Amendments to the notifiable events regime

The current consultation concerning the draft Pensions Regulator (Notifiable Events) (Amendment) Regulations 2021 (the “Amending Regulations”) is intended to provide that early warning effect by intervening earlier within the decision-making process, before the event happens. The Amending Regulations are intended to amend the Pensions Regulator (Notifiable Events) Regulations 2005 (the “Regulations”).

New notifiers and procedures

One of the important changes being proposed to the notifiable events regime concerns the identity of the person or persons who must notify events to the Regulator.

Currently, things are quite simple. The trustees or managers of the scheme must notify events in respect of the scheme, and the scheme employer must notify events in respect of the scheme employer itself. No one else is subject to a notification duty.

When the Amending Regulations come into force, the range of persons who must notify events concerning the scheme employer has been broadened to capture decision-makers other than the scheme employer itself. For certain events concerning the scheme employer, the “appropriate person” who must notify the Regulator will include parent or controlling companies as well as persons connected with the scheme employer and associated with the scheme employer.

Parent and controlling companies, and other persons connected or associated with the scheme employer, will need to identify themselves as being within scope and understand their new duties or face potential sanctions from the Regulator.

The new notification duty will apply on the sale of a “material proportion” of the scheme employer’s business or assets, the granting or extending of “relevant security” in priority over of the scheme, and the relinquishing of control of the scheme employer by a controlling company. These events must be notified to the Regulator when “the main terms have been proposed”. All of these terms are extensively defined.

It makes sense that the controlling company, if there is one, should also be under a duty to notify these events as the scheme employer is often informed of the decisions only when instructed by the controlling company to carry out the agreed sale, grant, or extension. Requiring a controlling employer to notify these transactions when “the main terms have been proposed” achieves the early warning purpose of the regime.

However, more than one “appropriate persons” will potentially find themselves under a duty to notify the same event, with the consequent risk of duplicate notifications, contradictory notifications, or no notification at all. Guidance is needed as to the Regulator’s response where one of the available “appropriate persons” fails to notify. Are they discharged by a notification from another “appropriate person” or will they be sanctioned if other “appropriate persons” don’t step in? By analogy with individual trustees within a trustee board, the “appropriate persons” are presumably jointly and severally responsible within the bounds of actual knowledge. This could cause some misunderstandings between “appropriate persons”, especially if there are differences in their understanding of precisely when and by whom “the main terms have been proposed”.

“Appropriate persons” may need to coordinate and document their actions, which may complicate routine business practices as well as constrain legitimate “need to know” information barriers within groups.

Further, the “appropriate person” will be required to provide an accompanying statement with the notification to the Regulator and that statement must describe any communication with the trustees or managers of the scheme about the event, amongst other detailed information. As controlling companies might not currently have lines of communication open with the trustees, there might not have been any communication with the trustees at that point.

Should controlling companies open lines of communication with trustees in anticipation of this burdensome requirement? This may give rise to complexities as “appropriate persons” will necessarily be outside the normal trustee / sponsor relationship.

Furthermore, the statement must be sent to the trustees or managers of the scheme at the same time as the notification is sent to the Regulator. Potential acquirers might be dissuaded from making offers to acquire, if their offer is going to be disclosed to the trustees when only “the main terms have been proposed” rather than when a full agreement is reached. One can imagine that a controlling company might be reluctant to inform the trustees unless an appropriate confidentiality agreement is in place.

Should controlling companies be entering into precautionary confidentiality agreements with the trustees to enable acquirers to make offers in confidence?

New notifiable events

One of the existing notifiable events and two new notifiable events are being brought in at a much earlier stage in the decision-making process, to deliver the early warning purpose of the regime.

Currently, the Regulations require the scheme employer to notify the Regulator when there is a decision by a controlling company to relinquish control of the employer company or there is an actual relinquishment of control without such a decision. This requirement can only bite if the controlling company informs the scheme employer before the event.

The proposed amendment to the Regulations is a little unclear as currently worded, but it requires a notification at the point of a “decision in principle” being reached (namely a decision before negotiations with any party take place) concerning the relinquishment of control or concerning the receipt of an offer to acquire control of the scheme employer. But again, this new requirement will only bite if the controlling company informs the scheme employer before the event.

The new notifiable events in the proposed Regulations require the scheme employer to notify the Regulator concerning any “decisions in principle” to sell a material proportion of its business or assets or to grant or extend a relevant security over its assets.

These two new provisions are effective if the scheme employer stands alone and there is no controlling company which takes the decisions, but they will be ineffective if the controlling company fails to inform the scheme employer of its decisions before instructing the scheme employer to carry them out, as explained above.

Arguably, for the purpose of delivering the early warning purpose, the proposed changes should also fall under the broadening of the notifying duties of “appropriate persons” to capture relevant decision-makers other than the scheme employer, where there are any. This may not be a popular proposal.

The question then arises as to why some duties to notify fall when a “decision in principle” is reached, and others when “the main terms have been proposed”. The current consultation declares that the later notifications are required only “when there is greater certainty as to whether the transaction is going ahead, its nature and the implications for the scheme”.

The Regulator clearly prefers to be notified of critical decisions at the earliest stage possible, without waiting for details, to allow it to intervene as it sees fit, whilst it wishes to be given more details of less critical decisions at a later stage, so as to devote less resources to their supervision. This enables the Regulator, as a risk-based regulator, to direct resource in proportion to the nature and impact of the events concerned. However, it also outsources much of the compliance effort and expense on the “appropriate persons” themselves.

Next steps

Scheme employers, group companies, and trustees, amongst other “appropriate persons” are going to require new communication and monitoring procedures early in 2022 when the new regime is likely to come into force.

For further information, please get in touch.