New legislation expected to come into force from the government's defined benefit (DB) white paper has the potential to increase company insolvencies and send their schemes into the pensions lifeboat, a lawyer has warned.
The Department for Work & Pensions (DWP) published in March its 76-page defined benefit white paper, which besides creating new legislation to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme, also gives The Pensions Regulator (TPR) powers to disqualify company directors, and introduce new punitive fines.
The government will also consider if the introduction of a targeted mandatory clearance process for specific corporate transactions, where the companies involved have defined benefit pension schemes, is necessary in the coming months.
Rosalind Connor, partner at Arc Pensions Law, told FTAdviser that future legislation, as it contradicts existing insolvency regulation, might prompt companies to give up sooner than intended.
The new rules, as laid out in the white paper, might mean that if companies pay money to anyone other than the pension scheme, they are at risk of some kind of demand from The Pensions Regulator, even if that was the appropriate and right thing to do, she said.
And if the firm pays the pension scheme before any other creditor, she said it might get in trouble with the insolvency legislation, which has a lot of controls about not preferring one creditor over others, particularly when the company is in financial difficulties.
Ms Connor said: "There is a very obvious solution [for this problem], which is filling for insolvency.
"The worry with this is that it will increase the number of people who will file for insolvency earlier, and I am not sure that was what was intended [with the new rules]."
FTAdviser understands that TPR's duties include protecting the employer, so the regulator wouldn't force a company into insolvency.
Industry specialists will be called to give their views on the coming rules.
A DWP spokesperson said: “As set out in the defined benefit white paper we will continue to work with industry, regulators and the charity sector to develop our policy proposals.
“Further consultations will take place during the rest of 2018 and into 2019.”
If a company files for insolvency, and its pension scheme is in deficit, it will enter into an assessment period at the Pension Protection Fund (PPF).
The pensions lifeboat is already predicting its membership will increase by 52 per cent by 2020 to 2021, compared with current levels, greatly due to the Carillion and British Steel cases.
The PPF will pay 90 per cent of a scheme member's benefits if they are not retired when they are transferred into the lifeboat, and 100 per cent if they are receiving a pension.
Another reason for company directors to give up more easily is that some of the new rules may come into force with a retrospective effect, Ms Connor argued.
Esther McVey, secretary of state for pensions, signalled that this could be a possibility in Parliament in March.
Ms Connor said: "It is pretty clear from the white paper itself and from the commentary around it that the government wants to make some of this retrospective. Whether it can, and the extent of it, remains to be seen."
She argued that when The Pensions Regulator's moral hazard powers were drafted, the government tried to make them retrospective, but due to push back from Parliament they became effective from the date the first draft of the Bill was published, in 2005.
She said: "The argument was that you can't make something retrospective if you haven't given people enough details to know if whether they would be caught or not.
"I think the same argument could be used here; if they try to make the new rules retrospective to the date of the white paper, they will have a challenge on their hands. But is quite clear that that is the expectation, particularly with these new powers against corporates.
"There are a lot of good legal arguments about why is difficult to have retrospective legislation, but in the end, it comes down to political will."
maria.espadinha@ft.com
