The UK pensions industry has given a mixed response to draft regulations from the Department for Work and Pensions (DWP) on so-called “notifiable events” potentially affecting defined benefit (DB) schemes.
These are events with the potential to cause harm to a scheme, for example by increasing the chances of the sponsoring employer becoming insolvent or by impacting on the employer covenant.
The government’s aim is to strengthen the powers of The Pensions Regulator (TPR) in this context, especially given a number of controversial takeovers of British companies over the years. The latest is the planned acquisition of the Morrisons supermarket chain by a US private equity group, which highlighted a perceived need to safeguard the sponsor covenant.
The law already requires that TPR is notified by the employer when specified events take place. However, new regulations are intended to ensure TPR is aware of notifiable events and can get involved, where necessary, before sponsoring employers make changes which could affect their ability to support the pension scheme.
Two new employer-related notifiable events have been introduced in the draft regulations:
- A decision in principle by a pension scheme employer to sell a material proportion of its business or assets. A material proportion of the employer’s business/assets is defined as one that accounts for more than 25% of its annual revenue/gross value.
- A decision in principle by a pension scheme employer to grant or extend a relevant security over its assets where the secured creditor will rank ahead of the pension scheme.
The existing notifiable event of wrongful trading is removed, because it was ineffective.
Crucially, the timing of some events – including the new notifiable events – is moved forward from existing law, as these events are now considered to occur when a “decision in principle” has been made, i.e. the point at which the employer has made a decision to go ahead, before negotiating specific terms and drawing up the contract.
‘Blunt tool’
As provided under the Pension Schemes Act 2021, the regulations introduce a duty for a relevant person to give notices and statements to TPR setting 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.
This will be required at a later point than the notifiable event notification, when there is greater certainty as to whether the transaction is going ahead.
The consultation period on the proposed new regulations ended last week, and while the pensions industry has generally been supportive of the intention behind the regulations, concerns have been voiced, particularly relating to the concept of “material proportion” of a business.
Alistair Russell-Smith, head of corporate defined benefit at Hymans Robertson, said: “It is good to see that pension schemes are now higher up the corporate agenda when planning corporate transactions.”
He added: “Now the implications of corporate activity on the pension scheme have to be considered at an early stage, with potential mitigations thought through. If it’s left too late then this weakens the position for the employer, and probably puts the trustees and TPR in a stronger position.”
But he warned that the specific notifiable events proposals define “material” corporate activity relative to the size of the employer, with no consideration of the size or funding position of the pension scheme.
He concluded: “It seems the proposed approach is such a blunt tool that it has the potential to capture events which are not material, and miss events that are material.”
The Society of Pension Professionals said: “There is no test that looks at materiality based on a measure of profitability, which is a key factor for covenant.”
It added: “The 25% threshold appears high. Commercial lenders looking to include material group entities in a security net will look at much lower levels of group revenue, profit and/or asset values to determine whether an entity is material.”
“The big question is exactly what TPR will do with the – potentially hundreds of – notifications it will start receiving once the new regime goes live”
Luke Hartley, director, Cardano Advisory
Luke Hartley, director at Cardano Advisory, said: “The proposed amendments to the notifiable events regime require critical thought. From the lack of clarity over what exactly constitutes a ‘decision in principle’, to the challenges of applying the threshold tests to large or multi-national groups, it’s apparent that clear guidance will be needed for employers to meet their obligations.”
And he expressed a common concern throughout the industry: “The big question is exactly what TPR will do with the – potentially hundreds of – notifications it will start receiving once the new regime goes live. While some may expect TPR to actively participate in all discussions, a more likely outcome is that TPR will seek to supervise and influence trustees in negotiations with employers.
“An inevitable effect will be to materially increase the cost and complexity of negotiations, with trustees also potentially caught between sponsor ambition and regulatory prudence.”
Guidance wanted
The Pensions and Lifetime Savings Association (PLSA) recommended that TPR provide more guidance to aid both employers and trustees in understanding when the new notification requirements are triggered.
It said: “The current regulations suggest judgement will need to be made by trustees to determine at what stage things should be declared, which could lead to inconsistencies as different employers could interpret these events differently.”
“The effect could be to turn a two-party transaction into a three- or four-party transaction, with all the complexity and adviser costs this will bring”
Craig Looker, legal director at global law firm DLA Piper
Craig Looker, legal director at global law firm DLA Piper, said the term “decision in principle” and the timing of the obligation to notify TPR when the main terms of the transaction have been proposed, but not yet agreed, would be open to interpretation by the legal advisers to sponsoring employers.
He said: “These changes may have the potential for the greatest impact on day-to-day transactions out of all of the recent changes in the law. They will provide TPR and trustees with the opportunity to intervene in transactions and have a ‘seat at the table’ much earlier in the process.”
But he cautioned: “The effect could be to turn a two-party transaction into a three- or four-party transaction, with all the complexity and adviser costs this will bring.”
A DWP spokesperson said: “We launched this consultation to gather views from industry, and we will consider all feedback submitted before responding in due course.”
No comments yet