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New Regulator powers will increase risk management obligations

New Regulator powers will increase risk management obligations

31 Jan 2020

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At a glance

The Pension Schemes Bill going through parliament sets out more detail on a number of changes that will impact corporate activity

Employers will have to notify the Pensions Regulator of a wider number of corporate situations and sooner, such as those that materially reduce employer resources

It will also be easier for the Pensions Regulator to impose obligations to fund a scheme through Contribution Notices

There will be new civil and criminal offences.The potential personal consequences for directors involved in corporate activity make it important to evidence due consideration of pensions.

Both ‘Acts’ and ‘Failures to act’ (including over a period of time) are within scope for regulatory action

Given the potential scope of the powers could be wide ranging, companies should be aware of defences available to prevent inadvertently falling foul of the new powers.

* Criminal penalties already exist for providing false information to the Pensions Regulator

Actions employers can take

  1. Understand your pension scheme’s creditor position and what corporate activities could affect it.
  2. Consider how to ensure that relevant corporate activity is identified so that the Regulator can be notified.
  3. For upcoming corporate activity, plan engagement with the scheme ahead of the activity taking place and formally record the treatment of the scheme.
  4. Pensions should feature in ongoing governance checks, to guard against ‘failure to act’.

What kind of actions could theoretically be caught by the new powers?

The new penalties will apply to actions that risk pension benefits. This could, in theory, be any event that is financially
detrimental to the employer of a pension scheme. More detail and guidance on the events in scope is needed from the
Government and the Regulator as the Pension Schemes Bill progresses.

All of the above can form part of the scheme’s monitoring of employer covenant. But, to defend against the new sanctions, employers may now need more detailed governance processes to identify, respond to and record events that impact on pensions.

Accounting update

Overall, companies reporting at 31 December 2019 are likely to see an improvement in balance sheet positions given that the returns on assets are likely to more than offset the expected increase to liabilities. This is dependent on the investments held. Schemes with greater equity and property exposure should have fared better than others.

RPI inflation – uncertainty over future benefits

The Chancellor announced in September 2019 that he is intending to consult on making changes to align RPI with the lower inflation measure CPIH sometime between 2025 and 2030. The uncertainty over this change has impacted RPI expectations in the market. Since CPI assumptions are typically set as a deduction to RPI, the assumption used in previous years may no longer be appropriate. Companies should carefully review both their RPI and CPI assumptions for year-end.

For further information, please get in touch with Vicky Mullins or James Saunders or speak to your usual XPS Pensions contact.

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