ACA laments lack of guidance on TPR’s employer resources test

In the consultation launched in March, the Department for Work and Pensions proposed creating a new “employer resources test” in TPR’s existing contribution notice regime.

Under the present system, the act or failure to act that eventually prompts the regulator to hand down a contribution notice is one that affects the employer, not its pension scheme, meaning that TPR has itself to look at the employer-related act and extrapolate its impact.

It is claimed that the new regime, laid out in the Pension Schemes Act 2021, would streamline that process by introducing a two-part employer resources test that would allow TPR to hand down a contribution notice if action or inaction has a “reduced the value of the resources of the employer”, and if “that reduction was a material reduction relative to the estimated section 75 debt in relation to the scheme”.

The consultation document also sets out what constitutes employer resources and how their value is to be calculated.

In its response, the ACA said: “We are supportive of a test that seeks to ascertain whether an act or failure to act has damaged the normal profitability of a company and hence its ability to stand behind the section 75 debt as a going concern — which is our understanding of how the employer resources test is intended to operate.”

However, it noted that the consultation does not set out what “non-recurring or exceptional items are to be removed by the regulator when working out ‘normal annual profit before tax’”, which is the definition TPR proposes to use for employer resources.

The consultation likewise makes no mention of “any industry-accepted practice in taking statutory accounts and adjusting the profit line in order to obtain the normal annual profit before tax measure, either pre or post the act/failure to act”, and therefore “a lot of uncertainty [remains] as to how these measurements will take place”, the industry body stated.

“It would have been much more helpful if the consultation on the regulation mechanics could have been married up with some regulator draft guidance, because there is a fear that many normal corporate activities will potentially result in exposure to an employer resources contribution notice,” it said.

In particular, the ACA called for more clarity around certain activities that might risk incurring a contribution notice, including the payment of dividends, taking on more debt, business sales and internal restructurings.

“We are not disagreeing with the proposed approach; it is simply that the consultation is too narrow to be able to assess the consequences, intended or otherwise,” ACA’s response stated. 

“There is a clear danger that corporates will take fright because of the uncertainties that this new test delivers when the policy intention all along is (say) to enable the regulator to pursue successfully a handful of cases, which under the current legislation it is held back from doing.

“We are disappointed that the consultation has not taken the opportunity to state that this new contribution notice test will not be backdated — ie, it will only apply to acts or failures to act occurring after, say, October 1 2021,” it continued.

“There is a fear that when the relevant commencement order is laid it will catch acts and failures to act from any time after, say, October 1 2015.”