Pension Schemes Act 2021 – updates to the notifiable events regime

The Pension Schemes Act 2021 (“the Act”) received Royal Assent on 11 February 2021.

Amongst other things, the Act lays the groundwork for changes to companies’ duties to disclose information to the Pensions Regulator (“the Regulator”) and trustees of Defined Benefit (“DB”) pension schemes.

The notifiable events regime requires trustees and employers to notify the Regulator when certain events occur in relation to a DB scheme. The purpose of this regime is to assist the Regulator in reducing the risks of situations arising that may lead to calls on the Pension Protection Fund.

The Department for Work and Pensions (“DWP”) issued draft regulations setting out two new notifiable events for employers to report and consulted on them last autumn. The draft regulations were due to come into force in April 2022 but the DWP hasn’t yet responded to the consultation and no final regulations have been published. We are monitoring any updates on this. It is expected that a response to the consultation, along with any changes to the proposals and a new effective date, will be confirmed by the DWP in due course.

For the avoidance of doubt, therefore, the changes are not effective as at today’s date and the below is based on the current draft regulations which may change as a result of the feedback on the consultation.

New notifiable events

A notifiable event is an event that must, by law, be reported to the Regulator, who has the power (as of 1 October 2021) to issue fines of up to £1m for a failure to report a notifiable event without reasonable excuse. As of 1 October 2021 “knowingly or recklessly” providing false or misleading information regarding a notifiable event can also result in penalties of up to £1 million or be prosecuted as a criminal offence with up to 2 years’ imprisonment or unlimited fines.

What will an employer need to notify the Regulator of?

The draft regulations provide for two new notifiable events:

1. The sale of material proportion of the sponsoring employer’s business or assets; and
2. Granting or extending relevant security which would rank ahead of the pension scheme.

A “material proportion” for a business sale is more than 25% of the sponsoring employer’s annual revenue, and for an asset sale is more than 25% of its gross assets, in either case on its own or when combined with other disposals decided upon or completed in the previous 12 months.

“Relevant security” is security granted by the sponsoring employer, or one or more subsidiaries, over more than 25% of the sponsoring employer’s consolidated revenue or gross assets and includes a fixed or floating charge as well as a floating charge which gives the charge-holder the right to appoint an administrator. It does not include the refinancing of an existing debt, security for specific chattels, or financing for company vehicles.

As well as introducing the new notifiable events, the draft regulations also set out a new “staged approach” for these events. This staged approach will also apply on a change in control of the employer (where the employer is a company), which is an existing notifiable event.

There are four other existing notifiable events which remain unchanged as follows:

1. A decision which will (or is intended) to result in a debt to the scheme not being paid in full.
2. A decision to cease carrying on business in the UK.
3. The conviction for an offence involving dishonesty of any person if the offence was committed while they were a director or partner of the employer.
4. A breach of banking covenants.

The new notifiable events and notifiable events 1 to 3 above must be reported in each case, whereas the change of control and notifiable event 4 do not need to be reported if:

• the scheme is fully funded on the section 179 (PPF levy) basis at the most recent valuation; and
• trustees have not needed to report in the previous 12 months any failure to Regulator of non-payment under the Schedule of Contributions.

If a report is required to be made to the Regulator it must be made “as soon as reasonably practicable” by the employer.

There is currently a requirement to notify the Regulator where the employer receives advice that it is trading wrongfully, or where a director or former director knows that there is no reasonable prospect that the company will avoid going into insolvent liquidation. However, this event is removed under the draft regulations.

When should notification be given under the proposed “staged approach”?

In respect of the new notifiable events and the existing “change of control” notifiable event, these will need to be reported at different times, before they happen, under the draft regulations:

A “decision in principle” is made before any negotiations or agreements have been entered into with another party.

A “material change” includes a change in the proposed main terms and a change in any of the steps taken to mitigate the adverse effects of the event.

What information needs to be given?

Any notification at stage 2 or 3 will need to be accompanied by a statement which provides a description of:

1. the event itself;
2. the main terms proposed in relation to the event;
3. any adverse effects of the event on the scheme;
4. any adverse effects on the sponsoring employer’s ability to meet its obligations to support the scheme;
5. any steps taken to mitigate those adverse effects; and
6. any communication with the trustees about the event.

The intention is to encourage employers to address the impact of corporate activity on the scheme at a much earlier stage in the process.

Impact on loan agreements

The proposed changes to the notifiable events regime will impact the banking sector, particularly for employers participating in private sector DB schemes.

For Registered Providers, this will include the Social Housing Pension Scheme (SHPS) and any stand-alone DB pension scheme they may sponsor. The Local Government Pension Scheme falls outside of the scope of the notifiable events regime.

How do the new requirements affect provisions in loan agreements?

Lenders are responding to the proposed changes by introducing extended representations, covenants and events of default regarding borrowers’ pension obligations into loan documentation.

Any borrower entering into a new loan agreement or restating an existing agreement will need to carefully consider the impact of the new provisions as they are likely to become market standard.

Borrowers should be getting their pension advisors to review the new clauses and confirm if and when they need to notify the Regulator when granting new security once the new regulations come into force.