above activities, if undertaken by a financial institution, are part of its day-to-day business.
Q6. Do you agree this is a reasonable definition of revenue and assets? If, not, how do you consider they should be defined?
It is helpful that “annual revenue” and “assets” have been defined in an objective and binary way for the purposes of regulation 2. However, please see our answer to Q1 above in relation to the definition of “assets”.
Q8. Do you agree that disposals which have taken place or agreed within 12 months of the date of the notifiable event should be taken into account when calculating the 25% threshold? If not, please explain why.
We agree that disposals made or agreed in the 12 months prior to the date of the notifiable event should be taken into account but we do not think basing this on what has been recorded in the most recent annual accounts is necessarily workable. Annual accounts do not need to be submitted for nine months after the accounting year end and so disposals recorded in the most recent annual accounts may not accurately reflect the disposals which should be taken into account. In our view, the employer should know what disposals have been made or agreed and the reference to annual accounts should be removed.
Q9. Does this list provide all the information which should be notified to The Pensions Regulator? If not, what else should be included?
Whilst the first item in the list incorporates an element of materiality (ie the “main” terms), the other items do not and are therefore extremely broad in their scope. For example, requiring a description of “any” communication with the trustees or managers of the eligible scheme about the event could amount to a vast volume of detail. In our view, it would be more appropriate and practical to require a summary of the material elements of those communications.
Similarly, as drafted, the information requirements for the accompanying statement under regulation 2(6) would require details to be provided of all adverse effects on the eligible scheme, without any materiality threshold.
Q10. Do you think that this meets the policy intention or are there any unintended consequences?
Whilst we appreciate the policy intention is to avoid missing any “material changes” which TPR would want to know about, setting out a non-exhaustive list could prove unhelpful. What constitutes a “material change” will depend on the circumstances of the transaction.
In our view, the current drafting could lead to TPR receiving many irrelevant notifications. We note, for example, that the current drafting appears to treat any change to the proposed main terms of a transaction as a material change (whereas we would expect that factors including the materiality of the change and the extent to which it is expected to impact the scheme should be taken into consideration when deciding whether to notify). Similarly we would not expect that TPR will necessarily want to be notified at every turn of the commercial negotiations.
We therefore suggest it would be preferable not to include a non-exhaustive list of examples, but rather to refer simply to material change. Employers would then be required to exercise judgement as to what should be notified, which could be supported by guidance from TPR. We believe this approach would be a more effective means of achieving the underlying policy aim, and would significantly reduce the risk of TPR being overwhelmed by unnecessary notifications.
Separately, the requirement to notify TPR of a material change in the event or the mitigation under the section 69A notification falls on an “appropriate person” which includes:
- a) the employer in relation to the scheme
- b) a person connected with the employer
- c) an associate of the employer
- d) a person of a prescribed description.
In contrast, the requirement to report employer-related events under section 69 falls on sponsoring employers.
As the new duty under section 69A is imposed on multiple parties within a corporate group, it is quite likely that it could be inadvertently breached due to a lack of knowledge. For example, where a parent company is unaware of activity placing its sponsoring employer subsidiary in scope. It would therefore be helpful to include an exemption from this duty where another “appropriate person”, such as a sponsoring employer, has already met the notification requirements. This would also avoid TPR receiving multiple notifications in respect of the same event or mitigation.
Other types of transaction
We note that the expected recovery on insolvency for trustees can be significantly diluted without granting security, for example where subsidiaries of the employer guarantee debt incurred by the employer’s parent. This has the effect of structurally subordinating the trustees to the relevant lenders (whereas those lenders were previously structurally subordinated to the trustees). We assume that the policy intention is that such transactions should not give rise to notification obligations.
Notification requirements under the Employer Debt Regulations 2005
Regulation 6D and schedule 1B of the Occupational Pension Schemes (Employer Debt) Regulations 2005 replicate the notification requirements under section 69 Pensions Act 2004, but with the requirement to notify falling on each of the guarantors. We assume that the Government will take steps to align the two sets of notification requirements. For example, we understand that the Government’s intention is to remove wrongful trading from being a notifiable event because the “requirement is ineffective”. However, as things stand, the requirement to notify of wrongful trading (under schedule 1B paragraph 1(2)(c) of the Employer Debt Regulations) would continue to apply to guarantors.
Application to former employers
Our understanding is that the notifiable events regime is intended to apply equally to statutory employers in closed DB schemes (and, in our experience, this is how the current legislation has been applied in practice) but this could be clarified to ensure that TPR is appropriately empowered to address non-compliance. We wonder whether the relevant definitions here need to be revisited.