Directors, don’t neglect your pension scheme

The Pensions Regulator (The Regulator) has been through some testing times and is making significant changes to the way it regulates. From BHS to Tata Steel UK, and more recently Carillion, its role in these high-profile cases has come under scrutiny.

Strengthening the Regulator’s powers

The Government intends to strengthen the Regulator’s powers and the White Paper describes this development principally as the fulfilment of a manifesto promise rather than a reaction to recent events.

However, the bulk of it explains how the Regulator could better use its existing powers on the basis of the experience gained. There will be many welcome consultations in the near future, focussing on fine-tuning what is already a pretty effective system. The new criminal sanctions should therefore be considered in context rather than as a new approach. This is all part of the regulatory direction of travel in recent years, improving governance and helping stakeholders gain a voice in the boardroom.

The White Paper rejects the notion of all corporate transactions being considered and approved by the Regulator which would be too burdensome. Instead, the Regulator will outsource this work to the directors through a beefed-up notifiable events framework and voluntary clearance regime.

New pensions pressures on directors

It is doubtful that there will be many successful prosecutions of errant directors, as “wilful or grossly reckless behaviour” is quite a high bar to establish in a criminal court, but the possibility of criminal prosecution should persuade any director with any pension role to act cautiously and take appropriate professional advice about everything they do.

These powers aim to change behaviours and cement the “comply or explain” approach of a risk-based regulator. Prudent directors will not need to change their behaviour, but they may need to make an effort to evidence their good behaviour in an easily demonstrable manner.

As a back-up should headline prosecutions fail, the Regulator will be given the power to impose punitive fines on targets of contribution notices, including individual directors. All of this will weave into the director disqualification regime as well.

In that respect, the White Paper should be considered alongside the consultation launched the same week concerning beefing up the investigative powers of the Insolvency Service and raising corporate governance in distressed companies. This consultation targets directors of distressed companies, and significantly of their parent companies too, who take actions which may be detrimental to stakeholders – including DB pension schemes. The net is closing on directors who neglect their schemes.

To get to the evidence it will need, the Regulator will be able to conduct a wider range of inspections and compliance checks, and compel relevant persons to attend interviews and cooperate extensively, or face more punitive fines or criminal prosecution.

What happens next?

As ever, the White Paper provides broad principles, and all the detail will be in forthcoming legislation. Nevertheless, one would expect to see an immediate reaction to these proposed new powers in due diligence conducted for corporate transactions, in corporate financing and in turnaround exercises, in the sure knowledge that the Regulator might just want to come and look under the bonnet and kick the tyres.

For more detail, please get in touch with Tristan Mander in our Newcastle office or Ian O’Toole in our Leeds office.