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Comments from ACCA
June 2008

ACCA is pleased to comment on the consultation on the above matter. These comments reflect the thoughts of senior members of ACCA who have long experience of the pensions sector from the perspectives of trustee, fund manager, auditor and employer.

We understand the need to ensure that sponsoring employers do not arrange their affairs so as intentionally to divert their responsibilities and liabilities onto the Pension Protection Fund. With this in mind, it is reasonable to review the Regulator's anti-avoidance powers in the light of relevant intelligence about market developments.

It is clear, however, that the specific proposals set out in the document would amount to a substantial increase in the Regulator's powers. The impact of these new measures stands to be even greater given the proposals to apply them retrospectively and to allow further changes to be made by secondary legislation. We consider that any changes that may be introduced as a result of the document need to be framed as clearly as possible, in the interests of certainty, and acknowledge the range of pensions-related pressures that currently face employers. While the Regulator's anti-avoidance powers should be strong, they should be careful not to systematically prejudge employer actions as amounting to avoidance and they should not present a further material deterrent to the operation of occupational schemes. We believe that the proposals need to be considered carefully in this light.

Our comments on the specific consultation issues are as follows:

A new alternative test for Financial Support Directions (FSDs)

It is proposed that a new, wider condition be introduced to regulate the issue of FSDs in respect of schemes whose sponsoring employers are deemed to be ‘insufficiently resourced'. The document suggests that, at present, before the Regulator can consider issuing an FSD, a single entity must be identified that may be able to provide the financial support deemed to be required. To resolve any difficulties that might be encountered in identifying an appropriate entity, it is being proposed that the definition of the term ‘insufficiently resourced' to encompass a series of associated or connected persons, rather than a single such person.

It does indeed appear anomalous that there is a different test in s44(3) – definition of ‘insufficiently resourced' - to that found in s43(6) – persons who may be the recipient of FSDs. It is already the case that an FSD can be issued to more than one person, provided that any such person is connected with or associated with the employer. It would therefore be logical to take out this apparent anomaly.

We would ask the question, though, why there needs to be the sort of criterion currently included in s44((3)(b) – if a sponsoring employer is, in the opinion of the Regulator, insufficiently resourced at any particular time, then that should be enough in itself to cause the Regulator to consider taking remedial regulatory action, irrespective of whether a suitable other person can be identified at that stage. The Regulator, if satisfied as regards the standing of the employer, could then proceed to consider whether there are persons who meet the criteria of s43(7).

With regard to the proposal to insert an express reference to groups of companies into the current s43(7), we do not regard this as desirable. Should such a reference be added, it could well give rise to an expectation on the part of the Regulator that, in all relevant cases, there will be resources available to warrant issuing an FSD. It might also be seen to be based on the erroneous assumption that all the companies in the group, and their respective shareholder bodies, can be expected as a matter of course to assume responsibility for the financial difficulties of one group member and its pension scheme. We consider that this assumption would be incorrect and unreasonable.

We consider it would be sufficient to address the inconsistency in the current rules and simply remove the initial limitation within the process of identifying an employer who is insufficiently resourced. Thereafter, it will be open to the Regulator to direct FSDs at one or more group companies provided the current criteria are met.

Expanding the circumstances in which Contribution Notices may be issued

We agree that the Regulator should have powers to intervene in relation to deliberate avoidance on the part of employers and are pleased to read that the current powers as set out in the Act are considered to have been successful since their introduction.

We are not, however, convinced that the Regulator has made out a convincing case for why the proposed extension of these powers is now necessary. In para 2.22, the document says only that the test as it stands ‘may' be circumvented. We appreciate that contingency planning for new methods of circumventing the rules is essential, but are concerned that the extension of the Regulator's right to intervene to cases where avoidance is an unintended consequence of an employer's actions might go too far. By imposing a test which was based on effect rather than intent, the risk we see is that employers would be subjected to a substantial increase in uncertainty, which would in turn increase the demands on the Regulator to consider and clear proposed actions by employers. While the Department says in the document that it foresees no material increase in the demands for clearance of proposed actions on the part of employers, we feel it may be underestimating the consequences of some of its proposals.

It is also unclear to us why, if the motivation behind the proposal of these new measures is, as suggested, to address deliberate cases of avoiding pension liabilities, why the Department is proposing that non-deliberate conduct should be brought within the scope of the Regulator's powers.

We would suggest that, if some strengthening of the current rules is considered necessary, it would be sufficient to make an appropriate amendment to s38(5)(a), which states currently that the Regulator can only act if ‘the main purpose or one of the main purposes' of the act or omission is obstruction. This passage could provide instead that the Regulator could issue a contribution notice if either the main purpose or ‘one of the purposes' of the entity's actions or failure to act is avoidance. This would, in our view, afford greater scope for the regulator to intervene without extending to cases of ‘innocent' non-compliance.

Replacing the defence of ‘good faith'

The current provisions of s38 allow the Regulator to issue a contribution notice where it considers that a main purpose of the employer's action or failure was to prevent a debt becoming due otherwise than where the employer has acted in good faith. The document suggests that this defence of good faith can enable employers to escape the imposition of contribution notices. We were surprised to read that, in cases where the Regulator can establish that the main purpose (or a main purpose) of an employer's action is, effectively, avoidance, it can be so straightforward for an employer to argue that he nevertheless acted in good faith with regard to that action.

If, however, this has been the Regulator's experience in practice, we consider that similar problems may afflict the Department's proposed alternative wording. What, bearing in mind that employers will usually be corporate bodies, should they reasonably foresee and what would be the test of what they ought to have known (in advance of a transaction which had a materially detrimental effect on members' benefits?) Again, unless any new rules are clear on such matters employers will face problems in dealing with them and the burden on the Regulator stands to increase.

In summary, we do not oppose a measured increase in the Regulator's powers to address loopholes that may exist in the current rules. But a drastic increase on the lines proposed, and implemented in the way proposed, seems to be at odds with the statement in the document that the current rules appear to be operating successfully. We reiterate the comments made earlier about employers' need for clarity and certainty as regards these powers: the danger of these goals not being achieved may be greater if the rules in future are made by secondary legislation.

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