Pensions Regulator (Employer Resources Test) Regulations 2021

Baroness Janke Excerpts

Monday 6th September 2021 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)]

My Lords, I am pleased to introduce this instrument, which was laid before the House on 28 June 2021. Subject to approval, these regulations provide essential details on the new employer resources test that was introduced by the Pension Schemes Act 2021 in connection with changes to the contribution notice regime.

The new employer resources test will enable the Pensions Regulator to overcome existing challenges of assessing the “act” or “failure to act” that has affected the financial strength of the sponsoring employer, and therefore its ability to support the scheme, rather than damaging the scheme directly.

These regulations outline that the profit before tax measure will be used to assess the resources of the employer. This measure is widely known and understood by the industry and gives the most appropriate picture of net profits available to provide support for a defined benefit pension scheme. The regulations set out specifically how the value of the resources of the employer is to be determined, calculated and verified.

I am satisfied that the provisions in the regulations are compatible with the European Convention on Human Rights.

Part 3 of the Pension Schemes Act 2021 strengthens the powers of the Pensions Regulator. It fulfils our manifesto commitment to take action against those who think they can plunder the pension savings of hard-working employees. These regulations provide essential details on the new employer resources test which forms part of the Pensions Regulator’s contribution notice regime. This regime enables the Pensions Regulator to demand that money is paid into a pension scheme from those found to have caused it detriment. A recent example is Dominic Chappell, who was ordered by the Pensions Regulator to pay £9.5 million into the British Home Stores pension scheme.

The new employer resources test, which these regulations relate to, will enable the Pensions Regulator to overcome existing challenges of assessing the “act” or “failure to act” that has affected the financial strength of the sponsoring employer and therefore its ability to support the scheme rather than damaging it directly.

With these new provisions, we will also avoid the associated challenge of having to project into the future to assess the likelihood of members receiving their accrued benefits. The purpose of the employer resources test is to provide the Pensions Regulator with a tool to make a simple snapshot assessment of the impact of the act or failure to act on the employer at the time. This allows for the act or failure to act to be assessed on its own terms, relative to the employer’s current potential exposure to the scheme, rather than an assessment of what could happen in future. Assessing whether the act or failure to act has reduced the value of the employer’s resources is just one part of the wider employer resources test. The Pensions Regulator, in addition to looking at the health of the employer, also has a focus on the scheme, where it is required to assess whether the reduction of the employer’s resources was material when compared to the scheme’s estimated Section 75 liability.

On the specifics of these regulations, what constitutes the resources of the employer is determined as being the employer’s profits before tax. This is a widely known and understood measure used by the industry and gives the most appropriate picture of net profits available to provide support for a defined benefit pension scheme. How the value of the resources of the employer are determined, calculated and verified are set out in these regulations. The general approach assesses the annual profit before tax position of the employer had the act or failure to act not occurred, which is then compared to an assessment including the act or failure to act. An adjustment is then applied to the profit before tax position that represents the impact which is expressed as a pound figure. The calculated figure would then be assessed against the scheme’s Section 75 debt immediately before the act or failure to act occurred. When the employer resources test has been met, the Pensions Regulator will follow the existing contribution notice process, whereby it will consider other factors, including the reasonableness of issuing a contribution notice.

Working in tandem with these regulations is the Pensions Regulator’s code of practice, which aims to provide further clarity to the industry on how it will interpret and use the powers. The Pensions Regulator launched a consultation in May 2021 on its contribution notice code of practice, which included clear examples covering scenarios of how the different tests would apply. The consultation concluded in July, and the Pensions Regulator is reviewing the responses with a view to publishing the code later in the year.

In closing, we remain committed to ensuring that there should be no hiding place for those who put workers’ retirement savings at risk, and these regulations will play a vital role in enhancing the Pensions Regulator’s ability to take action to protect pension scheme members. I commend this instrument to the Committee and beg to move.

[Baroness Janke (LD)]

My Lords, enabling the TPR to use contributory notices more widely to correct any detrimental action or failure to act is very welcome. However, I have a few questions about the method chosen for defining employer resources.

The Explanatory Memorandum refers to other methods being considered— EBITDA, or earnings before interest tax depreciation and amortisation, and a holistic measure based on covenant strength—but they were dismissed. Can the Minister explain why they were rejected, particularly the holistic assessment based on covenant strength? She will be aware that in very large university superannuation schemes, the level of contributions is affected by covenant strength. Can she explain why a snapshot of net income or profit before tax provides a better approach than this? If the snapshot route is to be followed for defining employer resources, what about the strength of employer assets? What part do they play in any assessment? I also question whether it is reasonable to allow the TPR absolute discretion in determining what are or are not exceptional or non-recurring items. I would welcome the Minister’s clarification on these points.