Industry slams lack of detail on regulator's new powers

The government closed its consultation on new powers for the Pensions Regulator on Tuesday. Proposed reforms include a strengthening of the notifiable events framework and a new declaration of intent, adding new sanctions to deter and punish wrongdoing, and improving anti-avoidance powers such as contribution notices or financial support directions.

However, respondents have complained that the document was not sufficiently detailed for them to provide coherent feedback.

I think there’s a good chance that they actually wouldn’t have been effective in changing the outcome of either BHS or Carillion

Lesley Harrold, Norton Rose Fulbright

Several supported the intentions behind the proposals, but highlighted gaps in details surrounding updates to moral hazard powers or new criminal sanctions.

“It was hard to actually look at a particular area and say, ‘No that’s wrong’,” said David Everett, chair of the pension schemes committee at the Association of Consulting Actuaries. “One of the difficulties with expressing concerns is that as a consultation paper there was not much material in it, particularly the moral hazard provisions.”

Regs could damage UK business

In its response to the consultation, the ACA pointed to vague terms of a new material detriment test, which the regulator would need to satisfy to issue a contribution notice.

The consultation states this would be “assessed by reference to the weakening of the employer rather than the prospect of scheme benefits being paid many years into the future”.

However, Everett pointed out that this might be used to tackle dividend payments and other corporate activities that, while reducing the immediate amount of cash available to the scheme, could be vital to the ongoing survival of the company.

“You can have situations where the covenant does decline materially but maybe only temporarily, and if that were a triggering event for a contribution notice that wouldn’t be right,” he said.

Lesley Harrold, a senior knowledge lawyer at Norton Rose Fulbright, agreed that the consultation lacked detail, a failure that might delay the implementation of meaningful change.

“Some of these are fundamental changes that the [Department for Work and Pensions] is proposing and there are a number of significant concepts that require further definition,” she said. “I would foresee that there will be several more consultations… it’s unlikely that we will see any new legislation in the near future.”

Key definitions missing

A new notifiable event brought in by the proposals aims for greater oversight of transactions involving the “sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liabilities”.

But Harrold said the definitions of “material” and “responsibility” were unclear, and that the risk threshold for the entire notifiable events schedule was set on an as yet undefined “pre-determined basis”.

A key feature of the response to high-profile corporate collapses involving pensions has been the discussion of criminal sanctions for negligent DB bosses.

A manifesto pledge for Prime Minister Theresa May’s Conservative Party, they have been largely rejected by the pensions industry and some doubt whether they could ever be used.

The consultation sets out the range of punishments, ranging from civil fines of varying severity up to criminal sanctions for wilful or reckless neglect.

Civil fines of up to £1m will attach to breaches of the notifiable events regime. Harrold hoped this would be flexible, to avoid employers incurring fines inadvertently through lack of resource.

New powers cannot prevent insolvency

The proposals in the consultation are largely the result of the public outcry at pensions scandals such as the failure of BHS and Carillion. But some doubt whether the new suite of powers will prevent these events from occurring in the future.

“I think there’s a good chance that they actually wouldn’t have been effective in changing the outcome of either BHS or Carillion, because there the employers ran out of money,” said Harrold.

However, said Tiffany Tsang, Local Government Pension Scheme and DB policy lead at the Pensions and Lifetime Savings Association, the experience of BHS and Carillion make it “clear that simply maintaining the status quo is not an option”.

She also criticised the lack of detail in the consultation, but praised the intentions of the proposals.

“We believe that the additional powers will help the Pensions Regulator gain access to critical financial information in a shorter space of time, allowing it to intervene sooner,” she said, adding that faster disclosures to trustees would help them be a better “first line of response".