TPR’s notifiable events regime more impactful than criminal powers

The Department for Work and Pensions published on Wednesday a consultation clarifying what and when trustees and employers will have to report to TPR, setting out a list of prescribed events.

The draft regulations stemming from the Pension Schemes Act 2021 build on the list of events already set out in the Pensions Act 2004. The government consulted in this area in 2018, setting out “notifiable events”. These are circumstances which “have the potential to cause harm to a pension scheme — for example, by increasing the chances of the sponsoring employer becoming insolvent or by impacting on the employer covenant”, the new consultation explained.

At present, legislation requires that TPR be notified by the employer when specific events take place. In a consultation response in 2019, the government said it would introduce two new employer-related notifiable events, with the aim of allowing the regulator to get involved earlier, before employers make changes that could adversely impact their pension schemes.

As well as affecting the process that seller or borrower in a transaction must follow, buyers and lenders are also likely to approach transactions with increased caution unless the position in respect of the trustees and regulator has been resolved

Matthew Swynnerton, DLA Piper

The first would see the watchdog being informed in the event of a “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”. The second event was the “granting of security on a debt to give it priority over debt to the scheme”.

It also introduced a “declaration of intent” — which the Pension Schemes Act 2021 legislated for — which is the duty for “a relevant person to give notices and statements” to TPR that “set out the implications for the scheme in relation to certain corporate events relating to the employer, and how any risks to the scheme will be mitigated”, the consultation explained.

“The notice and statement will be required at a later point in a corporate transaction than the notifiable event notification, when there is greater certainty as to whether the transaction is going ahead, its nature and the implications for the scheme.” 

Definitions matter

The new consultation sets out definitions that will determine at what point in the process employers should begin to consider the impact of any action on their pension scheme, making clear that this should happen from the moment a decision is made “in principle”, or at the start of the process.

The most impactful change, however, is the creation of the two new notifiable events.

The first is the intended sale by the employer of a “material proportion” of its business or assets, included because these transactions “frequently indicate a change in covenant support for a pension scheme”, the new consultation stated.

However, the form of this event has changed from when it was first laid out in 2019. Originally, “this requirement would apply to employers responsible for 20 per cent or more of the scheme’s funding”, with the threshold only being applied to multi-employer schemes, since a single employer will always be responsible for 100 per cent of the scheme’s liabilities, the consultation explained.

“The intention was to prevent unnecessary work for employers, schemes and [TPR] by not requiring the notification and statement where there was little likelihood of the transaction having a significant effect on the employer’s ability to support the scheme,” it continued.

“However, the structures of multi-employer schemes can be complex and varied, and the government is now persuaded there are circumstances where that policy intention could not be met — and that it would be challenging for some schemes and employers to establish whether a particular threshold of liabilities had been met regarding one of the scheme employers.”

As a result, it has removed the 20 per cent threshold, meaning employers will only have to determine whether a transaction affects a “material part” of their business or assets.

The draft regulations specify that a “material proportion” is one that accounts for 25 per cent or more of its annual revenue, or 25 per cent or more of the gross value of its assets.

“Using criteria such as the size of the corporate group, the pension scheme, the deficit or the amount needed to keep the scheme sustainable would add significant complexity for an employer when trying to assess if the transaction fell within the regulations,” it added.

The second event set out in the consultation is “the intended granting or extending of a relevant security by the employer over its assets”, an arrangement where, should the employer become insolvent, a secured creditor would be ranked above the pension scheme in priority list for debt recovery.

The draft regulations explain that “relevant security” is a level of security of more than 25 per cent of the employers’ consolidated revenues or its gross assets.

The consultation adds that TPR will provide more information on this in its code of practice and accompanying guidance.

A bigger impact than criminal powers

DLA Piper partner Matthew Swynnerton told Pensions Expert that despite a lot of attention being focused “on the regulator’s new criminal powers under the Pension Schemes Act 2021, the notifiable events changes are likely to have a greater potential to affect corporate transaction planning on a day-to-day basis”.

“Much has been made in the press about the regulator embedding its clearer, quicker, tougher culture. However, it can only act in respect of transactions which could affect a defined benefit scheme where it is actually aware of the transaction and its impact on the scheme,” he explained.

Under the current regime “that may only happen at a late stage”, whereas the new rules “will mean that there will be a requirement for regulator and trustee notification of the transaction at a much earlier stage in the transaction process than currently”. 

“This will need to be factored into transaction planning and addressed at a very early stage and could result in a need for increased dialogue with the trustees and regulator than would ordinarily be the case, as well as increased adviser input on the impact and strategy,” Swynnerton explained. 

“As well as affecting the process that seller or borrower in a transaction must follow, buyers and lenders are also likely to approach transactions with increased caution unless the position in respect of the trustees and regulator has been resolved.”

Jonathan Camfield, partner at LCP, told Pensions Expert: “It’s important that the regulator is not inundated with unnecessary notices and statements and that companies aren’t bogged down by unnecessary paperwork.

“Deciding when a ‘decision in principle’ has been made (the trigger for the new notifiable events) may pose practical questions for company directors in ensuring that they meet the new requirements, as will how directors determine when ‘main terms have been proposed’ (the trigger for the new statements).”

Hymans Robertson partner Laura McLaren warned, however, that there “remains some uncertainty with the inevitable challenge of trying to set down rules in a way that doesn’t become unduly restrictive or too onerous”.

“Specifically, with statements for the ‘relinquishing control’, ‘intended sale’ and ‘granting security’ events required ‘when the main terms of the relevant event have been proposed’, it appears judgment will be required to apply this principle to a given set of circumstances,” she said. 

“Ultimately, companies will need additional support and advice to navigate the new rules carefully. There is some hope that more clarity might come from TPR in its code of practice and accompanying guidance to follow.”