Company pensions obligations – being shy and retiring is not an option

Dealing with a defined benefit (DB) pension scheme on a corporate transaction can be challenging. DB schemes with significant funding liabilities can impact the parties’ ability to deliver a successful outcome and in some cases may even block completion. One issue which has to be considered and managed is the risk of enforcement action by the Pensions Regulator (tPR), where tPR believes that a corporate transaction is materially detrimental to the position of the DB scheme, as a creditor of the sponsoring company. The tPR’s anti-avoidance powers have seen it issue a number of contribution notices and financial support directions to parties connected or associated with the employer to a DB scheme. As well as delivering additional value to the schemes in question, these powers have promoted positive behaviours across the industry and focused attention on ensuring that pension schemes are treated equitably when it comes to corporate sales or restructurings.  

However, during the course of a review into certain high profile cases, the Work and Pensions Select Committee strongly criticised tPR, describing it as “failing in all its objectives” and “reactive and slow-moving”.

What has been the government’s response to the Work and Pensions Select Committee report?

As a result, the government consulted on plans to give tPR more robust, pro-active powers to intervene in deals where a DB scheme is involved. It published the response to the consultation in February and, although detail is somewhat light, the government has confirmed that it intends to:

• Introduce a new criminal offence in respect of individuals who wilfully or recklessly mishandle pensions schemes, including through “chronic mismanagement” of a business, allowing unsustainable deficits to build up, or taking huge investment risks. This offence will carry a maximum sentence of 7 years in jail, or an unlimited fine and is in line with the framework in place for similar criminal offences in the financial services sector
• Introduce a new civil penalty of up to £1 million for any individuals who fail to comply with a contribution notice

How else will the tPR regulate DB schemes?

As well as this, there will be a new legal requirement on a corporate transaction planner to provide a “declaration of intent” to the DB scheme trustees and tPR, which sets out a clear explanation of the deal and how any detriment suffered by the DB scheme will be mitigated. Clearly, this will give the opportunity for tPR to intervene at an early stage and for pension trustees to try and extract more value for their scheme – although of course, given the aggressive timetable which many deals operate to, it is slightly unclear how this early notice framework is intended to operate in practice. 

Further details around tPR’s new powers are expected to follow later this year. The fundamental point for directors of companies with involvement in DB schemes is that delaying engaging with the issues around pensions will not be an option. It will be more important than ever to openly engage with the pension trustees and tPR on the proposals, structure and likely outcome for a pension scheme at every stage of a matter, and to ensure that the ultimate outcome is a scheme which is properly funded and supported by a robust employer covenant.

If you have any questions around how these changes might be relevant for your business, or would like to discuss pensions matters generally, please contact Andy Campbell, Head of Pensions, in the first instance.