19 March 2021
The DWP has published a consultation on potential regulations arising from the Pension Schemes Act 2021. These relate to new powers for the Pensions Regulator to gather information as part of its inquiries and to issue ‘Contribution Notices’.
One key issue under consultation is the idea of an ‘employer resources’ test. TPR will need to look at whether an action (or a failure to act) led to a reduction in the resources available to a sponsoring employer to support their pension scheme. They will also have to assess whether any reduction was ‘material’ relative to the size of any deficit in the pension scheme. Options consulted on include whether to measure the change in employer resources in terms of the impact of the action on the *profits* of the company, or the strength of the employer covenant (its long-term viability) or in some other way.
Francesca Bailey, Senior Consultant at LCP has analysed the consultation document and points out that:
- TPR will be able to determine the impact of the act on company profits with the benefit of hindsight by referencing the subsequent published annual accounts. The issue for corporates is that at the time of the act they will not be able to assess with certainty its impact - this means that a company will not be able to predict TPR’s response with confidence at the time of the event.
- While it's interesting to see the other options considered for ‘resources’, ultimately seeing the regulations without the further detail on the other new Contribution Notice (the employer insolvency test), and any accompanying TPR guidance, provides limited clarity for corporates in terms of what this may mean in practice for how they assess the impact of corporate activity on their scheme – and how they can manage the risk of being at the receiving end of a Contribution Notice.
- This uncertainty could lead to many more companies going to TPR for ‘clearance’ for corporate activities before going ahead, and TPR will need capacity to process such applications in a reasonable length of time.
- If the new “employer resources test” is measured relative to company profits, it is not clear how the new rules will apply to charities and other not-for-profit organisations
In summary, Francesca Bailey said:
“It is good to see some further detail about how the Pensions Regulator might judge whether an action (or failure to act) by a company has had a material impact on the resources of the employer. The idea of using a simple profits test sounds straightforward at first sight but would raise many practical challenges and leaves unanswered how the rules would apply to charities and not-for-profit organisations. This could in turn lead to more requests for ‘clearance’ to TPR who will need the resources to deal with this”.