The Department for Work and Pensions has proposed granting the Pensions Regulator the ability to fine employers and associated parties up to £1m where they are found guilty of serious breaches and reckless behaviour.
The new fines regime would represent a serious boost to the watchdog’s current powers. At present, the regulator may issue a limited civil fine of up to £5,000 for individuals and £50,000 for corporate entities to penalise them for failing to comply with a range of duties.
The government consultation also outlines proposals to grant the regulator earlier access to information in relation to corporate transactions.
It suggests expanding the current framework for reporting ‘notifiable events’ in connection with a transaction.
The regulator already has sharp teeth but hasn’t really exercised its choice particularly well
Calum Cooper, Hymans Robertson
For the first time, ‘declarations of intent’ would subsequently have to be made to the regulator. These would include details on scheme trustee engagement during the transaction process.
The consultation succeeds the DWP's March 2018 defined benefit white paper, which outlined plans to embolden the regulator.
Watchdog may struggle to deliver criminal penalties
Civil and criminal sanctions would be used in response to “wilful or grossly reckless behaviour in relation to a defined benefit pension scheme, non-compliance with a contribution notice and failure to comply with the notifiable events framework”, according to the consultation.
Sir Steve Webb, director of policy at pension and investment provider Royal London, observed that the burden of proof required to deliver a criminal penalty will be higher than that of a civil offence.
“It’s hard enough actually to prove somebody should have funded a pension scheme,” the former pensions minister said, adding that if you raise the burden of proof to get a criminal conviction then it is conceivable that “nobody would ever be convicted”.
Fines of up to £1m will be imposed for more serious civil offences, particularly “to deter behaviours which are more serious in nature and have resulted in actual harm to the pension scheme or have the potential to do so if left unchallenged”.
Calum Cooper, head of trustee DB at consultancy Hymans Robertson, wants to see the regulator make more use of its existing powers.
“It’s already got really strong powers, but they’re rarely used… the regulator already has sharp teeth but hasn’t really exercised its choice particularly well,” he said.
Trustees will be closer to transaction process
Notifiable events are classified as events that could cause harm to a pension scheme, such as the prospect of its sponsoring employer becoming insolvent.
They are currently classed as employer-related events and scheme-related events, which are reported to the regulator by the employer and trustees respectively.
The DWP considers that this could be expanded by including a broader range of employer-related events, which will help the regulator oversee corporate transactions.
For example, the “sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20 per cent of the scheme’s liabilities” would be deemed a notifiable event.
Kate Smith, head of pensions at provider Aegon, thinks that the changes would allow the regulator to “move quicker and get more insight into actually what’s going on”, adding that at present the regulator can be “behind the curve, because they don’t necessarily know what is actually happening”.
For some notifiable event transactions, an employer will have to issue a declaration of intent outlining the implications of a transaction for its scheme and how it will mitigate any risks.
Smith welcomed this opportunity to bring trustees closer to corporate transaction process.
“Sometimes they are kept at arm’s length until a decision has been made, and it’s a bit late,” she said.
A matter of powers or approach?
Last week, the regulator’s chief executive Lesley Titcomb reiterated a pledge to monitor riskier schemes more proactively. This intention had been previously outlined in its written evidence to the Work and Pensions Committee’s DB white paper inquiry.
Less than a third of trustees think TPR will monitor fairly
Just 31 per cent of trustees are confident the Pensions Regulator will police funding agreements fairly and effectively in future, according to a survey by consultancy Willis Towers Watson.
Rosalind Connor, partner at Arc Pensions Law, observed that while there has been much focus on the powers available to the regulator in response to the political fallout of a “small number of very high profile failures”, many have instead scrutinised its conduct.
“Where the jury is out a lot is whether the regulator has behaved in a way that hasn’t got it where it wanted to go, because it didn’t have the right powers, or because it didn’t have the right approach,” she said.
“I think a lot people feel that certainly historically… the regulator perhaps didn’t have the right approach,” she added.
