Pension Schemes Bill reintroduced paving way for new criminal and civil sanctions aimed at directors of DB sponsors

The post below was first published on our Pensions blog

The Pension Schemes Bill was reintroduced in the House of Lords by the Government yesterday. As expected, the new Bill contains the same measures set out in the previous version of the Bill that was introduced last October, prior to the general election. This includes measures that will introduce:

• new criminal offences and civil sanctions (including fines of up to £1 million) aimed at directors and others who, broadly, take action which is deemed to be materially detrimental to a defined benefit (DB) scheme
• new and extended powers for the Pensions Regulator
• new funding requirements for DB schemes, including a requirement to set a long term funding and investment target
• legislation to enable the creation of collective money purchase schemes, and
• legislation to facilitate the creation of online pension dashboards.

To find out more about the impact of the proposed new criminal, civil and regulatory sanctions and the proposed new funding requirements read our previous blogs:

• Pension Schemes Bill (Part 1): Directors, banks and investors put on notice as new criminal sanctions and regulatory powers are significantly wider than expected
• Pension Schemes Bill (Part 2): New funding requirements likely to increase funding demands on DB scheme sponsors

A few things change, but most things stay the same

The text of the new Bill is almost identical to the previous version. However, the DWP has taken the opportunity to make a number of changes, most of which are minor tweaks to improve the drafting and to rectify drafting errors identified in the previous version. However, a few of the changes represent more substantive amendments to the legislation.

For example, in the context of the proposed new powers for the Pensions Regulator:

(i) changes have been made to the conditions that must be met in order for an individual to benefit from the statutory defence (under new section 38D (statutory defence to a contribution notice that might otherwise be issued as a result of the new employer insolvency test being met)) - these changes may make the defence less readily available where a failure to act persists for a long period of time, and

(ii) a change has been made to the definition of "relevant time" under new section 38E which removes the discretion for the Regulator to determine the date by reference to which a scheme's section 75 debt should be estimated where there is an act or failure to act which forms part of a series of events and which may be deemed to have materially reduced the value of the resources of an employer relative to the value of its estimated section 75 debt.

Missed opportunity

Unfortunately, the DWP has not taken the opportunity to address all of the issues identified with the previous version of the Bill. In particular, the proposed new employer resources test under new section 38E has not been amended despite the fact that, as currently drafted, it appears to produce some perverse outcomes.

As drafted, new section 38E provides that the employer resources test is met in relation to an act or failure to act if the Regulator is of the opinion that:

• an act or failure reduced the value of the resources of an employer, and
• that reduction was a material reduction relative to the amount of [that employer's] estimated section 75 debt in relation to its DB scheme.

The way that this provision is currently drafted would mean that when assessing whether this test is met, the Regulator would need to compare the amount by which the value of an employer's resources has been reduced with the amount of the employer's estimated section 75 debt and, if the reduction is material relative to the amount of the section 75 debt, the test would be met. This means that the test is more likely to be met where, for example, an employer which has net assets of say £200m pays a special dividend of £10m, where the value of that employer's estimated section 75 debt to its DB scheme is £1m, on the basis the £10m is a material sum relative to the value of the section 75 debt (of £1m). In contrast, the test is less likely to be met if the same employer paid a special dividend of £10m at a time when the value of its estimated section 75 debt to its DB scheme was, say, £100m on the basis that £10m is less likely to be considered to be material relative to the value of the section 75 debt (which is now £100m).

This seems to be a perverse outcome given that in both scenarios the reduction in the value of the employer's resources is the same and in the second scenario the scheme is in much greater need of employer support than in the first scenario. This also means that an employer with a larger deficit in its scheme is less likely to be the target of a contribution notice under this new test than an employer with a smaller deficit in a scenario where both entities experience a similar reduction in value.

We presume that this is not the policy intention. Therefore, we would expect this point to be addressed as the Bill proceeds through Parliament.

Next steps

The Pension Schemes Bill will now make its way through Parliament and we can expect some provisions to be amended as it proceeds. However, the overall direction of travel is clear.

Although it is not possible to predict precisely when the various measures contained in the Bill will come into force, it seems likely that the new criminal and civil sanctions and the new and extended regulatory powers will be introduced at the earliest opportunity. This means that they may well be in force by the end of this year. Consequently, directors of companies that sponsor DB schemes, as well as investors, banks and other financial institutions connected with such companies, need to understand these new measures and consider how they may impact corporate activity. Trustees of DB schemes also need to be familiar with this new regulatory regime.

Sponsors and trustees also need to consider the potential impact of the new scheme funding requirements on future valuations and the scheme's short term and longer term funding arrangements. This will be further informed by the first of a two part consultation on the new funding Code of practice for DB schemes which the Pensions Regulator is due to launch shortly.

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