The new Pension Schemes Act received Royal Assent in February 2021; the changes introduced in the Act will be wide ranging and will impact areas such as M&A transactions and restructurings. Companies and their advisors need to be aware of the new regulatory landscape, especially the new civil sanctions and criminal charges.
The Act covers a number of areas, but the presentation by Raquel Agnello QC is focused on four key elements:
- New civil and criminal sanctions
- Increased notification requirements
- Increased information gathering powers for the Pensions Regulator (tPR)
- Changes to the Contribution Notice (CN) test
Below are some FAQs relating specifically to these areas:
When are the new regulations coming into force?
The new powers for tPR and related sanctions should be introduced by autumn 2021.
However, there will be guidance from tPR following the consultation process, which will be starting shortly.
It is essential that all parties potentially affected by the new regulations engage with the consultation process to allow their views be heard.
What new civil sanctions will be introduced?
There will be a Civil Penalty for (amongst other things):
- failure to disclose information;
- conduct risking accrued benefits (which is similar to the original material detriment test); and
- an act that avoids an employer debt.
Who is liable under the civil sanctions?
Those liable include parties to the act or those who ‘knowingly assist’. It is as yet unclear quite how wide the net could be cast and whether this could include shareholders (including private equity firms), or advisors.
There is an expectation that this area will be clarified following the consultation process.
What are the defences?
The mitigation defence remains the same as before (i.e. steps have been taken to minimise losses and to avoid taking steps that could increase a loss). There is some protection for Insolvency Practitioners (IPs), but only if they have been acting solely in capacity as an IP.
What criminal offences will be introduced?
Failure to pay under a CN or providing false or misleading information as part of a notifiable event report could result in an unlimited fine or up to seven years in prison. Criminal offences are similar to the Civil Sanctions, but the burden of proof is higher. It will be up to tPR to decide if a criminal or civil case is to be brought in each situation.
What are the new notification requirements?
Under existing legislation, in certain circumstances, sponsoring employers are required to notify tPR about specific corporate events. The Act expands on these notification obligations and imposes new obligations to include notice of material changes, which will include:
- the sale of a controlling interest in an employer;
- the sale of a material proportion of the business or assets of an employer; or
- the granting of security ahead of the pension scheme.
These also await guidance and there are new financial penalties up to £1m for non-compliance.
What are the new requirements relating to provision of information?
It is currently unclear how these will be defined but they will include a declaration of intent which must be provided to tPR and the trustees as soon as reasonably practicable notwithstanding any confidentiality agreement. Again, it is hoped that tPR will clarify this area following the consultation. There are civil penalties for failing to cooperate.
How will the new Act impact information gathering?
The new section 72 powers will be much broader. TPR will have the power to summon individuals for interview and to enter premises to obtain information.
Changes to CNs?
The original ‘test the recovery of’ and ‘material detriment’ tests were narrower; the new Act extends the material detriment regime. TPR will be able to issue a contribution notice where an act or failure to act materially reduces the debt likely to be recovered from the employer in the event of an immediate insolvency (the ‘employer insolvency’ test); or reduces the resources of the employer in a manner which was material when compared to the buy-out deficit of the pension scheme (the ‘employer resources’ test).
The Act introduces two new tests:
- the ‘employer insolvency’ test , which is a simple ‘before and after’ test of scheme insolvency recoveries; and
- the ‘employer resources’ test, which assesses the ‘materiality’ of the weakening of the employer by reference to the section 75 debt, rather than to the value of the employer and its ability to pay.
The new tests are more objective and Independent professional valuations will be key to assessing the potential risks.
What are the conclusions?
- New civil and criminal sanctions will create new risks and wider potential targets, without much legal precedent, which creates uncertainty until tested in court. It is unclear whether tPR will use the new criminal offences, but it is advisable to remain vigilant to avoid unwittingly breaking the new rules.
- The new notification requirements will require earlier engagement with pension scheme trustees, which may result in improved outcomes for pension schemes, but this is currently uncertain.
- TPR has increased information gathering powers, which could result in individuals being summoned for interview or premises be entered. This can increase costs which cannot be recovered.
- The widening of the grounds for issuing CNs could increase the likelihood of tPR’s moral hazard powers being threatened or exercised. The new CN tests are intended to be more objective and valuations will be key. Reasonableness remains a factor.
- There remains much uncertainty, which we hope tPR’s guidance will significantly reduce.
If you would like to further discuss any aspects of the Pensions Schemes Act 2021, please get in touch with Matthew Gibson, Andy Palmer or John Hubbleday from BDO or Raquel Agnello QC from Erskine Chambers.
To understand the features of the Pension Schemes Act 2021 and the legal aspects in full, watch our webinar with Raquel Agnello QC.