• Proposed Amendment to the Powers of the Pensions Regulator
  • June 4, 2008
  • Law Firm: DLA Piper - Washington Office
  • Following its announcement on 14 April 2008 (see our Pensions Alert of 18 April), the Department for Work and Pensions published its consultation document on the proposed extension of the powers of the Pensions Regulator ("Regulator") on 25 April 2008.  This was accompanied by a statement from the Regulator in relation to the retrospective use of its powers during the consultation period.


    On 14 April 2008 the DWP proposed amendments to the Regulator's anti-avoidance powers in light of concerns over the introduction of "business models that look to sever the link between employer and scheme", in particular innovations in the uninsured pensions buy-out market.  The DWP proposed to extend retrospectively the Regulator's powers so as to:

    • enable a contribution notice ("CN") to be issued where conduct is "materially detrimental to members' benefits";
    • remove the good faith element from the test for issuing a CN;
    • enable a course of conduct rather than one single act to trigger the issue of a CN;
    • remove the requirement for there to be a single entity within an employer's group which is sufficiently resourced to enable the issue of a financial support direction ("FSD"); instead, the resources of the whole group of companies may be considered; and
    • prevent the circumvention of the Regulator's moral hazard powers by the use of bulk transfers between schemes.


    The Regulator has recognised that the retrospective effect of these changes could create uncertainty, particularly during the period from 14 April 2008 until the date the amended legislation comes into force later in 2008 ("Transitional Period").  It has therefore issued a statement (which it has subsequently clarified following concerns over its ambiguity raised by DLA Piper) confirming that the Regulator will not exercise its expanded powers in relation to:

    • relevant acts or failures to act that first occur (in relation to CNs) during the Transitional Period; or
    • a relevant time at which an employer is insufficiently resourced (in relation to FSDs) that falls during the Transitional Period;

    unless it is a transaction or business model incorporation any of the following features:

    1. moving the employer or pension scheme to another jurisdiction;
    2. splitting the operating company from the pension scheme without appropriate mitigation for the pension scheme;
    3. splitting the assets from the operating company without appropriate mitigation for the pension scheme;
    4. transferring scheme assets and liabilities to another scheme which does not have adequate support from an employer;
    5. running a scheme for profit without adequate account being taken of member interests; or
    6. business models in which risk is predominantly borne by scheme members, but high investment returns would benefit investors.

    However, caution is required if a transaction contains any of the above features even if the transaction is not a "non-insured buy-out vehicle".  For example, a traditional asset sale could fall within the third bullet point above, particularly since there is currently no guidance on what constitutes "appropriate mitigation".

    The consultation document states that the Regulator expects that there will all be initial increase in enquiries relating to clearance issues of only around 10%, and does not expect any extension to the time taken to grant clearance.  This may be an overly optimistic assessment of the impact of the changes if they are introduced in their proposed form.

    Detail in the Consultation Document

    Unfortunately, the draft legislation which will extend the powers of the Regulator has not yet been published.  The consultation document simply serves to flesh out the basic proposals summarised in our Pensions Alert of 18 April.  The purpose of the consultation is to seek views on the proposed changes but the legislation will not be amended until after the consultation period has ended on 20 June 2008.

    Contribution notices - detrimental effect

    In relation to the proposal that a CN may be issued where the effect of an act is materially detrimental to the scheme's ability to pay members' current and future benefits without a requirement to prove intent, the consultation document proposes guidance on the sort of transactions which are likely to have a material detrimental effect on a pension scheme.  It proposes defining the characteristics of detrimental effect as the six potential situations listed in the section on restrospectivity above.

    The consultation document also describes some of the aspects of the security of members' benefits which should be considered:

    • the assets and liabilities of the relevant scheme;
    • the resources of the sponsoring employer on ongoing and insolvency bases;
    • the resources of the corporate group or those connected or associated with the employer;
    • the business activities and operations of the employer and their location;
    • the strength of legal obligations to the scheme;
    • the scheme's investment strategy and the extent to which it involves an asymmetric allocation of risk; and
    • the jurisdiction in which any obligation to fund the scheme would be enforceable.

    Contribution Notices - reasonableness

    The consultation document proposes an extension to the factors which must be considered by the Regulator in deciding whether it is "reasonable" to issue a CN.  The additional factors are:

    • the reasonableness of the person's actions in the circumstances; and
    • the value of benefits received directly or indirectly by that person from the employer or the scheme.

    Contribution Notices - good faith statutory defence

    In relation to the removal of the provision which currently prevents a CN being issued where a party acted in good faith but their actions have had the effect of preventing a debt becoming due, the consultation document proposes the introduction of a statutory defence.  This will provide that the Regulator could not issue a CN if the person could demonstrate that, based on what they knew or what they ought to have known, they could not reasonably have foreseen that their actions could have a materially detrimental effect on the security of members' benefits.  The DWP believes that parties who have conducted effective due diligence, considered the impact on members and mitigated the risk effectively would have a statutory defence, even if the transaction was materially detrimental.

    Contribution Notices - series of acts

    In relation to the proposed change enabling a CN to be triggered by a series of acts, the consultation document has clarified that the series of events must be associated in such a way as to constitute a "course of conduct".  In other words, the acts must have been "connected in a relevant way and occurred in a reasonable timescale".  No guidance has been provided in relation to the meaning of a "relevant way" or a "reasonable timescale".  The consultation document also confirms that the Regulator will not be able to withdraw any clearance that has already been provided and therefore if an individual transaction has been cleared, that transaction could not form part of a course of conduct triggering a CN.

    Financial Support Directions

    The consultation document clarifies that additional group companies whose aggregate resources are considered to be sufficiently resourced to meet the proposed new test must be associated and connected with each other as well as connected to the under resourced sponsoring employer of the pension scheme.

    Bulk Transfers

    In relation to the proposed change ensuring that the use of the Regulator's moral hazard powers is not frustrated by a bulk transfer of members between schemes, the consultation document confirms that:

    • where the Regulator could have issued a CN but for the fact that a bulk transfer took place, it will still be able issue the CN;
    • where it does issue a CN, the contribution payable can be split between the transferring and receiving schemes to ensure that the relevant members receive the full benefit of the CN.  The value would split in proportion with the assets and liabilities involved; and
    • a CN may also be issued where a bulk transfer itself would be detrimental to members' benefits.

    The consultation ends on 20 June 2008 and we will update you again once details of the draft legislation become available.