Trustees and sponsors should consider how they would justify actions when faced with an intervention by the Pensions Regulator, which is consulting on new conditions to issue contribution notices, writes Chris Edwards-Earl, senior associate at Stephenson Harwood.
Two new tests have been created — the ‘employer resources’ and ‘employer insolvency’ tests – which, when satisfied, allow TPR to issue a contribution notice against a target where it considers it reasonable to do so.
On May 27, the regulator published a draft of its revised policy for how it intends to exercise its enhanced powers that includes examples of cases where it would consider it reasonable to issue a contribution notice:
A sponsor’s support is removed, substantially reduced or becomes nominal – such as where a sponsor transfers ownership of a profitable subsidiary as part of a group restructure, with compensation settled by way of an unsecured, non-interest-bearing, inter-company debt with no repayment date.
Trustees fall squarely within the scope of these new powers, even though these powers have been formulated with the sponsors, and not trustees, in mind
The directors of “an otherwise viable and solvent company” manufacture an “unnecessary insolvency to buy its business out of administration without the scheme. The scheme received an insolvency dividend, but the insolvency should never have occurred”.
A sponsor pays its parent company a “significant dividend… much larger than dividends paid in previous years”, and “greater than the company’s net profit generated during the same reporting period”.
A sponsor makes an “unscheduled repayment of an inter-company loan” when it is facing financial difficulty.
Mitigation to play important role
Where these circumstances arise, however, TPR says that it will take into account where steps were taken to mitigate their effects.
TPR has repeatedly emphasised the importance it places on early analysis and mitigation, its expectation that careful thought should be given to the effect on the scheme by corporate activity, advice obtained and trustees communicated with.
It does not consider that retrospective justifications when faced with a contribution notice, in effect trying to put a gloss on things later, will be sufficient.
The regulator says that it does not regard simply poor trading by a scheme sponsor or actions where appropriate mitigation has been offered to trigger the issuance of a contribution notice.
It includes an example of appropriate behaviour where the trustee is the party that took the act – that is, securing annuities for a category of members.
TPR has included this to provide assurance to trustees that ordinary activities, which could in theory be detrimental to certain members, are unlikely to be sanctioned.
Nevertheless, in doing so, it is illustrating that trustees fall squarely within the scope of these new powers, even though these powers have been formulated with the sponsors, and not trustees, in mind.
It is notable that TPR would have been able to pursue such behaviours using the powers available to it under the old regime.
The regulator regards the older two tests – the ‘main purpose’ and ‘material detriment’ tests, which remain available – as focused on assessing the pension scheme rather than on the condition of the scheme sponsor, which it considered to be looking through the wrong end of the telescope.
TPR has said that it will now be easier to pursue behaviours that it might have found too difficult, or too costly, to pursue before.
Little guidance on penalty amounts
Where the regulator has determined it is reasonable to issue a contribution notice, there is little guidance on how it would set the penalty amount.
While this will naturally depend upon the scheme and circumstances, there has been an expectation in the market that the amount of a contribution notice should link directly to the act that triggered the test.
TPR has indicated in the past, however, that it does not consider itself bound by this and that, provided it has cleared one of the tests, it can go on to issue a contribution notice for whatever amount it deems reasonable.
The new code, which is open for consultation until July 7, provides some guidance, but it is also made clear that the regulator does not consider itself restricted by the code.
TPR has been granted a significant amount of discretion over how it wields its new powers. It regards the existence of its powers as deterrents as much as tools to fix problems.
It will therefore be important that potential targets give early thought to how they would justify actions when faced with an intervention by the regulator.
Chris Edwards-Earl is a senior associate at Stephenson Harwood
