Pensions Regulator (Employer Resources Test) Regulations 2021

On the specifics of these regulations, what constitutes the resources of the employer is determined as being the employer’s profits before tax. This is a widely known and understood measure used by the industry and gives the most appropriate picture of net profits available to provide support for a defined benefit pension scheme. How the value of the resources of the employer are determined, calculated and verified are set out in these regulations. The general approach assesses the annual profit before tax position of the employer had the act or failure to act not occurred, which is then compared to an assessment including the act or failure to act. An adjustment is then applied to the profit before tax position that represents the impact which is expressed as a pound figure. The calculated figure would then be assessed against the scheme’s Section 75 debt immediately before the act or failure to act occurred. When the employer resources test has been met, the Pensions Regulator will follow the existing contribution notice process, whereby it will consider other factors, including the reasonableness of issuing a contribution notice.

Working in tandem with these regulations is the Pensions Regulator’s code of practice, which aims to provide further clarity to the industry on how it will interpret and use the powers. The Pensions Regulator launched a consultation in May 2021 on its contribution notice code of practice, which included clear examples covering scenarios of how the different tests would apply. The consultation concluded in July, and the Pensions Regulator is reviewing the responses with a view to publishing the code later in the year.

In closing, we remain committed to ensuring that there should be no hiding place for those who put workers’ retirement savings at risk, and these regulations will play a vital role in enhancing the Pensions Regulator’s ability to take action to protect pension scheme members. I commend this instrument to the Committee and beg to move.

In their response to the consultation published on 29 June, the Government set out their reasoning for the employer resources test. In summary, it said that, in the majority of past contribution notice cases, the regulator faced

“difficulty in forecasting the medium and long-term performance of a business for the purposes of the … ‘material detriment test’.”

This is because it had to extrapolate from an employer-related act into the future, with the uncertainty and challenges that causes evidentially. Indeed, trustees can experience exactly those similar difficulties in trying to assess those implications for the employer covenant, because there is no industry consensus on how to value the employer covenant. Therefore, the employer resources test removes the need to forecast how the employer might or might not have performed in the absence of that act and assesses the impact on a snapshot basis. So it is quicker, sharper and more efficient.

However, the regulator still will not be able to issue a contribution notice if a party can show that they meet the conditions for a statutory defence and can provide reasonable excuse. The three premises are that they gave prior consideration to the test and to the extent that the failure or failure to act would reduce the value of the employer’s resources in a material way; that they took all reasonable steps to mitigate any such detrimental impact; and that it was reasonable for them to conclude that the act would not detrimentally affect in a material way the likelihood of the scheme members receiving their benefits.

I sighed a little because, even after applying the employer resources test, the regulator still has to conclude that it would be reasonable to impose a contribution notice, taking into account all relevant factors including the extent of any mitigation provided and a broader assessment of the employer’s strength. I just wonder whether we are going to face a potentially long and drawn-out process, which the employer resources test was intended to remove, in the way in which the defence arguments can be applied and whether the Government’s intention of deploying an employer resources test as a quick and efficient snapshot—rather than on a holistic basis—could be undermined.

I ask the Minister: what powers or processes are relied on to prevent the statutory defence conditions undermining the policy intention to have a quick and efficient employer resources test? Is it the intention to issue fuller guidance on how measures to mitigate the detrimental impact on pension schemes of an act or failure to act will be assessed as to whether they are sufficient to meet the statutory defence? These are the kind of realities that trustees will need to understand and employers will need to know.

Just as a concluding line, poor behaviour affects not only the value of members’ benefits paid but, as the Pension Protection Fund is funded by a levy, it affects those businesses which abide by the rules but end up bearing the costs and subsidising those businesses which seek to avoid their pension liabilities. Good employers and trustees or members have an interest in these new regulations working efficiently.

I have two questions. First, can the Minister explain what assessment the Government have made of the impact that these regulations might have on the ability of companies to pay dividends? There has been some speculation in the press that it might significantly depress the payment of dividends by companies, something which on the whole is a good thing, but there could be situations where that could be a negative. Secondly, I would welcome confirmation from the Minister that the Government are still keeping under review the question of payment of dividends by companies that have deficits, as they promised.