Pension sponsors ‘left guessing’ on TPR’s Contribution Notice tests

Pension scheme sponsoring employers may be “left guessing” as to whether their activities could lead to enforcement action under The Pensions Regulator’s (TPR) enhanced Contribution Notice powers, LCP has warned.

The consultancy firm noted that TPR did not include an expanded ‘clearance’ framework in its recent publication on how it will conduct and assess two new Contribution Notice tests, which would have allowed employers to seek clearance from TPR before making business decisions.

Although it was “widely expected” that the regulator would introduce a clearance process for the two new tests, as it had under previous Contribution Notice tests, it has not done so, LCP stated.

Furthermore, LCP noted that TPR had not provided any guidance on when it may consider it reasonable to impose a Contribution Notice that is triggered by a technical breach of one of the news tests.

Concerns were raised that the lack of a clearance process and no “substantive” guidance from TPR on the approach it will take in applying the new tests would mean than employers would be “left guessing” as to whether their actions could lead to enforcement action.

“Now that we know how TPR plans to operate its new powers it is clear that there is a regulatory gap,” commented LCP partner, Jonathan Camfield.

“Sponsors will have to make some key business decisions, which could have an impact on their pension scheme, without any substantive guidance on whether TPR will seek to impose a Contribution Notice, and without having the option to seek clearance.

“For example, an employer might make a routine dividend payment which technically breaches the new ‘insolvency test’, or another employer might borrow more money to invest in a growth opportunity.

“Both can argue that this is not materially detrimental to the scheme because the risk of insolvency is so low. But, without obvious overall material detriment to the scheme, it is now clear that clearance is not an option for the sponsor and so directors could still be open to later regulatory challenge and the possible imposition of a Contribution Notice.

“Whilst TPR cannot be expect to ‘sign off’ every decision made in Britain’s boardrooms, nor should firms find themselves in a position where they have no choice but to be left guessing. The current guidelines mean too many firms simply will not know where they stand.”

In response, a TPR spokesperson said: “We have updated our clearance guidance to reflect the two new Contribution Notice tests introduced by the Pension Schemes Act 2021. It is important to note that the clearance process remains available for applicants within the scope of our guidance.

“We have seen a steady decline in the number of clearance applications, from 212 in 2005 to seven in 2020. We believe this shows that industry is confident of the scope of our Contribution Notice powers.

"We agree that it is not practical for employers to seek clearance for every business decision they take and most will continue to make their own sensible assessment of the risk of a Contribution Notice.”

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