Earlier in September, the Government published a consultation1 on revisions to the ‘early warning’ notifiable events regime. This is the regime, introduced in 2005, whereby certain parties – broadly the trustees and sponsor(s) of UK defined benefit plans – are required to notify the Pensions Regulator (TPR) of prescribed events that might give rise to concerns as to the ongoing viability of the plan. Amongst other things, the Pension Schemes Act 2021 extends the scope of who is required to notify to include, where appropriate, decision-makers in the wider group of companies associated with the sponsor – eg a parent company.
This note summarises the existing and proposed2 regime. It is important for clients – particularly those in complex group structures, including where there are non-UK domiciled corporates – to discuss this with their legal advisers as Willis Towers Watson is unable to give legal advice or comment authoritatively on the jurisdictional reach of the UK Regulator. Coupled with powers for TPR to impose significant financial penalties3 for failing to comply with this duty (or deliberately providing false or misleading information), it is important that decision-makers take these new duties seriously.
Most of the events that have to be reported are set out in a single set of existing UK regulations4, supplemented by guidance5 from TPR. However, the Government has also added some specific notifiable events through other regulation – for example where a Flexible Apportionment Arrangement is considered instead of a default ‘section 75’ (or ‘employer’) debt. They are broken down into events where the trustees are required to report and those where the employer has to do so (see table below).
| Employer notifiable events | Trustee notifiable events |
|---|---|
| Compromising a debt: Any decision which will or is intended to reduce a debt due to the plan | Compromising a debt: Any decision which will or is intended to reduce a debt due to the plan*. |
| Ceasing business in the UK | Considering use of a ‘scheme apportionment arrangement’ or ‘flexible apportionment arrangement’ on or after the date of the employer debt calculation. |
| Wrongful trading (as defined under Section 214 of the Insolvency Act 1986), or circumstances where a director or former director knows that there is no reasonable prospect that the company will avoid insolvency** | Large transfers (individual or bulk): A decision to or the making or acceptance of a transfer payment which is more than the lower of 5% of the plan’s asset value and £1.5 million***. |
| Breach of bank covenant (except where the bank agrees not to enforce the covenant)*** | Granting benefits on more favourable terms than provided for by the plan rules, without either advice from the actuary or such additional funding as is advised by the actuary. |
| A decision by a controlling company to relinquish control of it*** Conviction of a director or partner for dishonesty |
Granting high benefits: A decision to grant or payment of benefits the value of which is more than the lower of 5% of the plan’s asset value and £1.5 million***. |
| * This event is not notifiable if the conditions at *** below are met and, in addition, the debt that is not collected is less than 0.5% of the plan’s assets. By contrast, please note that a sponsor decision to compromise a debt always has to be notified. ** The Government proposes to remove this requirement as it has, in practice, never been used. *** These events are not notifiable if the plan was more than 100% funded on the PPF basis at the most recent valuation and the trustees have not needed to report any non-payment of contributions to the Regulator in the previous 12 months. It is not clear whether this will be disapplied for the existing relinquishing control event. |
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The existing legislation defines the employer as “the employer of persons in the description of employment to which the (plan) in question relates”, although it can be broadened through regulations to, for example, include former employers. Therefore, in the context of the existing notifiable events regime, it is the sponsor(s) of the plan who is under the reporting duty.
However, the “decision to relinquish control” would, in the context of a group of entities, cover decisions affecting the control of the sponsor, which would be taken by a parent entity of the sponsor. Consequently, the Pension Schemes Act 2021 extends the notifying duty to those in the wider employment group who are associated or connected with the sponsor. Clients should confirm this view with their legal advisers to ascertain exactly who will be under the new, wider duty to notify.
In addition to far-reaching new powers, effective from 1 October 2021, for TPR to gather information and, where mischief is identified, take potentially punitive action, the Government is adding two new notifiable events:
The consultation document defines ‘material’ as concerning 25% or more of the gross assets or annual revenue stream by reference to the employer’s latest annual accounts. Events in the preceding 12 months must also be brought into account to prevent the ‘materiality’ test being manipulated through a series of smaller transactions that in aggregate would meet the materiality threshold. ‘Relevant security’ is also defined relative to the same 25% threshold and excludes the refinancing of existing debt.
The timing of the reporting (and copying to trustees) for these two new events and the existing change in control event is to be tied to when there is a ‘decision in principle’, which is defined as “prior to any negotiations or agreements being entered into with another party”. This may be significantly earlier than the triggers for events under the existing regime.
Once terms are known (but still prior to being agreed) there is a requirement to provide a follow up notice and “accompanying statement” to both TPR and the trustees of the plan. This statement must describe the event, any adverse effects on the plan or sponsor support, steps to mitigate those effects and any communications the decision-makers have had with the trustees. It is implicit in this that deal terms should not be agreed until there has been discussion with the trustees about any steps to mitigate the effect on the plan. Material changes to the terms, adverse effects or mitigation, also have to be notified as would any decision not to proceed with the transaction.
As indicated above, the existing legislation places the notifiable event duty for employer notifiable events (solely) on the sponsor to the plan. However, in large corporate groups it is possible that such decisions may well be made without the prior knowledge of the sponsor, let alone the plan trustees, and, for multi-national groups, outside of the UK.
With this in mind, the 2021 legislation extends the duty to notify to those connected or associated with the sponsor. Therefore, in advance of transactions that may affect the sponsor of a UK defined benefit plan or how that plan is supported, clients should discuss the new notifiable events requirements with their advisers (including legal advisers) and consider putting in place suitable processes for identifying such events and subsequently communicating with UK stakeholders, including TPR; with clear lines of communication and robust governance frameworks, proper documentation processes, and potentially also reviewing current non-disclosure agreements.
1. DWP consultation – Strengthening The Pensions Regulator’s Powers: Notifiable Events (Amendments) Regulations 2021.
2. The measures are extended by the Pension Schemes Act 2021.
3. A fine of up to £1 million.
4. The Pension Regulator (Notifiable Events) Regulations SI2005/900 (as amended).
5. See TPR’s ‘summary table of notifiable events’.
