tPR started its consultation yesterday on changes to its Code of Practice 12. This code explains the circumstances in which tPR will consider issuing a contribution notice.

tPR has provided examples in the draft code to help the industry understand when tPR will consider exercising its contribution notice power.

A number of the illustrative examples refer to mitigation being provided to the scheme. Although each case will turn on its specific facts, further comment on what is appropriate mitigation might assist.

Similarly, the draft code discusses a transfer of a scheme to another employer. It will be interesting to understand what types of legal mechanism for a scheme transfer tPR has in mind here.

Employers and Trustees will want to keep abreast of developments in the code and take advice on the potential impact on their business or scheme activity.

What is a contribution notice?

There has been a lot of industry comment about tPR’s powers becoming wider under the Pension Schemes Act 2021. Amongst other things, there are new tests for when tPR can impose a contribution notice and new criminal offences.

A contribution notice is one of tPR’s statutory powers to ensure employers (and those connected/associated with them) do not avoid their pension liabilities. In certain circumstances, tPR can issue a notice to a target (who might not otherwise have any direct legal pensions obligation) telling that person to contribute to a defined benefit occupational pension scheme.

What is this consultation all about?

Code of Practice 12 contains information on when tPR might seek to use its contribution notice power. The updated code 12 is intended to provide clarity to employers and trustees given the new statutory tests.

For example, the draft code provides that granting security as a part of a refinancing where the employer had engaged with the trustees (and mitigated any detriment) would not normally meet the tests for a contribution notice. Equally, general poor trading or a properly conducted buy-out of liabilities would not normally be in scope.

Conversely, the following are examples of acts which could be the subject of a contribution notice (subject to the facts of each case). Each assumes there is no mitigation to the scheme:

• An employer substitution that reduces the sponsor covenant to a shell company;
• A sale of employer assets that halves the employer covenant (where consideration for the asset sale is paid out in dividends);
• A transfer of scheme liabilities to an employer with a weaker covenant;
• A restructuring where sponsor support is reduced;
• An insolvency of an otherwise viable and solvent company;
• An increase in debt of the employer weakening the scheme’s creditor position;
• Payment of non-routine dividends;
• An unscheduled repayment of loan favouring another creditor.

What does this mean in practice?

We fully support tPR having strong powers to pursue those who avoid their pension obligations to the detriment of members. We welcome tPR reworking Code 12 to provide clarity.

We will await the outcome of the consultation with interest. It is reassuring for Trustees to note that a properly conducted buy-out would not be behaviour subject to a contribution notice.

We consider that further commentary around what will constitute appropriate mitigation might assist (although we appreciate that each case will turn on its specific facts).Similarly, the draft code discusses a transfer of a scheme to another employer. It will be interesting to understand what types of legal mechanism for a scheme transfer tPR has in mind here.

We consider the boundaries for the new tests (and for the new criminal sanctions, which have been the subject of a separate tPR consultation) will settle and become clearer as the industry gets used to the new regime. There is comfort in tPR’s comments that the Pension Scheme Act 2021 is “not a piece of legislation to be feared, except by the minority of wrongdoers” and that there is no intention to upset commercial norms or accepted standards of corporate behaviours.

Nevertheless, there remains uncertainty and trustees and employers will want to take advice on the potential impact on their transactions.

Find out more

The consultation closes on 7 July 2021. If you have any questions about the changing pensions regulatory regime and the impact on your business or scheme activity, please contact Chris Brown, Director or Clive Pugh, Partner.