UK - Extensions to The Pensions Regulator's (TPR) anti-avoidance powers will be subject to certain "safeguards" including a "statutory defence" against the tests for issuing contribution notices.

In a formal consultation, the Department for Work and Pensions (DWP) outlined the proposed amendments to the existing legislation that would introduce "alternative tests" for the issue of contribution notices and financial support directions.

The government stated in the consultation paper the current tests for issuing Contribution Notices "may be circumvented" as it requires TPR to "consider and prove the intent in the mind of a potential subject". (See earlier IPE story: DWP extends TPR buyout powers)

As a result, the legislation would be amended to include an "alternative test" which focuses on the effect of a transaction, rather than the "motivation", while an alternative test for issuing a financial support direction (FSD) would be triggered if a group of associated or connected persons were between them "sufficiently well-resourced" to provide the required financial support.

However, the DWP emphasised the rules are not targeted at specific companies, but instead are focused on new business models which operate outside FSA regulation, and which may look to sever the link between the employer and the pension scheme in order to operate well-funded occupational pension schemes for profit.

In particular, the consultation highlights business models with the following key characteristics:

Moving the employer or pension scheme to another jurisdiction; Splitting the operating company from the pension scheme without appropriate mitigation for the pension scheme; Splitting the assets from the operating company without appropriate mitigation for the pension scheme; Transferring scheme assets and liabilities to another scheme which did not have adequate support from an employer; Running a scheme for profit without adequate account being taken of member interests, and
Business models in which risk is predominantly borne by scheme members, but high investment returns would benefit investors.

That said, the consultation said TPR's extended powers would be constrained by existing procedures, and guidance, and the government confirmed it planned to include an additional safeguard in the form of a "statutory defence".

The consultation revealed under the defence TPR "could not issue a contribution notice if the person could demonstrate that based on what they knew or what they ought to have known, they could not reasonably have foreseen that their actions could have a materially detrimental effect on the security of members' benefits".

As a result, the government said it considers parties who conduct effective ‘due diligence' on a transaction and take a view on its risks to the pension scheme "would be able to show" they had considered the impacts on members, provided they had mitigated the risks effectively.

The consultation also said government has concerns over the issue of bulk transfers where the link between the employer and scheme is effectively severed, so in response it proposes to could still issue the contribution notice if TPR was considering using its anti-avoidance powers before the bulk transfer.

However, in a statement TPR attempted to provide further reassurance by suggesting it would not use its powers between April 14 2008 and the legislation coming into force unless the event specifically relates to one of the key characteristics highlighted by the consultation.

In addition, if TPR has already provided clearance for an action this cannot be withdrawn unless the facts are "materially different", and once an event has received clearance it cannot be included as part of a "course of action" which TPR might use as a reason for deploying its anti-avoidance powers. (See earlier IPE story: TPR's buyout powers will be constrained)

The proposals will close to consultation on June 20 2008, and although the government has not published a full impact assessment, because it believes the proposals will have a "negligible" effect on the private and voluntary sectors, it has asked for feedback on the benefits and likely costs of the changes, which the DWP expects will be met within TPR's existing budget.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email