Pensions Regulator's new powers will focus the minds of corporate boards, says Herbert Smith Freehills

The Government has today published its response to the consultation on protecting defined benefit (DB) pension schemes and strengthening the Pensions Regulator.

In its response, the Government confirmed that it intends to:

• introduce a new criminal offence of wilful or reckless behaviour in relation to a pension scheme with a maximum sentence of seven years imprisonment, and
• give the Pensions Regulator the power to issue a new civil fine of up to £1 million in a range of circumstances including: for wilful or reckless behaviour in relation to a pension scheme; failure to comply with a contribution notice; or failure to comply with the notifiable events framework; or to issue a new Declaration of Intent when required.

Commenting on these new powers Michael Aherne, Senior Associate in the pensions team at Herbert Smith Freehills, said: "The Regulator is being granted its wish and being given significant new powers to regulate DB schemes. The introduction of a new criminal offence is a major step which will grab the headlines. However, the evidential burden required to establish wilful or reckless criminal behaviour may pose a significant challenge to the Regulator with its limited resources. For this reason, the new civil fines are likely to act as a more important deterrent in practice."

The Government has also confirmed that it will press ahead with its plans to:

• introduce a new requirement for companies to issue a Declaration of Intent to the trustees and the Regulator on corporate transactions setting out the nature of the proposed transaction and any detriment that may be caused to the scheme and how this will be mitigated, and
• extend the notifiable events framework to cover the sale of a material proportion of a business or assets of a scheme employer responsible for at least 20% of a scheme's liabilities (measured on a buyout basis) and the granting of security which has priority over the pension scheme.

He added: "The Declaration of Intent is unlikely to have a significant impact in practice. Most well advised sponsors would engage with their scheme's trustees prior to a major corporate transaction in any event. However, as with many of the proposals, the devil will be in the detail with several points, such as the content and timing of the Declaration of Intent being subject to further consideration and consultation. This lack of certainty is unhelpful but probably reflects the fact that the DWP, like the rest of Government, is preoccupied with Brexit.

"Ultimately, the new sanctions will focus the minds of corporate boards. They will also serve to make DB schemes even more unattractive to corporate sponsors, pushing more sponsors to look for an exit strategy, such as buying out their scheme or transferring it to one of the new DB consolidators."