The Pensions Regulator: Powers to protect pension benefits

The Pensions Regulator (TPR) has ‘anti-avoidance’ powers which it can use with the aim of protecting benefits in defined benefit (DB) pension schemes (i.e. schemes which provide benefits based on salary and length of service) and the Pension Protection Fund.

The Regulator’s two main ‘anti-avoidance’ powers are to issue:

• Contribution Notices - which require a target to make a lump sum payment to a scheme (or to the Pension Protection Fund);
• Financial Support Directions, which require the target to put arrangements in place to support the scheme, the details of which are approved by the Regulator.(see The Pensions Regulator– anti-avoidance powers.).

A clearance procedure is available for those wishing confirmation that they will not be subject to such powers when dealing with events that may impact upon their pension scheme, such as a business transaction.

In its December 2016 report on DB schemes, the Work and Pensions Select Committee recommended that reforms should enable TPR to intervene sooner when difficulties become apparent. It recommended that the Government should consult on new rules for situations where TPR clearance of major corporate transactions would be mandatory and that TPR should be able to impose punitive fines that could treble the amount payable under TPR’s existing anti-avoidance powers (press release, 21 December 2016).

In its February 2017 Green Paper, Security and Sustainability in Defined Benefit Pension Schemes, the Government said that the “overarching view of virtually all stakeholders is that the regulatory regime for DB pensions is satisfactory” but that there might be a case for “limited changes to the regulation of DB provision to help employers and trustees manage liabilities more effectively in some of the circumstances that exist” (para 139-40). It asked for views on reforms that had been suggested, including:

• Proactive compulsory clearance of certain corporate activities in limited circumstances;
• Levying substantial fines on companies for corporate transactions which have a detrimental impact on schemes; and
• Widening the criteria for Regulatory Apportionment Arrangements.

In its March 2018 White Paper, the Government said it would strengthen the regulatory framework and the Regulator’s powers to:

1. Give the Regulator powers to punish those who deliberately put their pension scheme at risk by introducing punitive fines;
2. Legislate to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme and, build on the existing process to support the disqualification of company directors; and
3. Work with the Regulator to strengthen the existing notifiable events framework and voluntary clearance regime so that employers have appropriate regard to pension considerations in any relevant corporate transactions. This includes improving the effectiveness and efficiency of the Regulator’s existing anti-avoidance powers. We will work with relevant parties to ensure that these measures do not have an adverse effect on legitimate business activity and the wider economy.
4. Legislate to give the Regulator some of the information-gathering powers already in place for automatic enrolment and Master Trusts to its Defined Benefit and Defined Contribution functions, including the power to compel any person to submit to an interview, the power to issue civil sanctions for non-compliance and an inspection power. (Cm 9591, chapter 1).

A further consultation on Protecting DB pension schemes – a stronger Pensions Regulator was published in June 2018, with a government response in February 2019.

The Pension Schemes Bill [HL] 2019-21 contains provisions intended to help TPR to meet their aim of being “clearer, quicker and tougher” and afford increased protection for Defined Benefit scheme members’ savings.” They relate to:

• Criminal and civil sanctions – strengthening the existing sanctions regime by introducing three new criminal offences and a new power to issue civil penalties of up to £1 million.
• Changes to the regime for Contribution Notices (one of the powers available to TPR to ‘recover any losses caused to a Defined Benefit pension scheme as a result of avoidance behaviours’).
• Corporate transaction oversight – provisions in the Bill would ‘require persons involved in a corporate transaction to make a statement setting out information about the event and how any detriment to a Defined Benefit pension scheme, as a result of this event, is to be mitigated.’
• Provisions to give TPR a ‘more coherent set of information gathering powers.’ (Explanatory Notes, paras 13 to 23).

When the Bill was in the Lords, Peers expressed concern that the scope of clause 107 (sanctions for avoidance of employer debt) was too wide (potentially relating to could inject “great uncertainty into pensions administration” and have the effect of deterring “ordinary pensions and business activity.” The Government responded that the aim was to “target individuals who intentionally or knowingly mishandle pension schemes or endanger workers’ pensions by behaviours such as chronic mismanagement of a business or avoiding pension liabilities.” It was important that “where the elements of an offence are met, no matter who has committed it, the regulator should be able to respond appropriately. Any restriction of the persons potentially in scope would create a loophole for those people to act in such a way” (HL Deb 30 June 2020 c634-8).

Third Reading in the Lords is scheduled for 15 July.