The new Pensions Regulator – notification requirements and clearance procedures

United Kingdom

One of the key objectives of the new pensions regulator, which has wider-reaching powers than its predecessor, is to minimise the risk of claims on the Pension Protection Fund – the new safety net which will provide limited benefits for members whose employer has become insolvent and whose scheme is underfunded.

Notifiable events

One of the ways in which the Regulator will attempt to limit the risk of claims on the Pension Protection Fund (PPF) is through “notifiable events”. The Regulator wants employers and trustees to provide an early warning of possible employer insolvency or scheme underfunding, and give it the opportunity to assist or intervene before a call is made on the PPF. Failure to comply may result in fines.

Since 6 April 2005 companies with occupational pension schemes that provide any final salary benefits and which were not in wind up before that date must provide the Regulator with details of:

  • a decision that may result in a debt to the pension scheme not being paid in full
  • a decision by the company to cease to carry on business in the United Kingdom
  • any wrongful trading
  • a conviction of a director for an offence involving dishonesty

There is the same obligation if there is:

  • any breach of a banking covenant except where the bank agrees not to enforce it
  • a change in the company’s credit rating
  • a decision by a controlling company to relinquish control of the employer company
  • two or more changes in the CEO or director responsible for the company’s financial affairs in the last 12 months

but not if:

  • the pension scheme is fully funded (on a prescribed basis) and
  • the trustees have not had to make a report in relation to a failure by the employer to pay contributions to the pension scheme in the last 12 months and
  • in the case of a change in credit rating, the change is other than from investment to sub-investment grade where the credit rating is provided by a recognised credit rating agency.

Information must be provided “as soon as reasonably practicable” – which will depend on the circumstances, but is likely to mean days: the draft guidance referred to “within five days”, which was dropped from the final version but shows the Regulator’s expectations.

There are separate reporting requirements for trustees.

Moral hazard and clearance

The Regulator will also be invoking the “moral hazard” provisions (discussed in the February 2005 edition of Clearly Corporate) to minimise the risk of claims on the PPF.

Where the Regulator decides that certain activities by companies (or their associates or connected persons) are aimed at avoiding a pensions debt, or making a debt less likely to be recovered, it can impose fairly onerous obligations under the Pensions Act 2004 to make good the debt – not just on the company, but also, potentially, on group companies or shareholders. Not all corporate transactions will be caught, and companies can seek clearance from the Regulator that their proposals will not trigger these obligations (but there is currently no requirement to seek clearance).

The Regulator has issued guidance on the sort of activities that may require clearance, including:

  • granting a fixed or floating charge that affects more than 25% of the assets of the employer or group
  • a return of capital (including dividends, share buy backs and distributions in specie) that, over a year, is “large or unusual” or leaves the employer with negative distributable reserves
  • a change in the group structure of the company.

The Regulator expects clearance to be sought only in relation to events that might be financially detrimental to an underfunded occupational pension scheme in its capacity as an unsecured creditor of the employer.

The guidance emphasises that trustees need to negotiate with the employer to obtain the best outcome possible for the pension scheme, and, where possible, improve its position in relation to other creditors. The Regulator says that, in order to do this,

“trustees need to understand the sponsoring employer’s financial position and the strength of its commitment to the funding of the scheme. They should monitor corporate activity and seek the employer’s agreement to be given information at an early stage subject to the usual restrictions such as those on handling price-sensitive information. Employers with a pension scheme should recognise that it is in their best interest to have properly informed, knowledgeable and competent trustees. They should provide the trustees with information on their financial position and future plans”.

The Regulator recognises the need for confidentiality agreements where companies give trustees this level of information, and indicates that it may take action against trustees who are in breach of such agreements.

The guidance also touches on the issue of conflicts of interest: where, for example, an individual is both a trustee and the company’s finance director. The Regulator expects a trustee who could be involved in both sides of a negotiation to “ensure that the trustees have the appropriate information on a timely basis and to draw his fellow trustees’ attention to the potential conflict and to absent himself from trustee meetings when the issue is discussed and to play no part in decision making”.

Changing practice

In future, companies with occupational pension schemes will constantly need to bear in mind the requirements and powers of the Regulator, even in relation to activities that appear to have no direct bearing on their pension schemes. For some transactions, it will be necessary to involve pension scheme trustees at a much earlier stage of discussions.