New reportable events can disrupt business

The new Pensions Act 2021 paved the way for possible changes to the Notifiable Events Framework, which aims to provide early warning to the Pensions Regulator (TPR) of possible calls on the Pension Protection Fund.

The Department for Work and Pensions (DWP) has now published a Draft Rule (Draft Rule) and consulted on proposed changes to the Notifiable Events Framework to introduce new requirements for notifying TPR of material activity of the likely to affect a pension plan, with steep penalties for failure to comply. The consultation closed on October 27, 2021 and the regulation is expected to enter into force in April 2022.

New “super” reportable events

The proposed rule establishes two new reportable events and updates an existing reportable event, each of which is treated as a “super” reportable event, addressing significant business sales and granting or extending certain warranties.

The two new ones are:

• When there has been a policy decision by the employer to sell a significant portion of its business or assets. For this purpose, for a sale of a business, a significant proportion is 25% or more of the annual turnover of the business (either alone or in combination with other disposals decided or carried out in the 12 months preceding the date of the event to be notified) . A significant proportion for an asset sale is 25% or more of the gross value of the employer’s assets. Both are valued by reference to the employer’s most recent annual accounts or, where the employer is not required to file annual accounts, to its books of account.

• Where there has been a policy decision by the employer to grant or extend security over 25% or more of its assets or income, such that in the event of the employer’s insolvency , the secured creditor would rank higher than the pension plan in the order of priority for debt collection. Certain grants of security are not affected, in particular the refinancing of an existing debt (other than when it comes to the granting of a security mentioned above), the security of specific assets or the financing of company vehicles.

An existing notifiable event in which a controlling company relinquishes control of the employing company will change to become a notifiable event at the time a “policy decision” is made by the controlling company, or there has been an offer to acquire the employing company.

It should be noted that the obligation to inform TPR will be triggered by a policy decision taken, rather than by the occurrence of the event itself. There will be two steps in the process:

What is meant by a decision in principle?

While the DWP has attempted to define what is meant by ‘policy decision’, the proposed wording is unclear for a number of reasons. The draft settlement does not specify who has the authority to make a policy decision, which constitutes the start of negotiations, nor does it provide many details about when notification will be given.

The draft regulation defines a “decision in principle” as a “decision prior to any negotiation or agreement concluded with another party”. This is meant to coincide with when an employer decides to go ahead with an action (eg selling an asset). The consultation foresees that the employer will then begin to negotiate the specific conditions and draft the contract.

A documented decision made at a board meeting to begin commercializing a significant portion of the employer’s business and assets may constitute a policy decision. But if it’s just to “test the market” rather than a real intention to sell, would that trigger the notification? What about the situation where an employer has no intention of selling the business, but is approached by a potential buyer, interested in buying part of the business? The employer allows the buyer to undertake due diligence on the business and they discuss what might constitute an appropriate price. At what point in this scenario was a policy decision made? Could internal conversations be enough to constitute a principled decision? Would correspondence or a discussion in a meeting suffice to confirm a decision in principle without this decision being formalized and/or voted on?

This uncertainty raises a number of concerns because, without further clarity from the TPR, legal notification obligations could be triggered without decision-makers being aware. Employers will wonder how specific or definitive a decision must be to trigger a notification requirement.

Notification and reporting requirements for “super” reportable events

The three notifiable “super” events will require an “appropriate person” to provide notice and declaration to TPR, as soon as the main terms of the event “have been proposed” (which will be at some point in the transaction after the decision in principle has been taken and notified to TPR, but before finalization of the transaction). This notice must be updated in the event of a “material change”, including a change in the main terms of the transaction or any mitigation for the pension plan. The change must be notified as soon as reasonably possible after an “appropriate person” becomes aware of it. This has already caused some consternation within the industry. Will it therefore be necessary to constantly submit updated notifications each time the terms of the agreement change, as is often the case during a negotiation? Additionally, will TPR have the resources to review and evaluate all submissions that are made?

The notice and statement must be given to the trustees of the pension plan at the same time. A “suitable person” will generally be the employer or a person related or associated with the employer.

The Pensions Act 2021 establishes a non-exhaustive list of information that may be contained in the declaration, and the draft regulations supplement it. Generally, the statement should contain a description of the event (transaction), any adverse effects of the event and the ability of the employer to meet its legal obligations to support the scheme, the steps taken to mitigate these negative effects and a description of any communication with the plan trustees.

Other Changes

Illegal Transactions (an existing reportable event) will be removed as an employer reportable event. The consultation indicates that TPR has never been made aware of illicit transactions in connection with the Notifiable Events and, given the nature of the Notifiable Event, it is unlikely that TPR will ever receive such a notification.

Fines and Penalties

Potential fines have increased to up to £1million for failure to comply with the notifiable events regime, including failure to comply with notification and reporting requirements. In its draft policy on how it proposes to use its new financial sanction powers, TPR stated that where a breach of regulations has minimal impact, the penalty will be up to £100,000! So there is no room for complacency.

Other guidance and advice

Employers and their parent companies will no doubt appreciate TPR’s examples and guidance to help them understand when the new notifiable event obligations are triggered. In any event, this is a key risk area where legal advice should be sought, including for:

• Clarify the scope of the new obligations (particularly after the draft regulations are finalized) and how and when these obligations apply to any actual or proposed business activity. Employers and parent companies should consider providing training to key personnel on this updated scheme as soon as possible and ensure that all key personnel are aware of the new requirements.

• Assess the risk of non-compliance and ensure that these risks are appropriately managed and mitigated, including the adoption of new procedures for companies and trustees to ensure compliance and proper governance around new obligations so reporting procedures and communication protocols are clear.

• Support appropriate decision-making in the provision by the employer and the response of the trustee to a notice and declaration of a “super” notifiable event.

Patricia Bailey contributed to this article.