TPR and The Pensions Act 2021 – how might trustee (and corporate) behaviour change?

17th November, 2021

  • The Pensions Act 2021 has some headline grabbing provisions so far as the powers of The Pensions Regulator (TPR) are concerned.  Many of these changes are either in force or due for 2022.  In practice, will it change behaviour and, if so, how?

    Clearly the prospect of finance directors being imprisoned for seven years for mistreating a pension scheme is the big news item and that will have an impact.  However, the wider scope for issuing a contribution notice (CN), and the expanded notifiable events (and increased fines for breach) will, in my view, make a much bigger difference in BAU practice.  Overall, trustees are going to need to be ready for much more engagement in corporate activity and are going to need the experience, organisation and resources to thrive in that arena.

    Lower bar

    Many more situations have been brought into the scope of a possible CN.  The new tests of employer resources and theoretical insolvency recoveries are likely to be met for a lot of normal business activities – including share buy-backs and dividends.  That, I think, was the point of the changes – to avoid the debate over whether an action will cause material detriment to scheme benefits and move straight to the question of whether the defences apply and whether it is reasonable for TPR to act.  So, TPR will have many more opportunities to flex its muscles and, by extension, that means trustees will likely have a seat at the table more often.  It is unsurprising that sponsors are asking whether this will inhibit legitimate corporate activity, but it need not unduly do so if all parties are sensible. Early engagement with trustees will be key, but it will also be down to trustees to ensure that they are able to get to grips with what is being proposed quickly and be nimble in their decision making.  Trustees with experience and good relationships with TPR will be sought out.

    In practice, I suspect there will remain a focus on the benefits test and the concept of covenant leakage – so dividends are going to be in the firing line.  There will also likely remain a focus on the trustees’ place in the insolvency pecking order.  Any granting of security to a bank, and not the trustees, is going to need very careful thought and consideration of whether to provide mitigation.  None of this is new to the well run schemes, so the behaviour of trustees is unlikely to change much.  The difference will be for TPR in terms of the work they will need to do to get a CN case off the ground. 

    Notifiable events/statements

    The proposed new notifiable events, and the penalties for failure to report them to TPR, are going to have the most material impact on corporate behaviour and their engagement with trustees.  These new notifications deal with two basic topics – M&A and granting security.  For M&A to be notifiable, the deal must sell 25% of the business/assets.  For security, the result must be that the scheme ends up below the person taking the security in the insolvency pecking order.  However, because these events currently relate to all employers (not just employers with a sizeable liability to the scheme), these tests are likely to be met pretty often and TPR might have concerns about the number of notifications it may receive.

    The nature of the tests for when a notification has to be made should generate earlier engagement with trustees.  The initial notifiable event will occur when a ‘decision in principle’ to sell or grant security is made.  This is a tough thing to define and, because there is a further notification needed when ‘the main terms have been proposed’, it feels like the decision in principle would naturally be interpreted as occurring pretty early in the process.  In the context of M&A, it may well occur when there are a number of potential purchasers and, in large organisations, perhaps before the Group Board is even aware of the proposal to sell a small subsidiary.  And given the £1m fine for breach, it’s highly likely that a cautious approach will be taken.

    This is likely to mean that trustees are informed about M&A and banking transactions at the early stages. This is to be welcomed – many trustees have experienced being told about a transaction after (or perhaps immediately before) it happens, by which time it is too late to discuss mitigation.  However, trustees will need to be mindful of the fact that this early engagement means that the transactions they’re notified of could easily change materially, or even fail, and there will need to be a degree of restraint and judgement on timing exercised.  Communication with the corporate will be key to making sure the trustees’ efforts are directed in the appropriate areas at the right time.

    Threats to trustees themselves

    Whilst my view is that the criminal penalties are likely to be sparsely used, that does not necessarily mean they won’t have a material impact.  As TPR recognises in its overlapping powers policy, Proposed approach to our new powers its primary aim should be to recover money to help the scheme.  However, there is a role for deterrence and, having been given these powers, TPR will have to think about (and be seen to be thinking about) exercising them from time to time.  The real impact on trustees here is that they can be in the firing line.  Many have suggested that this is likely to further the move away from lay trustees and towards professionals and I can see a real exodus of MNTs happening (or at least a reluctance for MNTs to put themselves forward).  It is also likely to put off a lot of the smaller ‘one man band’ professionals, who won’t have the same resources or governance processes behind them.  That said, the evidential proof for criminal guilt is “beyond reasonable doubt” – this is a high bar for good faith actors.

    In the end this means a greater focus on audit trail.  A material part of the criminal offences deals with the potential defendant’s state of mind and also whether there was a reasonable excuse. So it’s likely that lots of time will be spent ensuring that those two things are abundantly clear in the paper trail.  

    Overall, the 2021 Act is going to see trustees of defined benefit schemes involved much earlier, and more often, in corporate activity.  Experience, organisation and the ability to flex resources to meet the demand are going to be paramount.  

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    • Published byAmanda Banister

      Amanda is a Senior Professional Trustee. Her legal background gives her a strong governance and risk management skillset and an ability to solve testing problems. She has worked in a range of scenarios, including scheme mergers, innovative funding solutions (such...

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