Ouch! £1m fines and criminal sanctions - a new-look Pensions Regulator is on the way

Hot on the heels of the Government's Pensions White Paper setting out plans to sharpen the teeth of the Pensions Regulator and impose stricter duties on employers with defined benefit pension schemes (please see our briefing), the Government has announced its proposals to overhaul the Pensions Regulator's powers. It plans to force companies to involve the Regulator at an early stage of corporate transactions, restructurings and refinancings.  The new regime will be backed up by punitive fines and criminal sanctions against directors (and in some instances pension scheme trustees) who fail to comply. We expect these new powers to reinforce the more aggressive stance that the Regulator has recently adopted. The consultation on the proposals runs until 21 August.

The key proposed changes include:

• Involving the Pensions Regulator before corporate actions and events. The Government proposes that companies with defined benefit schemes in their corporate group must notify the Pensions Regulator before any of the events set out below. Criminal and civil penalties will apply for failure (of anyone, including trustees) to comply. The events are:

1. the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the pension scheme's liabilities;
2. the granting of security on a debt to give it priority over debt to the pension scheme; 
3. "significantly restructuring" the employer's board of directors and certain senior management appointments; or
4. the sponsoring employer taking independent pre-appointment insolvency/restructuring advice, such as an independent business review.

In the case of (1) and (2) above, the Regulator must be notified no later than when the negotiations have resulted in an agreement-in-principle or heads of terms.

The Government also plans to extend the current duty to notify the Regulator on breach of an obligation in a banking agreement to cover covenant deferral, amendment or waiver.

If these proposals are implemented, companies and pension scheme trustees would need to pay close attention to corporate and scheme activity to ensure that they do not inadvertently become liable to criminal sanctions.

• Requiring companies to issue "Declarations of Intent" before certain actions.  In relation to events (1) and (2) above, directors (or other "corporate planners") must issue a Declaration of Intent to the trustees (copied to the Regulator) before the contract is signed. The Declaration must:

• set out the nature of the planned transaction;
• confirm that the corporate planner has consulted on its terms with the trustees and confirm the trustees' agreement (or otherwise) to the planned transaction; and
• explain any detriment to the pension scheme and how this is to be mitigated.

Where the Regulator "has concerns", it envisages using its powers to interview directors, and possibly launch a moral hazard investigation.

The adoption of this proposal could impose a significant burden on companies, requiring them to carry out a process similar to preparing a clearance application (without having the comfort of obtaining clearance).

• Introducing stringent civil and criminal penalties against companies, directors and trustees. The Government proposes to expand the existing penalty regime by introducing:

• a new power to issue a civil penalty of up to £1 million where behaviours have resulted in actual harm to the pension scheme or have the potential if left unchecked; and
• new criminal sanctions, including introducing a criminal offence to punish directors (and associated or connected persons) guilty of "wilful or grossly reckless behaviour" in relation to a pension scheme.

While it may, in practice, prove difficult to establish "wilful or grossly reckless behaviour", the criminalisation of the failure to notify the Regulator of certain events (as outlined above) is likely to be of greater concern to directors and pension scheme trustees. 

• Enhancing the Regulator's current moral hazard powers. The Government proposes to overhaul the Regulator's two key powers against companies – contribution notices and financial support directions, as follows:

• Contribution notices (CN).  In practice, very few CNs have been issued to date. The proposals seek to strengthen the CN regime by making it easier for the Regulator to exercise its powers. The current "reasonableness test" will be amended, so that there is a stronger focus on the loss or risk caused to the pension scheme by the action of the company. 
• Financial support directions (FSD). A more streamlined and simple FSD regime is proposed. Particularly interesting is the proposed expansion of the forms of financial support the target may be required to make to the pension scheme, with a cash payment being an option. Other proposals include allowing FSDs to be issued to a broader range of targets, including individual directors, simplifying the "insufficiently resourced" test (which currently prevents an FSD from being issued unless certain financial criteria are met), and introducing a longer look-back period – currently two years - for the Regulator to investigate corporate activities.

The changes proposed to the Regulator's moral hazard powers may allow the Regulator to follow the route of issuing an FSD (which is regarded as less onerous than issuing a CN), while obtaining the same result (an immediate cash payment) which it would have achieved had it pursued a CN. 

• Voluntary clearance regime. As expected, the Government is not proposing to make clearance compulsory. Having said this, the proposals outlined above mean that companies may, in any case, be obliged to engage in a meaningful way with the Regulator before a wide range of corporate actions.

The Government's Pensions White Paper indicated that some punitive fines would apply retrospectively from March this year, but clarity is awaited in draft regulations to confirm the position.

If you have any questions, please speak to John Gordon in our Pensions team, whose contact details are set out below.