Speaking to banking colleagues recently about what the Pensions Regulator’s stronger powers mean for them reminded me just how much turns on the Regulator’s view of what is reasonable.
There has been a great deal of discussion about the wide range of circumstances in which the Regulator could use its various powers (what the Regulator calls the “act elements”). This is particularly true of the newest additions to its arsenal – fines of up to £1m and criminal powers. Many involved in DB pensions spent much of last year worrying about whether ordinary business activity could be caught.
Everyday activities such as paying dividends to shareholders or raising debt with security that ranks ahead of the scheme could in principle engage the Regulator’s criminal powers. But the safety valve is whether the potential target for the powers has a “reasonable excuse” – in the Regulator’s opinion. To calm an anxious pensions industry down, the Regulator’s criminal powers policy is full of helpful and sensible reassurances about what it believes the power is and is not for.
In a similar vein, the Regulator’s new draft scheme management enforcement policy and updated prosecution policy (both currently out for consultation) are littered with comforting wording – for example lots of references to reasonable, appropriate, risk-based and proportionate responses, prior engagement with potential targets for enforcement action and wanting to resolve issues without the need for enforcement.
But the draft enforcement policy also contains a potentially worrying note. It says the Regulator “may also seek to improve a scheme’s security or financial position, even where there has been no contravention of any obligations under pensions legislation”. Is this just a reference to the statutory test for financial support directions (FSDs) which – unlike contribution notices, the criminal powers and the new fines – is factual rather than fault-based? I.e. no objectionable conduct is needed for the FSD power to be engaged. (Very broadly, if the employer has insufficient resources but a connected party happens to be asset rich, the Regulator can consider the reasonableness, or otherwise, of issuing an FSD against the richer connected party. This is sometime referred to as the “rich man, poor man” test.)
Or is the comment about taking enforcement action even where there is no breach of pensions laws a reference to the Regulator’s s.231 powers in relation to valuations and funding?
The comment lacks proper context in the new policy so it’s difficult to tell what this is getting at.
In any event, being so reliant on the Regulator continuing to be sensible and balanced is uncomfortable in the ever-changing and volatile world that we now seem to inhabit. Restructurings that last year seemed sensible and promising may this year look anything but as the landscape shifts once again with the war in Ukraine and the Covid-related lock-down in Shanghai. The Regulator has said it won’t judge reasonable behaviour with the benefit of hindsight. Let’s hope that’s right.
