TPR looks to clarify new contribution notice tests

TPR published on Thursday a consultation on changes to its Code of Practice 12, following the introduction of new tests in relation to its contribution notice power. 

While the the present system only considers an act or a failure to act that affects an employer, leaving the regulator to extrapolate its impact on the linked pension scheme, the new employer insolvency test and employer resources test instead measure the impact of an act or a failure to act on an employer relative to the pension scheme.

“The employer insolvency test considers the impact of the ‘act’ on the hypothetical insolvency outcome for the scheme, and the employer resources test considers the impact of the ‘act’ on the value of the employer’s resources, relative to the scheme’s deficit,” the consultation paper stated.

The precise definition of “employer resources” is to be established by new legislation, and is currently the subject of a consultation launched in March.

It is claimed that the new regime, laid out in the Pension Schemes Act 2021, would streamline the contribution notice regime by allowing TPR to hand down a contribution notice if action or inaction has “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 intent was welcomed by much of the industry, but the consultation was criticised for a perceived lack of guidance accompanying it.

The Association of Consulting Actuaries, for example, noted that the document 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been much more helpful if the consultation on the regulation mechanics could have been married up with some regulator draft guidance, because there is a fear that many normal corporate activities will potentially result in exposure to an employer resources contribution notice,” it said.

The ACA further raised concerns that corporates might “take fright because of the uncertainties that this new test delivers”, and called for more clarity. It will now have the opportunity to air these views publicly, as TPR’s consultation will be running until July 7.

David Fairs, executive director for regulatory policy, analysis and advice at TPR, said: “We know from our casework that there are certain acts that affect an employer’s ability to deliver the retirement outcomes savers expect. The existing tests for the use of our contribution notice power do not focus solely on the effect of a specific act on the employer.

“The new employer insolvency and employer resources tests build on the current legislation to capture situations in which an act affects an employer covenant in a sufficiently material way. They look at the impact of the act on the employer at the time the act takes place, like a snapshot.”

Fairs continued: “While we don’t expect the new tests to significantly shift our current approach for assessing potential contribution notice cases, it’s important that we consult with the industry and give some examples of the circumstances in which the new tests could apply.

“A contribution notice will not automatically be issued if one of these tests is met. The legislation sets out a number of tests that must be met, including that it is reasonable to issue a contribution notice.”