Background
The Pensions Act 2004 introduced a power for the Pensions Regulator (TPR) to issue a Contribution Notice (CN) in certain circumstances, requiring an employer (or a connected party) in relation to a defined benefit pension scheme to make a payment to the scheme. Initially, there was one test that might trigger a CN, known as the Material Detriment test. The Pension Schemes Act 2021 has introduced two new tests that might trigger a CN:
- the Employer Insolvency test and
- the Employer Resources test.
TPR has to maintain a code of practice explaining how it expects to exercise its power to issue CNs, so has revised the existing code of practice (number 12) in light of the introduction of the two new tests.
The three tests
TPR will issue a CN by reference to the Material Detriment test only if it believes that an act (or failure to act) of the employer has been materially detrimental to the likelihood of members receiving their accrued scheme benefits.
For TPR to issue a CN by reference to the Employer Insolvency test it must be of the opinion that:
- immediately after the act or failure to act took place (or started if over a prolonged period), the value of the assets of the scheme was less than the amount of its liabilities and
- if a “section 75 debt” had fallen due from the employer to the scheme immediately after that time, the act would have reduced materially the amount of the debt likely to be recovered by the scheme.
The code explains that, for this purpose, TPR will estimate the value of the scheme’s assets and liabilities and the section 75 debt.
For TPR to issue a CN by reference to the Employer Resources test it must be of the opinion that:
- the act (or failure to act) reduced the value of the employer’s resources and
- that reduction was material relative to the estimated section 75 debt in relation to the scheme.
In this case, there will be regulations to dictate how the value of the employer’s resources must be calculated.
In all cases, there is a statutory defence if the employer:
- considered the likely impact of the act on the scheme,
- took steps to mitigate any adverse effect and
- reasonably believed that the impact had been minimised.
Where the statutory defence applies TPR is unlikely to issue a CN. It will be important, therefore, for companies to keep an audit trail of their decision making in relation to acts that might trigger a CN.
The circumstances
The code includes a list of circumstances which TPR expects might trigger a CN. These include some instances of payment of a dividend and early repayment to other creditors. However, TPR may issue a CN only if it considers it reasonable to impose liability on the person to pay the sum specified in the notice.
The code is accompanied by guidance, which sets out further examples of behaviour that are likely or unlikely to be materially detrimental to a scheme.