Dramatic extension of Pensions Regulator's "moral hazard" powers

Yesterday, in a move that took the pensions industry by surprise, the Government announced proposals to amend the Pensions Regulator's so-called moral hazard powers.

Background

The moral hazard provisions allow the Regulator to issue contribution notices ("CNs", which require payment of a specified sum to a pension scheme) or financial support directions ("FSDs", which require financial support for a scheme to be put in place) in certain circumstances against parties associated or connected with scheme employers.

These powers have received wide coverage since they were introduced in April 2005. While they have only been used in relation to one scheme (the Sea Containers case), many employers and investors have sought to close off any risk by obtaining Regulator approval to proposed transactions through use of the statutory clearance procedure. Others have been able to satisfy themselves, on professional advice, that they did not fall within the scope of the powers.

The announcement

The secrecy surrounding the introduction of the changes can perhaps be explained by the fact that they are to be backdated to yesterday's date (14th April 2008). Their key aims are:

• to allow CNs to be issued where the effect of an action or transaction "is materially detrimental to a scheme’s ability to pay members’ current and future benefits": so the Regulator would no longer need to prove intent on the part of a party to avoid properly funding the scheme;
• to remove the existing provision in the legislation that states that a CN may not be issued where a party has acted in good faith;
• to clarify that the issue of a CN can be triggered by a series of acts, not just a single act (note that this change only will be backdated to 27 April 2004);
• to amend the legislation so that the resources of the whole group of companies may be considered when judging whether to issue an FSD - this should make it easier for the Regulator to find companies within a corporate group which could potentially be subject to an FSD; and
• to ensure that the Regulator’s use of its powers "is not frustrated by bulk transfers of members between pension schemes".

It is important to note that the detailed consultation document intended to accompany the Minister's statement has not yet been issued: it is expected "shortly".

Immediate implications

For the moment, the Government seems keen to link its announcement with the recent development of the market for "pension buy-out" models. It says that "the overwhelming majority of pension schemes will not be affected by these changes", while the Regulator itself "wishes to reassure applicants for clearance that the DWP proposals do not change our established clearance process".

However, the changes will turn CNs into a “no-fault” environment. The Regulator will still be required to act reasonably, but this may not be sufficient comfort on its own, given the size of numbers involved in pension schemes and the difficulties in identifying all possible outcomes of any particular transaction. These changes will drive far more employers into the arms of the Regulator.

For the Minister's statement please click here.

For further information, please speak to your normal CMS Cameron McKenna contact.