Schemes must be prepared for an interventionist regulator

This was reinforced in its latest corporate plan, which set out eight priorities for the next three years – with three of them expressly referring to “intervening”.  

The consultation is now seeking views on proposals in three key areas:

• Increasing the regulator’s and trustees’ access to timely information to allow greater corporate oversight;

• Extending the sanctions regime to deter wrongdoing and to punish it when necessary; and

• Strengthening existing anti-avoidance powers.

If the radical overhaul of the regulator’s powers proposed in the consultation is implemented in its current form, it will undoubtedly raise the stakes considerably for trustees and employers

The government aims to improve the regulator’s oversight of corporate transactions by broadening the current notifiable events regime and introducing a new requirement for sponsors to produce a “declaration of intent” (to be addressed to the scheme’s trustees and shared with the regulator) prior to certain business transactions.

There is also a proposal to extend the existing penalty regime to include a new power to impose a civil penalty of up to £1m for serious breaches and new criminal offences to punish wilful or grossly reckless behaviour in relation to a defined benefit scheme.

TPR targeting scheme funding

It is hopefully unlikely that many pension schemes will have first-hand experience of the regulator’s more draconian new powers in the years ahead. However, one area where they may feel the heat is in relation to scheme funding.

The regulator has made no secret of the fact that it wants to reduce the total deficit of around £500bn of DB scheme liabilities.

So, the 125 active cases concerning scheme funding and recovery plans that it had on the go in March this year are almost certain to rise significantly in the next couple of years.

But the watchdog’s success in achieving this aim may be limited, at least until the publication of strengthened guidance. The regulator’s resources, and its ability and appetite to use its new powers, will also be crucial in determining their ultimate effectiveness.  

New approach to be more specific

The regulator will no doubt target those employers whose behaviour clearly warrants it. The aim appears to be to change the nature of boardroom discussions on pensions, so that the situation is not reached where it needs to bring out the big guns.

It will want to see fair treatment for pension schemes, robust risk management and contingency plans, and appropriate action from trustees in relation to affordability and the management of deficits.

We have already seen the regulator flexing its muscles and being prepared to set out for trustees and employers the parameters (and sometimes even the specifics) of an agreement it would be willing to accept.

Trustees will not escape scrutiny   

The trustees’ role in scheme funding is also likely to come under increased scrutiny, with more requests to disclose advice they have been given, as well as minutes of meetings and correspondence with the employer – and should it be necessary, the regulator has a power (that it can easily use) to force trustees to disclose this material.

While this sort of intervention might not always be welcomed by trustees, it is here to stay and trustees need to face up to the new reality and prepare themselves. A robust paper trail that records decisions will be a very good starting point.  

In summary, if the radical overhaul of the regulator’s powers proposed in the consultation is implemented in its current form, it will undoubtedly raise the stakes considerably for trustees and employers involved in occupational pension schemes. You have been warned.

Peter Murphy is a partner and head of the pensions and investment litigation team at law firm Sackers