New TPR powers could lead to upsurge in clearance applications

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The Pension Regulator’s (TPR) strengthened powers under the Pension Schemes Bill could lead to a revival of its clearance process, according to advisers and lawyers.

Several years ago, voluntary clearance was often used by corporates and private equity houses in corporate transactions such as mergers and acquisitions, following the introduction of rules over contribution notices (CNs) and financial support directions (FSDs). Clearance was a way of corporates knowing in advance of doing a deal whether TPR would come after them. 

The watchdog used to receive on average 200 applications per year between 2005 and 2007, but numbers gradually dwindled to just around a handful each year by 2019.

According to Sackers partner Ian Pittaway, the reduced reliance on clearance is partly because the regulator insisted on a box being ticked to say the trustee supported the clearance application, which gave the trustees enormous negotiating leverage.

He explained: "Trustees used their leverage to get a deal, getting corporates to be more generous to the pension scheme than they would otherwise have liked. Corporate advisers, corporate actuaries, corporate lawyers, and investment bankers then realised that this was actually quite an expensive insurance premium.

"So, many decided not to take a chance on applying for clearance, because the downside was the trustee would extract a big price for their consent. And also, even if clearance wasn't granted, there was every chance the regulator wouldn't do anything about it."

But Pittaway believes that now faced with stronger TPR powers under the Pension Schemes Bill, which introduces criminal and civil offences for pension funding negligence, boards and individuals may once again turn to the clearance process when undertaking corporate transactions.

He said: "The regulator's powers are incredibly wide under the Pension Schemes Bill, with an individual being liable for doing an act, or engaging in a course of conduct, including a failure to act, that detrimentally affects, in a material way, the likelihood of accrued scheme benefits being received.

"In a corporate transaction, directors [will likely] seek advice on how they can be sure that the regulator is not going to say that they've done something which is going to materially affect the likelihood of the benefits. I think the only answer those corporate advisers will be able to give is, ‘if you really want to be safe, you need to go to the regulator and get advance clearance'."

He thinks this might lead to a "revival" of the clearance process. "That might only be for a period while people get comfortable [with the new rules], but I suspect that for a period, we will have a lot of people being cautious."

Lincoln Pensions director Luke Hartley agreed that an increase in clearance is "highly likely", especially coupled with the expectation of increased corporate activities and restructurings as the UK comes out of lockdown.

"We're almost back to square one in terms of the practical application of the new regulator's powers, how they will use them, and the kind of mitigation they would expect to see for their new strengthened powers. And of course, there's currently no guidance on when TPR may expect to use them - an example being the criminal sanctions which need a reasonable excuse. Clearance buys you insurance or certainty over the regulator's future action."

However, the regulator has indicated it will give guidance on its new powers.

DLA Piper pensions partner Joel Eytle said there will be people who will err on the side of caution, and therefore think clearance is the best way to make sure that they are outside of the scope of these powers. While he believes clearance applications will increase, he does not think it will go back up to the same high level as it was years ago.

"I think now, people have experience of how the regulator works, and now understand that if they do all of the things that the legislation says they need to do, then they don't need to go for clearance," he said.

A TPR spokesperson said: "It is not possible to provide clearance in respect of the potential use of our new criminal powers. Nevertheless, we do appreciate that the changes to our anti-avoidance powers may lead to an increase in the volume of clearance applications in relation to the potential use of our CN and FSD powers."

The regulator will need to be sufficiently well resourced and appropriately pragmatic to be able to process clearance applications quickly, said Hartley.

"If we can't do that, then we run the risk of either clearance gumming up the process, or people not doing deals because they can't get clearance and the level of certainty that they want to get," he added.

The TPR spokesperson said the workforce it has in place is "flexible and able to meet increases in demand in particular areas to ensure we protect savers."

Stephanie Baxter is a financial journalist at Rhotic Media

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