62: DWP consults on the Notifiable Events (Amendments) Regulations 2021
The government is consulting on changes to the notifiable events regime which requires pension scheme trustees and employers to notify the Pensions Regulator of certain prescribed events under section 69 of the Pensions Act 2004. The changes are contained in the draft Notifiable Events (Amendments) Regulations 2021 and the consultation closes on 27 October 2021.
The draft regulations include two additional prescribed events and the removal of the existing notifiable event of wrongful trading. In addition, they set out the events in respect of which a notice and statement must be given to the Regulator under section 69A of the Pensions Act 2004. The notice and statement requirement was inserted by the Pension Schemes Act 2021 and applies at a later stage in a corporate transaction than a notifiable event notification, when there is greater certainty as to whether the transaction is going ahead, its nature and the implications for the scheme.
Changes to the notifiable events regime
The first additional notifiable event is the intended sale by the employer of a material proportion of its business or assets, in respect of which a decision in principle has been reached.
Under the draft regulations a ‘material proportion’ of the business of the employer is one that accounts for more than 25% of its annual revenue and a material proportion of the assets of the employer is one that accounts for more than 25% of the gross value of its assets (both revenue and assets as measured in the most recent annual accounts). Because corporate events may sometimes be structured as a series of transactions, the definition also captures other disposals made or agreed in the 12 months prior to the notifiable event.
The draft regulations move away from the original intention to limit this requirement only to employers responsible for 20% or more of the scheme’s funding. This was intended to avoid unnecessary work where a transaction was unlikely to have a significant impact on the scheme however the government has been persuaded, especially in relation to multi-employer schemes where funding and liability is complex, that there are circumstances where that policy intention could not be met by retaining this condition.
The rationale behind the new notifiable event is that these transactions frequently indicate a change in covenant support for a pension scheme, for example the sale of a material part of a sponsoring employer’s business may significantly reduce the ability of the sponsoring employer to support the pension scheme, including where it is structured as inter company debt which the scheme employer may not be able to realise for future funding purposes or to transfer the profit-generating activity from one legal entity to another while ‘leaving behind’ a pension funding liability.
The second new notifiable event is the intended granting or extending of a relevant security by the employer over its assets – a decision in principle by the employer to grant or extend a relevant security over its assets, such that, should the employer become insolvent, the secured creditor would be ranked above the scheme in the order of priority for debt recovery.
A relevant security is a security granted or extended by the employer, or one or more subsidiaries of the employer, the level of which is more than 25% of either the employer’s consolidated revenues or its gross assets. It includes both a fixed charge or floating charge over assets of the employer or the wider employer group, and an all assets floating charge which gives the charge-holder the right to appoint an administrator. It does not include the refinancing of an existing debt, security for specific chattels, or financing for company vehicles. The Pensions Regulator will provide more information in its code of practice and accompanying guidance.
The rationale behind adding this new event, is that the granting of security on a debt to give it priority over debt to the scheme means that, in the event of debt recovery should the employer become insolvent, the scheme is more likely to receive a smaller amount of debt than if the security wasn’t in place.
The draft regulations also remove wrongful trading from being a notifiable event, an acknowledgement that the requirement is ineffective and one in respect of which the Regulator has confirmed it has never received a notification. A director is unlikely to admit wrongful trading, as such an admission may form the basis of a claim under the Insolvency Act 1986, with personal financial consequences.
Notice and statement
The draft regulations list the three events where a notice and statement must be given to the Regulator under section 69A of the Pensions Act 2004. The statements must be given by relevant persons 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.
The events are:
- the intended sale by the employer of a material proportion (as noted above) of its business or assets, in respect of which the main terms have been proposed;
- the intended granting or extending of a relevant security by the employer over its assets which would result in the secured creditor being ranked above the scheme in the order of priority for debt recovery, in respect of which the main terms have been proposed; and
- the intended relinquishing of control by a controlling company of the employer company, in respect of which the main terms have been proposed, or the actual relinquishment of control where it is relinquished without a decision having been taken.
The intention is to balance the desirability of the Regulator and trustees having the relevant information as early in the transaction as possible with the acknowledgement that full details of the transaction and any mitigation in respect of the scheme may not be available until nearer the end of the process.
The draft regulations also describe the information that the statement must contain pursuant to section 69(A)(9) of the Pensions Act 2004 including a description of the main terms of the event, any adverse effects on the scheme and the employers ability to meets its legal obligations to support the scheme together with a description of any steps taken to mitigate the adverse effect and any communications with the trustees about it.
The draft regulations provide a fairly clear statement of the requirements for scheme employers to notify the Regulator in respect of the new events, together with useful specificity on what constitutes a material proportion of an employers revenue and assets, the types of security that are caught and the timing for notifications and statements. However, there is still likely to be some uncertainty for employers and trustees and the Regulator will be helpful will issue further guidance which will be helpful.
Our experienced pensions team will be able to help affected parties understand and manage these new requirements.