TPR’s Code of Practice on the two new tests (employer resources and employer insolvency) for imposing a Contribution Notice – Sackers’ response to consultation

Background

TPR is consulting on changes to its Code of Practice 12 (“the Code”) and the accompanying code-related guidance in relation to two new tests for imposing a Contribution Notice (“CN”). The new tests, the employer insolvency and employer resources tests, are being introduced under the Pension Schemes Act 2021 (“PSA2021”). The updated draft Code explains the circumstances in which TPR will consider issuing a CN on the basis of these new tests.

Responses to questions

1. Is our overall approach in the draft code and code-related guidance consistent with the policy intent behind the changes introducing the two new alternative ‘act’ tests to the CN power?

The Bill which became PSA21 was first introduced into Parliament in October 2019. The stated policy intent underpinning TPR’s new powers (outlined in the accompanying Queen’s Speech) is “to tackle irresponsible management of private pension schemes” so that TPR “can respond earlier when employers do not take their pension responsibilities seriously, including taking tougher action against those who recklessly risk peoples’ pension benefits”.

TPR’s approach noted in the consultation is to “focus on the effect of an act on an employer, which in turn affects its capacity to support the scheme”. In our view, this is in keeping with the stated policy intent. Further, TPR has sought to assure stakeholders that it does not “expect the new tests to significantly shift [its] current approach” for assessing potential CN cases.

As we set out below, there are some aspects of the draft Code which we feel would benefit from further detail and/or clarification; in particular, to help better illustrate the circumstances in which TPR may or may not seek to impose a CN.

Finally, as a general comment, we note that the current version of the Code dates back to June 2009. This pre-dates the introduction of TPR’s statutory objective, when exercising its scheme funding functions, “to minimise any adverse impact on the sustainable growth of an employer.” There may be circumstances in which this obligation overlaps with the exercise of TPR’s CN powers.

2. Is the code clear on what the tests are and the circumstances in which we will consider any of the tests to be met? If not, how could we make it clearer, without limiting the scope of the tests?

In keeping with its current documents, the draft Code and guidance are both very brief. It is important to bear in mind here that there is currently little judicial guidance on the use of TPR’s CN power and the application of the existing tests. Few publicly available determinations or notices have considered their application. It is therefore difficult to be entirely certain as to what might fall in or out of scope. As a consequence, more detail would be welcome. It would also be of interest to all schemes and their advisers to see more decisions / notices published generally.

Whilst the tests outlined in the draft Code help to explain the circumstances in which a CN could or might be imposed, the examples in paragraph 14 are of behaviour which would be most obviously caught. As a result, they do not shed any clear light on potential grey areas. The draft Code, therefore provides limited additional detail than that already covered by the relevant legislation.

We would encourage TPR to make clear when a “circumstance” is most likely to meet one specific test, rather than stating they could meet all tests.

3. Are the examples provided in the code-related guidance useful in illustrating the circumstances in which we might consider the new ‘act’ tests to be met? Are there any other examples you would consider helpful?

Whilst the examples outlined in the draft guidance help to explain where a CN might be imposed, they mostly fall at two ends of the spectrum:

• behaviour which would be most obviously caught, and
• in contrast, behaviour which is highly unlikely (but for very specific circumstances) to be caught.

Against the backdrop of limited external guidance on the tests, it would be useful to have further examples outlined, including borderline and less obvious ones. More detailed commentary around the potential grey areas would be appreciated, including scenarios which more closely skirt the boundary between acceptable and unacceptable behaviour.

As with the Code, it would be useful if the guidance could make clear the specific tests to which the illustrative examples attach.

Mitigation

CNs are more likely to be imposed where “appropriate” or “adequate” mitigation is not provided. The guidance does not itself address what might constitute appropriate mitigation. It would be helpful to have examples as to when mitigation might be considered inappropriate or inadequate.

There are, of course, situations in which additional mitigation will not necessarily be sought or offered because of the strength of the existing employer support already in place. For example, the scheme benefits from a parent company guarantee which would more than cover any potential downside of an act or failure to act. We assume that TPR would factor such a possibility into its “reasonableness” assessment, but it would be useful if this could be explicitly addressed.

4. Other comments

Whilst we appreciate that the proposed draft Code and guidance are in keeping with the style of the current documents, at the moment the risk is that they are so brief that they are in danger of being overlooked rather than used as a practical reference point. Greater detail and insight from TPR would lead to better informed corporate sponsors, and we think TPR could go further without “tying their hands” or limiting the scope of the tests.

The current material detriment test can be hard to demonstrate and therefore the more specific “snapshot” tests are expected to give TPR a clearer way forward for taking action. However, we consider that the concept of “material detriment”, and mitigation for this, needs to remain at the heart of addressing the impact of corporate action on pension schemes. It would be unfortunate if this broader focus were to be lost, not least because it will continue to cover situations where TPR’s powers are engaged even when the snapshot tests are not met.