We may be approaching Valentine’s Day, but the new “Declaration of Intent” to be made by employers to their pension trustees is unlikely to be romantic….
A lot can happen in a year. We’ve had two Royal weddings, a Royal baby, Facebook has been under fire for misuse of personal data, Donald Trump and Kim Jong Un held a summit in Singapore, France won the World Cup and the DWP has been busy considering how best to protect defined benefit pension schemes. In March 2018, the DWP issued its White Paper on “Protecting Defined Benefit Pension Schemes”, which was swiftly followed by various consultations. This included a consultation in June 2018 on strengthening the powers of The Pensions Regulator (TPR). The DWP has now issued its outcome of that consultation. We are pleased to see that many of our own comments which we provided during the consultation appear to have been persuasive.
The outcome has generated a few headline grabbing statements, such as the Telegraph’s “Bosses who ‘play fast and loose’ with pensions face seven years in jail”. But what did the DWP really say in the document that was issued on 11 February? Well, in fairness, the government will be introducing a new criminal offence of wilful or reckless behaviour in relation to a pension scheme and/or for failure to comply with a contribution notice. The offence of wilful or reckless behaviour will carry a penalty of up to seven years in prison and unlimited fines. This would be reserved for the most serious of cases, not least because evidencing beyond reasonable doubt that a person’s behaviour was wilful or reckless in relation to a pension scheme may prove a challenge. It does, however, make good headlines and it will act as a deterrent.
On the whole, the outcome of consultation seems a measured response to the concerns and views expressed by the pensions industry (and others) during the consultation process. Not all proposals put forward at the consultation stage have been adopted. For example, the proposal to require a sponsoring employer that takes independent pre-appointment insolvency advice to make a notifiable event submission has been dropped. The government took on board concerns that this proposal might discourage companies from taking advice at appropriate times, noting that it is important that companies seek pre-insolvency advice at an early stage when they become financially distressed.
Here are a few of the highlights from the outcome document:
Declaration of Intent
- The government will proceed with the “Declaration of Intent”, which must be provided to trustees and TPR during a corporate transaction (i.e. sale of a controlling interest in a sponsoring employer, sale of a material proportion of the business and assets of an employer which has funding responsibility for at least 20% of a scheme’s liabilities and granting of security on a debt in priority over a pension scheme).
- The declaration will confirm that the trustees have been consulted about the transaction and will set out any mitigation agreed.
- The government has not reached a conclusion as to the point at which the declaration of intent should be made (e.g. heads of terms stage, immediately before completion etc – there are lots of arguments for and against each) and intends taking a flexible approach.
- The maximum fine for employers and trustees who fail to comply with the notifiable events regime will be increased to £1 million.
- There will be civil penalties for failing to comply with section 72 notices (provision of information to TPR), as well as the existing criminal penalties that already exist.
- Failure to comply with a contribution notice will now carry criminal penalties of UNLIMITED fines (no prison) and, where it is treated as a civil offence, fines of up to £1 million.
- Failure to comply with a financial support direction (FSD) will carry a civil penalty of up to £1 million and will extend to individuals who are controlling shareholders (but not to other individuals).
- Failure to comply with a declaration of intent will carry a civil penalty of up to £1 million.
- Knowingly or recklessly providing false information to pension trustees or TPR will carry a civil penalty of up to £1 million.
- There will be changes to the material detriment test and ‘reasonableness’ test.
- The calculation date for a contribution notice will be closer to the date of the Determination, rather than being assessed at the time at which the ‘event’ triggering the contribution notice occurred.
Financial Support Directions
- There will be a new single stage FSD process, to cut down the time that it currently takes to issue an FSD.
- FSDs will become known as ‘financial support notices’.
- Financial support notices will require financial support to be provided to a scheme in the form of either a cash injection or guarantee ONLY. Other forms of financial support will not be provided for in a financial support notice, although employers could always reach some other agreement with TPR before a financial support notice is issued (in the greatly reduced timeframe available).
- The insufficiently resourced test will be replaced by one that is more scheme focused and the definition will be set out in secondary legislation. The definition of a service company will also change.
- The lookback period for an FSD/FSN will not be extended at the moment, but will be kept under review.
- TPR will have the power to call any person for interview outside of the section 72 request for information process. This new power will override an advisers’ duty of confidentiality (but legal privilege provisions under section 311 PA04 will still apply).
The government has said that it will bring forward legislation as soon as Parliamentary time allows and that in the meantime it will continue to liaise with key stakeholders, such as TPR, on the detail. It will be interesting to see how much appears in a Pensions Bill this Summer.
If you would like to discuss any of the above then please get in touch with the author or your usual Squire Patton Boggs contact.