The Pensions Regulator’s powers are being extended to enable the Regulator to respond more effectively to the emergence of new business models (including alternatives to traditional buyout structures) that may impact on the security of members’ benefits. One of the reasons for extending the Regulator’s powers in this area was the recognition that it may not be within the trustees’ power to address risks resulting from these models.
‘Material detriment’ test
The Regulator’s powers will be extended so that contribution notices may be issued on employers or other group companies if they are a party to an act or failure to act that has a ‘materially detrimental effect’ on the likelihood of members receiving their benefits. Although this provision is not yet in force, the test will apply retrospectively quite soon (no date is yet known). Concern has naturally been expressed by employers given uncertainties associated with the proposed test and, in particular, its retrospective effect.
Code of Practice
The Regulator issued a draft Code of Practice for consultation in December 2008 in respect of the ‘material detriment’ test. This sets out the proposed circumstances in which the Regulator expects to issue contribution notices as a result of the ‘material detriment’ test being satisfied.
These circumstances are any of the following:
- The transfer of the scheme out of the jurisdiction of the UK.
- The transfer of the sponsoring employer out of the jurisdiction of the UK, if by doing so there is a material reduction in the level of employer support or legal and regulatory protection for scheme members.
- The severing of employer support for the scheme so that such support is removed, substantially reduced or becomes nominal.
- The transfer of liabilities of the scheme to another scheme or arrangement that does not have sufficient employer support or is not sufficiently funded.
- A business model or the operation of the scheme in a way that is designed to create a financial benefit for the employer or some other person from the scheme, but where inadequate account has been taken of the interests of the members of the scheme, including where risks to members are increased.
The consultation period in respect of the Code of Practice ended in February. A formal response from the Regulator in respect of such consultation is expected in due course. The test will come into force when the Code of Practice is formally published (this is expected to be in June or July 2009).
A statutory defence
If it can be shown that it was reasonable to conclude at the time that the act or failure to act would not be materially detrimental to the security of members’ accrued benefits, it will be possible to take advantage of a statutory defence to a contribution notice being issued on ‘material detriment’ grounds.
Showing that it was reasonable to reach such a conclusion will require a formal assessment of the risks involved and, potentially, steps taken to mitigate any possible detriment arising.
Impact on employers
The five circumstances set out in the draft Code of Practice do not necessarily provide comfort. Their general nature could mean that activity such as scheme mergers, enhanced transfer-value exercises, dividend payments and the granting of security by the employer to a third party may be caught.
The Regulator has stressed throughout that the changes to its contribution notice power are expected to impact on only a small number of schemes where pension liabilities are being actively avoided or put at ‘unacceptable risk’. It has also stated that the powers must be used ‘reasonably’ and there is no intention to hamper appropriate market activity.
While this may well prove to be the case, it is likely that the uncertainties associated with the test and its retrospective effect will still have an impact on corporate activity in practice. For example, actions may have already been taken since April 2008 that could be seen, potentially, to fall foul of the material detriment test.
Conclusion
Notwithstanding the circumstances set out in the Code of Practice and the intention not to hamper corporate activity, the terms of the ‘material detriment’ test and the statutory defence are likely to mean that companies will have to build in extra time (and potentially cost) for a project to address the issue and determine whether consultation with the trustees and a clearance application to the Regulator is required.
By Catherine Parker, solicitor, Eversheds LLP.
E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .