Protecting Defined Benefit Pension Schemes – the Regulator’s proposals

This consultation, the first of many as explained in the White Paper, does not guarantee that these proposed measures will become law. However, it is more likely than not that they will, in the form proposed in the consultation or in a slightly diluted format, due to the recent criticism of the Regulator relating to its perceived failures in dealing with BHS, Carillion, and British Steel amongst others.

The main novelty is the introduction of a Declaration of Intent procedure within a strengthened Notifiable Events Framework, backed up in the case of non-compliance with new civil penalties of up to £1,000,000 and new criminal sanctions in the form of unlimited fines and custodial sentences.

Concerning the strengthened Framework, the following Notifiable Events are proposed to be added to the existing Framework:

• Sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities.
• Granting security on a debt to give it priority over the scheme.
• Significant restructuring of the employer’s board of directors and certain senior management appointments.
• Sponsoring employer taking independent pre-appointment insolvency / restructuring advice (such as an independent business review).

Other adjustments to the Framework include:

• The Notifiable Event relating to a breach of a banking covenant is proposed be extended to include deferral, amendment, or waiver of such covenants.
• The reporting obligation under the Framework is proposed to be extended to other parties such as to directors of a sponsoring employer’s parent, so as to capture the planning process at a much earlier stage.
• The moment of notification is proposed to be set no later than when negotiations have led to agreement in principle of the main terms, i.e. when Heads of Terms are agreed.

Concerning the new Declaration of Intent, the corporate planners of a transaction (usually the Board) will be required to issue a Declaration of Intent to the trustees of any affected DB scheme and share it with the Regulator, where that proposed transaction will involve (a) the sale of a controlling interest in a scheme employer, (b) the sale of the business or assets of a scheme employer, or (c) the granting of security in priority to scheme debt, and where certain risk-based criteria are met (yet to be established but relating to the funding level of the DB scheme in question).

The point of issue of the Declaration will be after the parties to the transaction have completed due diligence and transaction financing has been finalised, but before the signature of the sale and purchase contract. Nevertheless, the Regulator expects the trustees to be engaged no later than the point of notification under the Notifiable Event Framework explained above, i.e. as soon as the Heads of Terms are agreed. The Declaration of Intent will:

• Explain the nature of the planned transaction;
• Confirm that the corporate planner has consulted the trustees on the terms of the Declaration, and confirm the trustees’ agreement (or otherwise) to the planned transaction; and
• Explain any detriment to the scheme and how this is to be mitigated.

The Regulator may then act on the Declaration such as deploying enhanced powers to interview relevant persons or commence the process of issuing a contribution notice or a financial support direction in a new format to be announced.

As suggested in the recent White Paper, the Regulator seems to be steering all corporate transactions in the catchment described above towards obtaining voluntary clearance, a procedure which has become largely obsolete in recent years due to the low likelihood of the Regulator deploying its anti-avoidance powers and the inordinate length of time before these powers actually bite, if deployed at all. The Regulator is proposing numerous changes to its anti-avoidance powers to vastly increase the likelihood and the speed of their intervention, and needs the voluntary clearance procedure to function more effectively to cope with the inevitable increase in workload. There is considerable overlap between the proposed Declaration of Intent and the existing voluntary clearance procedure, so the two may well be amalgamated in future rather than run in parallel.

Many matters remain unclear at this stage, such as (amongst others):

• How sensitive commercial confidentiality will be maintained;
• How the trustees are to be consulted in parallel to the commercial negotiations on incomplete positions;
• How likely the Regulator is to intervene, and whether this will cause delays between the issue of the Declaration and the signature of the sale and purchase contract; and
• Whether transactions or transaction financing will routinely become contingent on Regulator approval as a result of such delays.

It is to be noted that the Regulator intends to become involved in matters that are entirely internal to a corporate group and which do not involve any transaction or Declaration of Intent, as demonstrated by the proposed Notifiable Events concerning the reorganising of the Board or the taking of insolvency advice, both of which are standard activities in a corporate’s routine existence. This interventionism represents the new direction of travel as the Regulator seeks to incentive better employer behaviours by creating greater transparency around the pensions outcomes of employer actions.

These proposals from the Regulator ought to be read alongside the Insolvency Service’s consultation in March, which strongly indicated that the corporate veil would cease to protect decision makers in a parent company where a transaction involving a non-viable subsidiary is entered into in order to eventually dump a final salary scheme into the Pension Protection Fund.

When is all this likely to happen? 

Brexit does not leave much parliamentary time, so it’s difficult to predict. However, the White Paper made clear that the legislation may be retroactive to the date of that document’s publication, so these issues may well be live.

For more information, please get in touch with Tristan Mander.