The Government is consulting on draft regulations which propose to:
- significantly widen the types of corporate activity that must be notified to the Pensions Regulator (tPR); and
- bring forward the timing of the notification to when a decision in principle to pursue a course of action is made rather than, as is currently the case, its completion).
Under the proposals, the new requirements would come into force in April 2022. They apply to defined benefit pension schemes only.
Two new notifiable events are proposed:
- a decision in principle by a scheme employer to sell a "material proportion" (broadly 25%) of its business or assets; and
- a decision in principle by a scheme employer to grant or extend a "relevant security" (broadly security comprising more than 25% of either the employer's consolidated revenues or gross assets) if the security would have priority over the pension scheme. This is on a cumulative basis and could impact on a series of re-financings.
These new events would be in addition to the existing requirement for a controlling company to notify any decision to relinquish control of an employer (i.e. selling the shares in company participating in a defined benefit scheme). The accelerated notification requirements would apply to all three events.
The proposals state that tPR and the trustees must be provided with the following information in an "accompanying statement":
- the main terms proposed;
- potential adverse effects of the transaction on the scheme, and any steps to mitigate the adverse effects; and
- any communication with the trustees.
Subsequent material changes will also need to be notified to tPR and the trustees.
Penalties for non-compliance
Changes already in force under the Pension Schemes Act 2021 will increase the maximum financial penalty for non-compliance with the notifiable events requirements to £1 million. This is part of the wider expansion of tPR's powers effective from 01 October which you can read about here. This applies to the existing notifiable events regime from 1 October even though the changes to the new regime will not come into force until next year.
The industry's view is that it is likely that the proposals will become law and that any changes as a result of the consultation process will be minimal.
This will mean that there will be a significant increase in the number of notifications that entities sponsoring defined benefit schemes will need to make in relation to M&A activity and re-financings.
DWF has experience in advising corporate groups with defined benefit schemes on putting in place suitable procedures to ensure that notifications are made when required in order to avoid financial penalties and negative publicity. We can also assist in providing insight in relation to the likely response of trustees and tPR and the optimum approach to engaging with both parties.