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New moral hazard powers for Pensions Regulator

The Government tabled amendments to the Pensions Bill yesterday that will change the moral hazard framework (ie when the Pensions Regulator can look to non-employer parties in a corporate group to make payments to underfunded pension schemes).

Current position

Under the existing legislation, the Regulator can issue a contribution notice requiring a wide range of people associated or connected with scheme employers to contribute a specified amount to the scheme if one of the main purposes of an action was either to prevent the recovery of all or part of a section 75 debt or, otherwise than in good faith, to compromise, settle, reduce or prevent such a debt becoming due.

In April this year, the Government announced its intention to extend the Regulator’s moral hazard powers to adapt to the evolving pensions market. The proposed changes included introducing an alternative test that could trigger the issue of a contribution notice where a course of conduct is materially detrimental to the scheme’s ability to pay benefits to members.  These changes were effective from 14 April 2008 but the Pensions Regulator issued a statement saying that prior to the issue of relevant legislation, it would only seek to rely on these new powers in limited circumstances such as when the link between the employer and the scheme was severed without appropriate mitigation for the scheme (click here for full statement).

Draft legislation

The draft legislation issued yesterday sets out in more detail the way in which the contribution notice regime will be changed.  The key features of the draft legislation are:

• the removal of the requirement for a reduction or compromise of a section 75 debt to be “otherwise than in good faith”
• the introduction of a new trigger for a contribution notice where “the Regulator is of the opinion that [an] act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received”
• a defence against a contribution notice triggered by the material detriment test on the basis that the relevant party gave due consideration to any potential detrimental impact and either concluded that there was no such impact or took steps to eliminate or minimise it
• a requirement for the Pensions Regulator to issue a Code of Practice setting out when it intends to use its “material detriment” powers.

The Regulator has published the draft content of this Code of Practice. It says that it intends to use the material detriment test to trigger a contribution notice in the following circumstances:

• the transfer of the scheme out of the UK
• the transfer of the sponsoring employer out of the UK if this results in a material reduction in the level of employer support or legal and regulatory protection for members
• employer support for the scheme being removed, substantially reduced or becoming nominal
• the transfer of scheme liabilities to another scheme which does not have sufficient employer support or is not sufficiently well funded
• a business model for the operation of the scheme in such a way that is designed to create a financial benefit for the employer or some other person from the scheme, but where inadequate account has been taken of the interests of the members of the scheme, including where risks to members are increased.

The Government intends that the principal amendments will still have retrospective effect from 14 April 2008 and the Regulator’s April statement will continue to have effect prior to the new legislation coming into force.

Copies of the proposed amendments to the Pensions Bill are here.

The contents of the draft Code of Practice are here.

For further information, please contact: