Legal Q&A: New pensions changes

The spate of new guidance from the Pensions Regulator and its extra powers to protect people whose company pension scheme is involved in a buy-out have been more of a downpour than an April shower. The Pensions Regulator will gain additional powers to make sure companies that buy other businesses and their pension schemes put enough money in to protect members’ interests. How should HR teams approach the changes?

Q The Pensions Regulator has been issuing guidance for years – are these changes much the same?

A The themes are familiar – protecting members and reducing calls on the Pension Protection Fund – but the regulator has evolved into a bolder organisation that is determined to regulate by broad principles rather than detailed rules. The new guidance reflects this – making it, some say, more uncertain how employers should act. But the regulator stresses that it does not mean to impose a heavier burden on employers, and says it will be practical and commercial in the way it applies its principles.

Q What are the new powers?

A There are some far-reaching new powers, such as the extension to the regulator’s right to make one employer pay the pensions debt of an associated and connected body by issuing a contribution notice. An eight-week consultation on the new powers is under way.

Q Contribution notices have been around for a long time, haven’t they?

A Yes, but so far the regulator has not issued any. This is partly because of the tight conditions that have to be met. However, the new proposals make it easier to issue a notice:

  • Until now, the regulator had to show that the employer intended to avoid a debt to the pension scheme. From now on, there will be no need to show intent it will be enough that the effect of the employer’s conduct was “materially detrimental” to the scheme’s ability to pay members’ benefits.
  • The defence of acting in good faith will no longer be available.
  • Contribution notices could be issued on the basis of an employer’s course of conduct over time, not just in relation to an individual act.
  • The new powers will be backdated.

Q If the consultation is still taking place, are these pensions proposals law or not?

A Although parliament has not passed the proposals yet, the plan is that they will be retrospective, and will take effect from 14 April 2008. Also, where a contribution notice is based on a course of conduct, the regulator will be able to look back as far as 2004. Retrospective legislation is rare, but the government is concerned that otherwise people might act now to avoid the new law while it is being finalised.

Q Aren’t the changes worryingly wide-ranging?

A The changes widen the power to issue a contribution notice significantly. In principle, they could catch a lot of ordinary corporate activity, such as selling a business. But the regulator has tried to comfort employers by saying it intends to use its new powers only in cases where there is an attempt to separate a scheme from its sponsoring employer, or from the employer’s asset base. Typically, these would be where a terminating scheme is to be run for profit, rather than being transferred to an insurance company. The regulator’s target circumstances are one subject of the consultation.

Q Are there any other proposed changes (other than those made to contribution notices)?

A There are further proposed changes, including plans to widen the regulator’s power to appoint trustees to cases where it is in the general interests of scheme members. In addition, the threshold for appointing new trustees will be lowered from where it is “necessary”, to where it is “reasonable” to do so.

Q What do the changes mean for HR?

A The proposals represent a considerable extension to the regulator’s powers. However, it is some comfort to employers that the regulator has said it plans only to use the powers in narrowly defined circumstances. Beyond that, the main constraint on the regulator is that it can only use its powers where it is reasonable to do so. It will generally help HR staff to have sound commercial reasons (unrelated to avoiding the pension debt or associated detriment) for what they are doing, and for those reasons to be clearly evidenced (eg, in the minutes of planning meetings).

Clive Pugh, parnter, Burges Salmon

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