In the first of what will likely be a number of consultations following the Government’s White Paper, “Protecting Defined Benefit Pension Schemes”, the Department for Work and Pensions (DWP) has launched its consultation on extending the Pension Regulator’s enforcement powers and the notifiable events regime (available here). Should the proposals be introduced as currently outlined, they would place a significant new burden on companies with defined benefit pension obligations in the context of corporate activities.
1. Increased notification requirements
Currently notifications to the Pensions Regulator are limited to a small number of significant corporate events (e.g. a breach of a banking covenant, a decision to relinquish control of a sponsoring employer, a decision to cease trading in the UK).
The consultation proposes a significant widening of that regime to include a greater range of as yet ill-defined corporate activities such as:
- asset and business sales;
- secured financing arrangements;
- use of oversight/monitoring rights by lenders;
- amendment, waiver or deferral of banking covenants;
- obtaining any independent restructuring or insolvency advice;
- two out of three key board changes (i.e. Chairman, CEO and CFO) in any six month period; and
- the appointment of a restructuring or transformation officer.
These events are not exhaustively defined in the consultation and, although Pensions Regulator guidance may assist, there is a concern that it may be difficult for boards to know whether or not a particular event is notifiable. For example would legal advice in relation to a group reorganisation constitute ‘restructuring advice’ if it involved a business turnaround? If so then there would be issues of legal privilege to consider (as there would be in relation to any legal advice).
It is also proposed that the timing of notifications is brought forward. Currently notifications need to take place “as soon as reasonably practicable” after a relevant event has occurred. The consultation proposes that for all material transactions (essentially all secured financing arrangements and M&A transactions) notification will be required at the point a ‘Heads of Terms’ is agreed (see 3. below for potential impact on transaction timetables).
It is also proposed that new criminal and civil sanctions may be imposed for non-compliance (see 4. below for further detail).
2. New declaration of intent requirement
The consultation envisages that for all material transactions (i.e. those corporate activities requiring earlier notification (see 1. above)) a sponsor will need to provide the Pensions Regulator and trustees with a ‘declaration of intent’ stating what the impact of the transaction will be on the DB scheme and what (if anything) is proposed to be done to mitigate any negative effects. It is anticipated that the declaration will be given after notification of the transaction but before definitive agreements for the relevant transaction are signed.
Such a change could have the effect of making what is currently a voluntary mitigation regime into a mandatory one. All sponsors would need to consider the pensions impact of each material transaction at the initial planning stage in order to factor in the approach to mitigation and engagement with the trustees and Pensions Regulator.
In practice many sponsors already engage proactively with trustees in relation to significant transactions (either before or after signing/completion). However, the consultation proposals seek to formalise what is currently a flexible regime and could cause some corporate activity to be delayed (or scrapped) because of the need to undertake and then consider a pensions impact analysis (even where the DB scheme is either not involved directly in the transaction or is immaterial in the context of the deal). Requiring boards to issue declarations of intent may also give rise to increased concerns and awareness of directors’ potential personal liability under the Pension Regulator’s moral hazard powers (see 5. below).
3. Impact on transaction timetables
Currently many transactions are undertaken without sponsors communicating with the Pensions Regulator. If the consultation proposals are implemented as currently proposed then Pensions Regulator involvement will become mandatory to most corporate M&A or financing activities.
One of the biggest impacts of the proposed changes will likely be to transaction timetables, as these will need to factor in a pensions impact analysis, the new early notification obligations, and the declaration of intent report, all of which would need to occur prior to signing of definitive transaction documents.
We would also expect clearance applications to significantly increase as a result of these changes (particularly if directors are being required to give a declaration of intent) and this will likely delay transactions and lead to increased deal uncertainty where a DB scheme is directly or indirectly involved.
4. New criminal sanctions and increased civil fines (up to £1m)
Whilst the headline grabbing criminal offence of “wilful or grossly reckless behaviour in relation to a DB scheme” may prove to be a high bar to clear once Parliament spells it out, the consultation also proposes that criminal sanctions (up to two years in prison) may be imposed for non-compliance with the new notification regime. Civil fines of up to £1m may also be imposed for breaches of the notification and declaration of intent regime (as well as other breaches). Directors may be concerned that where their good faith commercial judgement has turned out to be wrong, statements made in a declaration of intent could be used as part of any enforcement proceedings by the Pensions Regulator (unless clearance has been obtained).
A practical consequence of this is that sponsors will need to update their compliance systems and processes to ensure timely notifications are made once triggered; many of these actions would not typically involve a pensions advisor to flag the issue. Businesses generally will need to be more aware of their reporting obligations to the Pensions Regulator as will advisors to sponsors and DB schemes (who already have separate reporting obligations for breaches of law).
The consultation does not currently make allowance for the fact that sponsors who are listed entities already have obligations to make market announcements in relation to price sensitive events. It is not currently clear how the new notification regime will interact with those obligations and whether notification will be deemed to be made where the relevant information is publicly available.
5. Widening of TPR’s moral hazard powers
The Pensions Regulator has come under significant pressure since the collapse of BHS (most notably from the DWP and BEIS Select Committees) over its failure to successfully use its moral hazard powers (i.e. Contribution Notices (CNs) and Financial Support Directions (FSDs)).
The consultation proposes simplifying and streamlining these powers to make their application more ‘user friendly’ for the Pensions Regulator.
One specific area of concern is that the proposals potentially extend the CN regime to include any entity or person connected or associated with the target of an FSD (previously it was only those connected or associated with DB scheme sponsors who could be targeted). This could potentially lead to CNs being issued against a much wider range of individuals and entities — for example investors in JVs in corporate groups with DB pension liabilities.
It is yet to be seen whether the proposed changes will result in more regular and decisive action by the Pensions Regulator but the proposed changes certainly strengthen the Regulator’s hand should it choose to do so.