A question of value – contribution notices and the employer resources test

You will no doubt recall that, back in February, the Pension Schemes Act 2021 (the “Act”) finally became law. The Act changes the pensions landscape quite drastically and one way it did this was to extend the Pensions Regulator (“tPR”)’s contribution notice (“CN”) regime.

What changed in a nutshell?

tPR could already issue a CN, if it was reasonable to do so, where there had been deliberate avoidance of a s75 debt or an act or failure to act materially affected the likelihood of members receiving accrued benefits.

The Act added two new grounds which made it easier for tPR to issue a CN. Very briefly, these are:

• the “employer insolvency” test which allows a CN to be issued where, immediately after an act or failure to act, if the employer was to suffer a hypothetical insolvency event triggering a statutory s75 debt, tPR is of the opinion that the act or failure to act materially reduced the amount of the s75 debt which the scheme could recover; and
• the “employer resources” test which allows a CN to be issued where tPR is of the view that an act or failure to act would have reduced the value of the employer’s resources and this reduction is material relative to the estimated s75 debt in relation to a scheme.

Employer resources

We now have draft Regulations, The Pensions Regulator (Employer Resources Test) Regulations 2021. These Regulations are expected to come into force on 1 October 2021 and the Government has made it clear that they will not have retrospective effect. The Regulations set out what constitutes “employer resources” and how they are valued for the purposes of the new CN ground.

Essentially, when considering an employer’s resources, what will need to be considered are the profits of the employer before tax as stated in the employer’s accounts adjusted for non-recurring and exceptional items (i.e. infrequent or unusual items). When categorising an item as non-recurring or exceptional, and considering any value, tPR will have to have regard to the relevant accounting standards published by the Financial Reporting Council.

If there are no suitable accounts (for example, because the employer is not required to prepare annual accounts under the Companies Act 2006), tPR may determine, calculate and verify the value of the employer resources.

In undertaking any assessment and calculations, tPR must take account of all relevant information and, provided it does so, no further verification is required.

How does this fit into the bigger CN picture?

Whilst the employer resources test widens the grounds for imposing a CN, tPR must still establish that it is reasonable to impose a CN (for example, this could include tPR considering a broader assessment of an employer’s strength rather than just the employer resources calculation).

It is also worth noting that, under the new Act, it will be a criminal offence to fail to comply with a CN. However, there is a statutory defence to both the new grounds for a CN: where a person gave due consideration to the act or failure to act and took all reasonable steps to eliminate or minimise the potential for the act or failure to act to have that impact.

What is likely to happen in practice?

In practice, particularly while the employer resources CN ground is new, I expect that employers will pursue the tPR clearance application route more often. This may happen less once more is known about this new test. Employers will be pleased to hear that tPR is working on a revised Code of Practice 12 (Circumstances in relation to the material detriment test), with associated guidance, to set out the circumstances in which it expects to issue a CN. Watch this space! In the meantime, companies may want to ensure that, where a company in its corporate group participates/has participated in a defined benefit pension scheme, they consider the impact of any material business activity on the pension scheme and keep a record of the reason(s) that the decision to proceed with the business activity, having given such pension scheme due consideration, was made.

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