Sponsors could be “left guessing” as to whether key decisions could lead to enforcement action under new guidelines from the Pensions Regulator, LCP has warned.
The new guidelines, published 48 hours before major changes to the rules came into force on October 1, set out how TPR will use its enhanced criminal powers to prosecute those who fall short of legislation.
But consultancy LCP has identified a potential “regulatory gap” in a sponsor’s ability to secure “clearance” from the regulator, potentially causing a contribution notice to be issued.
Such a notice forces sponsors, company directors or connected parties to put money into their defined benefit pension scheme.
We agree that it is not practical for employers to seek clearance for every business decision they take and most will continue to make their own sensible assessment of the risk of a contribution notice
The Pensions Regulator
But TPR has said falling clearance application rates indicate industry confidence in the scope of its contribution notice powers.
Contribution notice controversy
Under the previous rules, a contribution notice could be issued where an individual acted in a way that was “materially detrimental” to the security of members’ benefits, but under the Pension Schemes Act 2021, two new tests were created — both of which can result in a contribution notice if triggered.
The employer resources test is triggered when a business decision or other event has a negative impact on a sponsoring company’s profits, and that impact is material relative to the cost of passing the pension scheme to an insurer,
The employer insolvency test is triggered when a business decision has a significantly negative impact on the amount the pension scheme would get following the hypothetical insolvency of the sponsoring employer.
LCP noted that routine business actions, such as dividend payments, borrowing more to invest in business opportunities and growth, could technically breach one of the new tests.
Under the previous regime, employers could seek clearance from TPR before making a key business decision, meaning that TPR would not make use of its contribution notice powers.
In March, Pensions Expert reported that pension professionals were anticipating a sharp rise in the number of clearance applications made to the regulator.
LCP said that it was widely expected that TPR would introduce a similar clearance process tailored for the two new contribution notice tests.
In May, Pensions Expert reported that the consultation into the new contribution notices tests had received industry criticism, including concerns around a lack of guidance and uncertainty about some specific elements.
Lacking in guidance
“It is now clear that TPR is not offering an expanded clearance framework that provides the opportunity for sponsors to clear business decisions before they are taken, even where there is a technical breach of one of the new tests,” LCP said.
Jonathan Camfield, partner at LCP, added that a lack of a clearance process for the two new tests, alongside no substantive guidance from TPR on the approach that it will take in applying the tests, means that even “employers who want to do the right thing by their pension scheme” will now be “left guessing” as to whether something they are about to do could later lead to enforcement action by the watchdog.
He said: “Now that we know how TPR plans to operate its new powers it is clear that there is a regulatory gap. Sponsors will have to make some key business decisions, which could have an impact on their pension scheme, without any substantive guidance on whether TPR will seek to impose a contribution notice, and without having the option to seek clearance.”
Camfield cited the example of an employer who might make a “routine dividend payment”, or another who “might borrow more money to invest in a growth opportunity”, both of whom technically breach the new insolvency test.
“Both can argue that this is not materially detrimental to the scheme because the risk of insolvency is so low. But, without obvious overall material detriment to the scheme, it is now clear that clearance is not an option for the sponsor and so directors could still be open to later regulatory challenge and the possible imposition of a contribution notice,” he said.
Camfield added that while TPR cannot be expected to “sign off” on routine, daily business decisions, companies should not “find themselves in a position where they have no choice but to be left guessing. The current guidelines mean too many firms simply will not know where they stand”.
TPR criminal powers policy spurs more industry concern
The Pensions Regulator has published its policy on how it intends to use upcoming criminal powers to prosecute those who fall foul of new legislation, following widespread industry concern into the scope and extent of the powers.
In response, a TPR spokesperson told Pensions Expert: “We have updated our clearance guidance to reflect the two new contribution notice tests introduced by the Pension Schemes Act 2021. It is important to note that the clearance process remains available for applicants within the scope of our guidance.
“We have seen a steady decline in the number of clearance applications, from 212 in 2005 to seven in 2020. We believe this shows that industry is confident of the scope of our contribution notice powers.
“We agree that it is not practical for employers to seek clearance for every business decision they take and most will continue to make their own sensible assessment of the risk of a contribution notice,” they added.
