25 January 2017 - Post by:Jason Shaw
With the high profile collapse of BHS and two subsequent Parliamentary inquiries, the role and powers of the Pensions Regulator have come under close scrutiny since the second half of 2016. This spring, the government is planning to issue a discussion paper on various issues related to defined benefit pension schemes; it is perhaps no surprise that the paper is also expected to look at the issue of whether the Pensions Regulator’s powers need to be expanded.
What those new powers might be is unclear. For example, changes could be made to legislation to make regulatory clearance for transactions compulsory in certain circumstances, or the Regulator could perhaps be given a power to block dividend payments where a scheme is in deficit. However, it is by no means evident that the Regulator needs new or extended powers at all. Taking BHS as an example, the Regulator has now issued warning notices setting out its case for the use of its powers to issue contribution notices (CNs) and financial support directions (FSDs) against various parties – a Contribution Notice requires a person to pay a sum of money to a scheme; a Financial Support Direction requires ongoing financial support to be put in place. These powers – particularly the FSD power – are quite far-reaching, but there is a time limit on the Regulator’s powers (a look-back period). The focus is often on the pension scheme employer, or another company in the group, but it is important to remember just how wide-ranging the Regulator’s powers are – potentially even affecting banks, lenders and corporate investors.
In light of the renewed focus on the Regulator’s powers, we have published an updated version of our briefing ‘Financial Support Directions: issues for banks and lenders’, which highlights the potential significance of FSDs to banks, lenders and corporate investors, and sets out practical checks and safeguards to help mitigate these wider FSD risks.
So what should the government do? Perhaps what is needed is not an extension of powers but greater resources for the Regulator so that it has greater capacity to utilise its existing powers, and a more streamlined way of exercising those powers – under the current process the Regulator often finds itself embroiled in litigation for years. As always, this is a balancing act, since parties subject to a CN or FSD should also have the opportunity to put the Regulator to the test, and challenge the CN or FSD where there are grounds to do so.
Jason Shaw is a senior associate at Allen & Overy LLP.