Risk & Economy » Regulation » The implications of pensions white paper

Businesses that have defined benefit pension schemes are long used to regulation. Ever since the Maxwell scandal, nearly 30 years ago, successive governments have dealt with the political fallout by passing yet more regulation around schemes and their employers, promising to ensure that businesses “do right by their pensioners”.

The problem is that doing right by pensioners is a vague concept. Recent scandals have not, despite the accusations raised by some, suggested that anyone has been a 21st Century Maxwell, stealing from the pension scheme. However, a nebulous feeling remains for many that, if a business is wound up and employees don’t get their full pension, someone is to blame.

The last election, in the wake of the insolvency of BHS, saw a wave of manifesto promises across the board on this subject, but no material action. However, the issues appears to have reignited in the light of the Carillion collapse at the beginning of 2018. The white paper, entitled “Protecting Defined Benefit Pension Schemes” was published on 19 March and focused particularly on penalising businesses which do not give sufficient attention to their pension schemes.

Businesses could argue, with a lot of justification, that they have plenty of regulation in place to ensure that they give sufficient attention to their pensions. As well as regulations on the funding of pensions, which have passed a good deal of power from the company to the trustees and the Pensions Regulator, businesses are very aware of the Pensions Regulator’s powers to “pierce the corporate veil” and impose pension liabilities on group companies and directors using contribution notices, particularly where their actions have had a “materially detrimental” effect on the pension scheme security. Most directors would agree that this has affected behaviour – a group of companies may take a risk, but no director wants to be personally liable to the pension scheme because of a board decision.

So, what does the white paper suggest?

The white paper proposes an “extension” to the contribution notice regime, to allow the Regulator to issue punitive fines where “irresponsible behaviour” has affected scheme funding. The paper acknowledges that this is a work in progress, but the idea may well involve extending the use of contribution notices to circumstances where the materially detrimental test isn’t met.

More widely publicised has been the proposal for a criminal offence for “wilful or reckless behaviour” in relation to pension scheme liabilities. Although the concept of criminal offences is often frightening, in practice the higher legal burden of proof for criminal charges means that this is unlikely to be more than a threat in most circumstances.

The white paper also proposes further obligations in relation to any “transaction”. This includes an obligation to notify the Pensions Regulator of any transaction, and an obligation to declare in advance the effect of the transaction on the pension scheme. The idea of this is to keep the pension scheme in the minds of directors in any transaction, and to flag any concerns to the Regulator as early as possible.

Of course, the draft does not say what a “transaction” is – at present the regime already requires an employer to notify the Pensions Regulator of any proposed change of control, so “transaction” is clearly expected to be wider than a share sale. The concept could be extremely wide, covering all sorts of corporate activities from a capital reduction to a refinancing, possibly extending to inter group financing or even contractual arrangements.

How will this change corporate transactions?

Inevitably, and at least to begin with, boards are going to be more nervous of any transaction that involves a company with a defined benefit pension. A lot of public criticism of businesses about their pension arrangements has the benefit of hindsight, and it is not always possible to understand how actions might be viewed in the future. This uncertainty can often paralyse business decisions.

Of course, businesses will find a way through, but this will require very early assessment of pension liabilities. No doubt there will be a much greater use of clearance from the Pensions Regulator and reliance on advice from professionals that the board complies with its obligations, but it will be difficult to have complete certainty. Inevitably, the effect will be that transactions involving pension schemes will become less popular, and doing business with someone who has a defined benefit pension scheme much less attractive.

Of course the devil is in the detail and the white paper is very short on details on these issues. Any legislation needed to bring in these changes is not expected until after Brexit, so in one sense we have some time to go before we grapple with these issues. However, the white paper makes it clear that the new powers may well operate retrospectively to the date of the white paper, meaning that businesses need to be aware of these issues now, even whilst the detail is some time off.

Where does this leave businesses?

Once again, businesses are caught with a great deal of uncertainty caused by further pensions regulation. The lack of clarity will make commercial life for employers of defined benefit pension schemes, and those that do business with them, tougher than ever.