The Pensions Regulator

Amendments to the regulator's powers and 'material detriment test' code of practice

Ref: PN08-25
20 October 2008

The Pensions Regulator welcomes today's tabling of amendments by the Government to the Pensions Bill, which proposes changes to the regulator's Contribution Notice and Financial Support Direction powers to protect members and the PPF.

The regulator is required by the draft legislation to produce a code of practice relating to one of these changes, and has today published draft content for that code.

Amendments to the Pensions Regulator's powers

The proposed changes adapt the powers available to the regulator since April 2005, seeking to ensure they remain relevant in an evolving pensions landscape, and provide that adequate protection is in place so members' benefits and the PPF are not put at risk.

Pensions Regulator chief executive Tony Hobman said: “Responsible employers will not be affected by these amended powers. But it is essential that the regulator is able to keep pace with market developments.

“These changes will impact upon only a small number of schemes where pensions liabilities are being actively avoided or put at unacceptable risk. The existing legislation requires us to, and our track record shows that we do, use our powers proportionately and reasonably. We will continue with this approach, implementing the new powers without hampering market activity or innovation.”

The existing clearance regime will continue to be available in relation to type A events to provide assurance that these powers will not be used in relation to particular events.

The Pensions Regulator will amend guidance materials as necessary following any changes to the powers. In particular, we expect to add to our current clearance guidance information on using the statutory defence to the new material detriment test. We also propose some simplifications to the notifiable event regime.


Material detriment test code of practice

The amendments require the regulator to produce a code of practice outlining when it expects to use the new material detriment test. This will help trustees, employers and other related parties understand the practical application of the new ground for CNs, and the standards of conduct and practice the Pensions Regulator will follow.

The regulator has today published draft content for this planned code, outlining circumstances where we would expect to issue a CN on the proposed material detriment test ground, and welcomes comment.

We will not be able to issue a CN in relation to this new test until the legislation comes into force, at the same time as the final code of practice is issued. In the meantime, to address any continuing uncertainty about this new test, the regulator's statement of 25 April continues to apply to this test.

The code of practice will only relate to the new ground for CNs, and has no impact on the other grounds, powers, clearance or scheme funding. There will also be a formal consultation period on the draft code once it is published.

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Editor's notes

1. To comment on the draft content for the code of practice visit the regulator's website.

2. The tabled amendments propose that all the changes would come into force from royal assent of the Pensions Bill, except for the new ground and the associated statutory defence, which would come into force at the same time as the regulator's code of practice.

3. Details of the proposed changes and Government consultation are available on the Department for Work and Pensions website: www.dwp.gov.uk.

4. Among a number of changes, the amendments introduce a new contribution notice ground so the regulator may issue a CN where acts or failures to act detrimentally affect a pension scheme in a material way. There would also be a range of measures to target the Pensions Regulator's use of this new material detriment test, including a statutory defence.

5. In relation to the new CN detriment ground, other changes of note include:

• an addition to the statutory list of reasonableness factors the regulator must have regard to where relevant for a CN, relating to benefits from the employer of the scheme;
• a mandatory requirement for a CN that the regulator must consider the reasonableness of the party's actions in all the circumstances of the case; and
• a statutory defence for parties facing a CN under the new detriment ground, where a party can show that at the time they reasonably believed their behaviour would not be materially detrimental to the scheme.

6. There will be a formal consultation on the regulator's draft code of practice once it is published following royal assent, after which the code, with any revisions, must be approved by the Secretary of State for Work and Pensions and laid before Parliament before it comes into force. Codes of practice are not statements of the law. However they do have evidential value, meaning they will be taken into account by the Pensions Regulator Determinations Panel, a court or tribunal where relevant.

7. The regulator's planned guidance materials will address subjects including: the statutory defence to the material detriment test, some practical guidance about transactions that might fall within the second ground for CNs (following the removal of "otherwise than in good faith"), and some other, minor, updates to the regulator's clearance guidance. No significant change will be made to the definition of type A event in the clearance guidance.

8. Clearance is the term used to describe the voluntary process of obtaining a clearance statement from the Pensions Regulator. A clearance statement gives assurance that, based on the information provided, the regulator will not use its anti-avoidance powers to issue, to the applicants for clearance, either CNs or FSDs in relation to a defined benefit occupational pension scheme and a particular event. Events include transactions, agreements, decisions, other acts/ failures to act.

9. A CN requires payment of a specified sum into a defined benefit scheme. An FSD requires financial support to be put in place for the scheme. These powers have been in place since April 2005. The regulator must act reasonably when using these powers.

10. If the regulator wishes to exercise its CN or FSD powers it
is required to provide a submission to the Pensions Regulator Determinations Panel. A decision will be made by the panel as to whether the use of the power is appropriate and a determination notice sets out the decision. The regulator website provides more information on the panel and the determinations process.

11. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate.

We have the ability to:

• collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
• issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
• direct pension schemes as to how to calculate their liabilities and the contributions required;
• issue a CN where there is an attempt to avoid liabilities, or a FSD where the employer is a service company or insufficiently resourced.