UK - The Pensions Regulator (TPR) has initiated a consultation on the code of practice for applying the "material detriment test" when deciding whether to issue a contribution notice.

The government strengthened TPR's anti-avoidance powers under the Pensions Act 2008 in response to the emergence of new business models acting as alternatives to standard pensions buyouts, but which may reduce the security provided by the sponsoring employer.

Part of these new powers is the use of a "material detriment test" when issuing contribution notices to companies, so the draft code of practice outlines the circumstances in which TPR is likely to use this test.

As a balance to TPR's increased powers, the government has also introduced new protections for companies, individuals and other parties, including three layers of legislative filters to ensure the material detriment test is "appropriately targeted".

These filters include the publication of the code of practice; confirmation the test would only be triggered when there is a "material detriment" to the chances members will receive accrued benefits; and the introduction of a statutory defence, where a contribution notice cannot be issued on grounds of material detriment if certain conditions have been met.

The statutory defence is a three-step process designed to allow the relevant party to "demonstrate with evidence" that at the time of the event in question it was "reasonable" to conclude it would not be "materially detrimental".

To prove this the company, or individual, must:

Give due consideration to the extent of a resulting material detriment to the chances of members receiving accrued benefits If the consideration suggests a potential detriment "all reasonable steps to eliminated or minimise the potential detrimental effects" must be taken, Show that at the time of the event the circumstances meant it was reasonable to conclude there would not be a material detriment

However, in the consultation TPR noted "the sorts of due diligence and discussions with trustees that are already undertaken by responsible employers would in many cases satisfy the statutory defence".

The consultation also revealed TPR cannot issue a contribution notice to any person unless it is "reasonable to do so", and specifies a list of relevant factors TPR must consider, alongside a new mandatory requirement for the regulator to "consider the reasonableness of the person's actions in the circumstances".

"We have had valuable input from our stakeholders during the writing of the draft material detriment code of practice," said Tony Hobman, chief executive of TPR.

"We look forward to continuing this work as we move forward into the consultation period, and welcome wider responses from industry on the draft code published today."

Lord McKenzie of Luton, parliamentary under-secretary for the Department for Work and Pensions (DWP), added: "We want to do all that we can to ensure that our regulations reflect the needs of the current market. I welcome the consultation that TPR has launched on the material detriment test, which shows the commitment to protect members' benefits without hampering routine business activity."

The TPR consultation will close to responses on 6 February 2009.

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