UK pensions regulator: knocking on the boardroom door?

The legal and regulatory landscape governing defined benefit (DB) schemes is changing following the BHS and Carillion insolvencies: the Government published a White Paper on Protecting DB Schemes in March, and the UK Pensions Regulator has said it is changing its approach and getting tougher.

Tougher Legislation

New criminal offence for directors - The Government will introduce a new criminal offence to punish wilful or grossly reckless behaviour by directors in relation to a DB pension scheme. The Government wants to signal to directors the importance it places on DB pensions by making it a criminal offence, and will consult on the specific details of the offence.

New punitive fines - The Regulator will be able to impose additional new "highly punitive" fines to sit alongside its existing powers to impose liability on other group companies or directors. The Government has not indicated the amount of the fines, but it has said they will extend to individual company directors and that it is considering introducing this change from 19 March 2018 (the date of the White Paper).

Tougher Regulator

The Regulator has been heavily criticised following recent parliamentary inquiries into the collapses of BHS and Carillion. Frank Field, the Chairman of the Work and Pensions Select Committee said in relation to Carillion: "with characteristic alacrity, [the Regulator] started its arduous process of chasing money down from Carillion a few days after it was formally announced that there was no money left.."

Against this backdrop, the Regulator is keen to be seen to be acting (in its words) "quicker, clearer and tougher". For companies there is now a greater likelihood of regulatory intervention, and with it increased reputational risk given the high profile nature of pensions issues in the press.

This more interventionist attitude can be seen in Sainsburys' proposed acquisition of Asda - the Regulator took the decision to investigate even though Asda's pension plan will be retained and supported by Walmart.

Tougher Trustees

The Regulator is also putting increasing pressure on pension scheme trustees to negotiate robustly with companies. It has said that it expects trustees to compare whether dividend payments are disproportionate compared to the pension scheme contributions. This is likely to result in dividend payments coming under greater scrutiny by trustees, and being used as leverage by trustees when agreeing the funding contributions made to pension schemes.

The recent example of the GKN trustees' high profile role in the takeover of GKN by Melrose also indicates that trustees are becoming more robust in defending their interests following the BHS and Carillion collapses.

Tougher for companies?

While the Government is toughening up the legislation, our view is that the new penalties are being introduced primarily as deterrents against bad behaviour and that they will be rarely exercised in practice. The Regulator is getting more resources to enable it to increase its enforcement efforts, but it will expect trustees to be on the frontline in ensuring that their sponsor companies act appropriately towards the pension plan.

Authors:

Jonathan Sharp, Senior Associate, Baker McKenzie jonathan.sharp@bakermckenzie.com

Sarah Hickling, Professional Support Lawyer, Baker McKenzie sarah.hickling@bakermckenzie.com