On 8 September the DWP issued a further consultation on aspects of the new powers for The Pensions Regulator (‘TPR’), in particular extending the list of corporate events employers are required to notify the Pensions Regulator of - and introducing the requirement for an ‘accompanying Statement’ in some circumstances.
This consultation is the next piece of the jigsaw of the new requirements in the Pension Schemes Act 2021. All employers will need to be aware of the new requirements, to ensure they notify and provide statements to TPR (and the pension scheme trustees) where needed and within the required timescales.
Details of the two new events requiring notification to TPR are provided in the draft regulations, alongside the specific triggers for notification (which are broadly dependent on the relative materiality of the event in the context of the employer’s assets/revenues) and the timescales for notification (which are somewhat less clear, and may be challenging to work through in practice, more on this below).
It will be important to ensure that the new requirements do not inappropriately impact on day-to-day business activity and that TPR is not inundated with unnecessary notices and statements. The consultation closes on 27 October 2021 and ahead of then it will be important for industry participants to think through any unintended practical consequences in determining whether to respond to the consultation. Our early thoughts on some of the practical consequences are set out below.
Notifiable Events
The two new employer-notifiable events are as follows:
- Sale of a ‘material proportion’ of the business or assets – which is defined as accounting for more than 25% of annual revenue or more than 25% of the gross value of the employer’s assets
- Granting of ‘relevant security’ which is defined as more than 25% of either the employer’s consolidated revenue or its gross assets. The definition goes on to set out what type of security is included and excludes refinancing of existing secured debt and small increases in security
It is helpful that the government have thought about materiality for both new notifiable events – and it is now clear that refinancing, and less material grants of security, will not need to be notified to TPR.
The draft regulations set out that notification is required when a decision has been made ‘in principle’ by the employer and this is defined as ‘prior to any negotiations or agreements being entered into with another company’. In practice, it may be challenging for company directors to make a call on at what point this is – and it will require judgement to apply to a particular set of circumstances. It is also likely to lead to earlier dialogue with the trustees and with TPR than may otherwise have been the case – which will need to be factored into transaction planning.
As well as affecting the process that a seller or borrower in a transaction must follow, companies, buyers and lenders are also likely to approach transactions with increased caution and be mindful of the need to also consider the tougher regulator powers being introduced from 1 October 2021 – new criminal offences, and new contribution notice triggers.
The triggers for notification will also require a level of awareness in the broader business to ensure that the requirement to notify is not missed, for example:
- The possibility of multiple smaller transactions under the 25% materiality threshold is addressed by the draft regulations as the term ‘material proportion’ will include other disposals made or agreed in the prior 12 months. Company directors will need to be aware of this – and the need to look at asset sales on a rolling basis to determine when there is a requirement to notify.
- ‘Relevant security’ also includes security granted or extended by one or more subsidiaries of the employer (as well as the sponsoring employer itself) – again, company directors need to be aware of this to ensure they do not inadvertently fail to notify in respect of the granting of security by a subsidiary.
Accompanying Statements
There are also new requirements to issue a Statement to TPR and to the trustees for three notifiable events. The events are the two new notifiable events referred to above as well as the intended relinquishing of control by a controlling company of the sponsoring employer.
The Statements must be given when the ‘main terms of the relevant event have been proposed’, and must indicate the impact on the scheme of the transaction and what action is being taken to mitigate any detrimental effects. As such, they are intended to be a follow-up to the initial notification.
It is likely to be challenging initially for company directors to determine when ‘main terms have been proposed’ and will again require a level of judgement applied to the particular set of circumstances.
There is also an additional requirement which has been introduced to update TPR if there is a ‘material change’ in the event or the proposed mitigation for the event. This raises a new practical challenge in some situations, where employers may need to consider making multiple notifications to TPR as negotiations evolve
Implications
Following the consultation process, and any review of the draft regulations in light of responses, the new requirements are likely to come into force at some point in 2022. We would not anticipate substantial changes to the proposed new notifiable events or requirements for accompanying statements as a result of the consultation – with any revisions likely to reflect more practical points raised during the consultation around timescales and materiality. And so there is some time for employers to work through feeding in the new notification requirements to their corporate governance processes and into their planning for upcoming transactions. We hope that forthcoming guidance from TPR will assist with this.