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31 Mar 2021

DWP’s consultation on regulations under PSA 2021 strengthening TPR’s powers


Pensions analysis: Chris Edwards-Earl, senior associate at Stephenson Harwood, comments that under the recently enacted Pension Schemes Act 2021 (PSA 2021), the powers of the Pensions Regulator (TPR) were clarified and expanded. In particular, the abilities of TPR to exercise its ‘moral hazard powers’ (designed to reduce the number of schemes calling on the Pension Protection Fund) have been enhanced, alongside complementary powers to compel the sharing of documents and co-operation with TPR’s investigations. The Department of Work and Pensions (DWP) is now consulting on regulations it intends to issue that expand on the powers in the primary legislation.

Employer resources test for Contribution Notices

The circumstances in which a Contribution Notice (CN) may be issued (i.e. requiring the target to pay money toward the affected pension scheme) have been expanded.

Two new tests have been introduced:

  • the ‘employer insolvency’ test, and 
  • the ‘employer resources’ test 

Where these tests are met, TPR would consider whether it is reasonable for it to issue a CN. The employer insolvency test assesses whether if a hypothetical section 75 debt arose (under section 75 of the Pensions Act 1995), the act or omission in question would reduce the amount of that debt anticipated to be recovered by the pension scheme. The employer resources test, which is being consulted on now and is (arguably) the more complicated and controversial test, assesses whether the act or omission materially reduces the resources the employer would have relative to the estimated section 75 debt.

DWP proposes that the employer’s resources be ascertained by reference to the ‘normalised profits of the employer before tax’. TPR would use the latest accounts from before the act or omission (while excluding ‘any exceptional or non-recurring items’) as compared against after the impact of the act or omission occurred, calculated by TPR using subsequent accounts or management accounting information.

These two new tests will operate alongside the existing regime:

  • the ‘main purpose’ test (i.e. seeking to avoid the section 75 debt), and 
  • the ‘material detriment’ test (i.e. material reduction in likelihood of benefits being received) 

both of which are assessed by reference to the impact on the scheme of the act or omission.

DWP is of the view that these two existing tests require TPR to look through the wrong end of the telescope, as the problematic act or omission tends to affect the scheme sponsor rather than causing damage to the scheme. It can be difficult, DWP argues, for TPR to work out and then demonstrate evidentially what the likely impact would be on the scheme. The material detriment test also tends to require complicated projections as to the likely impact over the longer term.

DWP acknowledges that the proposed employer resources test is not perfect, it is subjective (with TPR determining the outcome based on available information, particularly where there are no available accounts) and will likely provide ‘uncertainty for the market’. Nevertheless, DWP approves of its simplicity and argues that it is still better than alternatives that it considered.

DWP may well be right, but it is already apparent that there will be instances where the test will be difficult to apply—for example:

  • where the act or omission is part of a chain of events which combine into an unreasonable course of conduct 
  • where the sponsoring employer is a charitable or not-for-profit entity, or 
  • where it is unclear which items should be regarded as exceptional (which may be difficult so close to an act or omission TPR says justifies the issue of a CN) 

There will no doubt also be opportunities to argue which resources would in fact be available to pay a section 75 debt arising. The hard-fought Nortel case (Re Nortel Networks Corporation et al case ([2014] ONSC 6973) dealt with various intricacies in the interpretation of the insufficiently resourced test (the gateway test for financial support directions under the Pensions Act 2004), and it seems that some of these issues may arise again as cases come before the Upper Tribunal.

The newly augmented TPR has sought to reassure the industry that normal corporate activity should not fall foul of the new regime and that passing the gateway tests for the potential use of moral hazard powers does not mean that the powers will necessarily be exercised. The reasonableness of any action will remain the key determinant. Nevertheless, the various uses of ‘should’, ‘not expected to’, and ‘normal’ in its assurances have not allayed the fears of the market just yet. It seems very likely that these regulations (assuming they are issued in their current form), when combined with the other changes under the PSA 2021, will lead to an increase in clearance applications. The fact that these powers are accompanied by new criminal sanctions will necessitate careful analysis and advice before significant corporate activity is undertaken.

Information gathering powers and fines

As part of the PSA 2021, TPR’s information gathering powers were brought together in a more consistent way. The draft regulations which will underpin these investigative powers include:

  • the power to compel an individual’s attendance at interviews with TPR (previously the interview powers were limited to automatic enrolment and master trust compliance) 
  • extending circumstances where TPR investigators can enter premises, and 
  • the new penalties for failing to co-operate with TPR 

The regulations would also confirm that TPR should be able to apply its inspection powers in the same way for multi-employer schemes as it does for single employer schemes.

The new financial penalty system for non-compliance by employers would be an escalating penalty, with £500 applying on the first day, increasing cumulatively by £500, with a daily rate of £10,000 after 20 days. Escalating penalties for individuals will be £200 each day. As regards fees for fixed penalties, these are anticipated to be £400—the same level as for auto-enrolment non-compliance.

Since TPR’s requests for information and documents have tended to prescribe short periods for compliance, these new penalties (if confirmed) will underline the importance of urgent action by recipients, as well as sending prompt requests for extensions of time as soon as it is apparent that deadlines may not be met.

Next steps

The consultation period commenced on 18 March and runs until 29 April 2021 (a week after the consultation on the use of criminal powers closes), after which a consultation response will be published, and the regulations finalised. It is anticipated that the new information gathering powers will come into force on 1 October 2021.

This article was first published in LexisNexis (March 2021) and is also available here.