DWP consults on rules to protect schemes in corporate activity
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The Department for Work and Pensions is consulting on regulations to implement the new notifiable events regime, which prescribes which corporate events need to be reported to the Pensions Regulator, making some changes to the original proposals.
Notifiable events are those corporate transactions which could potentially harm a pension scheme – for example, increasing the chances of the employer becoming insolvent or impacting on the employer covenant. In the wake of the BHS scandal, the government saw a need to strengthen the notifiable events regime, among others asking companies to tell trustees and the Pensions Regulator sooner whether they are planning a transaction, introducing the concept of a ‘decision in principle’.
The new powers for TPR are contained in the Pension Schemes Act 2021. The consultation will implement the new notifiable events regime by amending regulations.
DWP drops 20% liability threshold for employers
The consultation, which runs until 27 October, means an event will now be notifiable if it is the sale of a material proportion of the business or assets of a scheme employer and where a security is granted on a debt to give it priority over debt to the scheme.
Additionally, the government will remove the existing notifiable event of wrongful trading as it says it is unlikely someone would report their own wrongful trading.
The government had originally proposed to limit the application of the first test – sale of a material proportion of the business or assets – to employers which have funding responsibility for at least 20% of the scheme’s liabilities in the case of multi-employer schemes, but it has now dropped this test in the new consultation.
The intention of the 20% threshold “was to prevent unnecessary work for employers, schemes and The Pensions Regulator by not requiring the notification and statement where there was little likelihood of the transaction having a significant effect of the employer’s ability to support the scheme”, the DWP explained.
However, it has now concluded that there are circumstances where it would be challenging for some schemes and employers to establish whether a particular threshold of liabilities had been met, putting significant extra work on employers.
“The possibility that scheme trustees would be put under significant pressure and expense to try and establish in a short time whether the liability threshold had been met is also a factor to be considered,” it added.
Will companies adapt to the ‘decision in principle’ requirement?
Employers and some pension professionals have criticised the new regime for requiring early notification of what can be uncertain events and delicate negotiations.
Mike Smedley, a partner at consulting firm Isio, said: “Company boards and deal-makers will struggle with the 'decision in principle' concept as the Regulator’s new early warning system. There is a big difference between exploring a potential sale and a final decision, and it’s very difficult to know when the Regulator expects to be notified.”
He said the requirement to discuss any material deal with the trustees is already best practice where the pension scheme is significant but will be more of a challenge in complex deals or for multi-national groups with small UK pension schemes.
“There also appears to be a loophole for listed company bids. These deals are ultimately between a purchaser and the shareholders, and there is often no controlling company which would fall within the new rules,” said Smedley. “ By definition these deals are in the public domain, so it may not be a concern in practice – but it seems an odd gap in the legislation if some of the biggest deals are excluded.”