Focused, faster and more frequent
As TPR seeks to intervene more often in DB schemes, Anne-Marie Winton looks at how sponsors can avoid getting a red card
The Pensions Regulator (TPR) has published its corporate plan for the next three years, with a list of eight priorities including intervening more often and more quickly where a defined benefit (DB) scheme is underfunded or avoidance is suspected.
The regulator is seeking to maximise its regulatory impact within the resources available to it. But this could be a challenge if added to its workload is dealing with various enquiries from Frank Field MP who, on behalf of the Work and Pensions Committee, has recently asked TPR about its involvement in the corporate activity of various (unrelated) groups. Perhaps it is no surprise that TPR has had to ask the Department for Work and Pensions (DWP) for additional funding to address its increased workload.
But how can employers and groups ensure they are not the reason for adding to the regulator's workload? Or - to use the analogy of TPR as a 'referee' not a 'player' - how can you make sure you do not get a red card and are sent off the pitch?
Generally, an employer's wider group (in the UK or otherwise) has no legal obligation to make good the deficit in that employer's UK DB scheme. Entities that are connected or associated with the scheme employer(s) (and this includes directors of the employer and its associates, and any entity that exercises at least one third of the voting power of the employer) would only be liable to support the scheme if they had entered into a direct obligation to do so in favour of the scheme's trustees and/or under an intra-group agreement with the scheme employer(s).
However, in certain circumstances, TPR can impose statutory liability where none otherwise exists to require the target of these moral hazard powers to pay money into or otherwise support the scheme, if reasonable to do so. The regulator has a wide discretion in deciding whether it is reasonable to use its powers.
But in practice, the very occasional use (or threatened use) of the moral hazard powers is headline news. Engagement with the regulator is far more likely to take place in private, and may occur over a period of months if it becomes aware that intervention may be necessary to carry out its statutory duty to protect members' benefits.
Quite a long list of routine corporate activity could put you or your company on TPR's moral hazard radar. Top of the list is any activity that means that the sponsoring employer(s) are less able or potentially less able to pay contributions into the scheme. The regulator's clearance guidance gives a non-exhaustive list of corporate events (known as 'employer-related type A events') that could weaken the financial support provided by a scheme's employers.
However, it is important to note that not all type A events fall within the scope of TPR's moral hazard powers. But if a type A event is being contemplated, it is important to also consider the impact of that event on any DB pension scheme and work out how to mitigate any detriment caused.
Also, having an audit trail of this process can provide a statutory defence to the use of some of the regulator's powers. Best practice is to anticipate these issues in advance of any type A event, take the appropriate advice and engage pro-actively with the scheme's trustees (under confidentiality agreements if appropriate).
Anne-Marie Winton is partner at ARC Pensions Law
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