DWP response to consultation on draft regulations strengthening TPR’s powers

Original news

DWP publishes response to the Pensions Regulator powers consultation, LNB News 29/06/2021 98

The Department for Work and Pensions (DWP) has published its response to the ‘Strengthening The Pensions Regulator’s Powers: Contribution Notice and Information Gathering Powers Regulations 2021’ consultation, which ran from 18 March 2021 to 29 April 2021 and received 19 responses. In its response, DWP said it will not increase the level of fixed penalty, nor will it alter the increasing penalty regime outlined in the consultation document.

What was the background to the consultation?

Under the Pension Schemes Act 2021, TPR was provided with enhanced powers to:

• issue Contribution Notices (CNs), requiring the target to pay money toward the affected pension scheme 
• compel the production of documents or information from targets (used in order to assist it in its regulatory role and in pursuing disputes) 

A consultation was conducted by the DWP seeking views on the drafting of two sets of regulations which underpin those powers. The consultation closed on 29 April 2021, during which the DWP received 19 responses from law firms, consultants and advisers and covenant assessment organisations

The first part of the consultation focused on regulations accompanying one of the two new gateway tests which, when triggered, grants TPR the power to issue a CN—the so-called ‘employer resources test’ (the other test being the ‘employer insolvency test’). When passed, TPR would consider whether it is reasonable for it to issue a CN. The employer resources test operates by assessing whether a relevant act or omission materially reduces the resources the employer would have relative to the estimated debt arising on an employer insolvency or employment cessation event (ie Section 75 debt).

The DWP proposed that the employer’s resources be ascertained by reference to the ’normalised profits of the employer before tax’ (PBT). TPR would use the latest accounts from before the act or omission (while excluding ‘any exceptional or non-recurring items’) as compared to the position after the impact of the act or omission, calculated by TPR using subsequent accounts or management accounting information.

The second part of the consultation focused on the regulations which will underpin TPR’s enhanced investigative powers, including the power to compel an individual’s attendance at interviews with TPR, extending circumstances where TPR investigators can enter premises, and increasing penalties for failing to co-operate with TPR.

What was the outcome of the consultation? Have any changes been made to the draft regulations?

Employer Resources Test Regulations

—this part of the consultation was the focus of the majority of the consultation responses received by the DWP, many of which disagreed with the proposals. Some criticised the proposed use of PBT as the relevant measure as being too crude, and potentially not as accurate as ‘Earnings Before Interest Tax Depreciation and Amortisation’ (EBITDA). Some responses argued that EBITDA could provide a more accurate picture as to the cash which would be available to support a scheme, and be less prone to manipulation than PBT.

Nevertheless, the DWP has decided to stick with PBT, noting that it was the simplest approach and that EBITDA is ‘not a required accounting disclosure, is not covered by the [Financial Reporting Council] and is therefore not audited’. The DWP also noted that the relevant act which was the subject of the CN would usually affect EBITDA and PBT. That said, the DWP has acknowledged the issue that PBT will provide a ‘snapshot’ picture and that it may be necessary, before issuing a CN, for TPR to consider the wider, holistic sequence of events and the position of the wider employer group.

Some responses queried whether the new test would operate successfully for charities and not-trading-for-profit organisations. The DWP has confirmed that the draft regulations will be clarified to address charities.

The DWP also confirmed the publicly stated position of TPR that the tests are not retrospective and that the new employer resources and insolvency tests will only apply to acts (or failures to act) from 1 October 2021.

Finally, some responses noted that the test would be so wide in practice that it will compel a wave of requests for clearance from TPR for standard corporate activity. The DWP acknowledged this, but stated that it will be putting in place sufficient resources to deal with such a wave of applications.

Information Gathering Regulations

—the DWP received comparatively fewer responses in respect of this part of the consultation; these were neutral or supportive. A few responses commented on the need to make it clearer in advance on what basis interviews are to be held, whether they be criminal or civil, and in the case of an adviser being required to attend interview, how their duty of confidentiality will apply. The DWP confirmed that, where an individual is called for interview, the information provided will be detailed, particularly as to whether the interview will be under criminal caution or not, and at least two weeks’ notice will usually be given.

Nevertheless, the DWP resisted pressure to make the information provided to an interviewee any more prescriptive than originally indicated. Further guidance will instead be issued by TPR in due course regarding how the information gathering powers will be used more generally.

What are the implications for pension schemes and their advisers?

Since the DWP had already acknowledged the problems with using PBT for the employer resources test when launching the consultation, it is perhaps not surprising that those regulations have been left unchanged. The DWP has, nevertheless, sought to remind the public that the employer resources gateway test is only one part of the process by which a CN would be issued. The DWP has reiterated that simply passing the employer resources test would not alone be sufficient for the issue of a CN, and that TPR will exercise its judgment, acting reasonably, and taking account of representations from affected parties.

It is also anticipated by the DWP that TPR will issue further guidance to allay the concerns raised in the consultation responses, drawing together other guidance it has issued in a comprehensive fashion. In view of the continuing concerns in the market regarding the scope of the new powers, and the reliance on proper exercise of discretion by TPR, further, and more streamlined, guidance will likely be welcomed.

This article was first published in LexisNexis (July 2021) and is also available here.