The new requirements require engagement with the trustees and the Pensions Regulator from an early stage and a raft of new information powers and financial penalties and offences should make this a governance focus for groups that have UK defined benefit schemes.

Who should read this?

Anyone dealing with a group that includes the sponsor of a UK defined benefit pension scheme.

Changes to notifiable events

The current notifiable events regime introduced by the Pensions Act 2004 requires trustees and employers sponsoring defined benefit pension schemes to notify the Pensions Regulator of certain events when they occur or a decision is taken, including a change of control of the employer. This is understood as when a final decision is taken, i.e. at signing. The new regime will require notification before negotiations begin.

The draft regulations will:

• remove the duty to notify where the employer has been trading wrongfully;
• replace the existing duty to notify a decision to relinquish control with a duty to notify a “decision in principle” by a controlling company to relinquish control of the employer or an offer to acquire control of the employer;
• insert a new duty to notify a “decision in principle” by an employer to sell a “material proportion” of its business or assets; and
• insert a new duty to notify a “decision in principle” by an employer to grant or extend prior ranking “relevant security”.

A “decision in principle” is defined as “a decision prior to any negotiations or agreements being entered into with another party”. The consultation paper states that a decision in principle will generally be made at “… the point at which the employer has made a decision to go ahead (for example, to sell the asset)… ” and prior to negotiating specific terms or drawing up a contract.

When a “decision in principle” is made will need careful consideration so as to ensure compliance with the revised notifiable events regime. The objective of requiring early notification of key corporate events is to facilitate regulatory and trustee involvement during negotiations which is a significant change.

For the sale of a material proportion of an employer’s business or assets, a “material proportion” is defined as assets representing 25% of annual revenue or 25% of gross asset value by reference to the employer’s latest annual accounts. This has the merit of being a clear test. Original proposals to limit this notification to employers who have funding responsibility for 20% of scheme liabilities have now been dropped.

“Relevant security” is security granted or extended by the employer, or a subsidiary comprising more than 25% of either the employer’s consolidated revenue or gross assets, which has prior ranking over the pension scheme. It includes fixed and floating charges over the assets of the employer or wider employer group and all asset floating charges which give the charge holder the right to appoint an administrator. 

Detailed and sustained reporting

The new provisions will require further notices to be given to the Pensions Regulator and the trustees in relation to these events (other than an offer to acquire control) when “the main terms have been proposed” and thereafter when material changes are made or a decision is taken not to proceed.  Careful judgment will be needed to determine in each case as to when the “main terms” have been “proposed”.

The duty is extended to persons who are connected with or associates of the employer, i.e. including shareholders and group companies and the directors of the employer and any others, such as lenders, that employ a director of the employer.

The notification has to include an “accompanying statement” covering the details of the event, its main terms, any adverse effects on the pension scheme, steps taken to mitigate those adverse effects and communications with the trustees. This will need to be shared with the trustees at the same time.

Typically, an earlier notification will have been made at the “decision in principle” stage, assuming the main terms will not be proposed until after negotiations. The need to include analysis of the impact on the scheme and any appropriate mitigation will require legal, actuarial and covenant advice.

The concept assumes the main terms will not be proposed, let alone agreed, until there has been engagement with the trustees and steps to mitigate the impact on the scheme have been included.

Sanctions for failure to comply

Penalties for failing to comply are increased to a maximum £1 million fine. Any individual or corporate that is associated or connected with the employer is responsible and potentially liable in respect of the notification of main terms and the accompanying statement. Any director, manager or company secretary of a shareholder or other associated corporate who has “connived” in the failure or whose consent was required may also be liable.

Providing false or misleading information is an offence punishable by up to 2 years imprisonment and/or a criminal fine. Alternatively, the Pensions Regulator may directly impose a financial penalty of up to £1million on anyone it finds has knowingly or recklessly provided false or misleading information either to the Pensions Regulator or the trustees.

These provisions are supported by extensive information gathering powers, including the ability to carry out dawn raids or compel any person to come for interview if they are thought to have relevant information about the employer’s business or a change of control.

What next?

The provisions are out for consultation until 27 October 2021 and not yet in force. It is likely that the Pensions Regulator will provide guidance which may clarify its approach to determining the point in time when a “decision in principle” is made and when “the main terms are proposed”.

In the meantime, corporate groups with defined benefit pension schemes should prepare to be able to identify and notify relevant corporate activity and consider how to manage notifications to ensure they are complete and accurate and made at the right time.