Today the DWP published a consultation on plans to increase the powers of The Pensions Regulator (TPR) to issue Contribution Notices or Financial Support Directions, where scheme changes or corporate transactions (including bulk transfers) could - in TPR's opinion - threaten the security of members' pensions. This follows a controversial Government statement on 14 April that the net would be cast widely, applying to an employer or their associates, including investors in the employer who might seek to profit from the scheme. The changes - which require Parliamentary approval - are to be made retrospective to 14 April; the DWP intends to legislate at the earliest opportunity.

The DWP is reacting to the rapid development of alternatives to the insured buy-out model, which could facilitate the extraction of scheme surpluses. Minister for Pensions Reform Mike O'Brien said:

"The Pensions Regulator has done an excellent job in recent years but we need to ensure its powers keep pace with developments in the pensions market."

Innovation is welcome, but I am concerned some emerging business models might not give the same protection for pension schemes as traditionally provided by a sponsoring employer or insurance capital. ... I want to guard against pension schemes simply being treated as a commodity to be bought or sold."

This announcement elicited widespread alarm in the industry, which was not mollified by Government assurances that the changes would not affect the vast majority of pension schemes, and that TPR would only uses its powers "where it is reasonable to do so", ie when an employer's actions put pension scheme members' benefits at risk. The problem perceived by the industry is that whereas at present a Contribution Notice can only be issued in the wake of an intentional action to destabilise a pension scheme, in future TPR could issue one where an action - or indeed a series of actions going as far back as 27 April 2004 - has the effect of putting the pension scheme in a worse position.

The Government proposes that Contribution Notices may be issued where the effect of an act is materially detrimental to a scheme's ability to pay members' current and future benefits. The connection could be indirect, with the target put in the invidious position of having to prove that it could not reasonably have foreseen the likely consequences of its action upon the pension scheme. No longer will it be able to rely upon the present 'good faith' defence. There might have been no intention whatsoever to damage the scheme, but to prove a negative is a severe philosophical challenge.

More alarm bells were rung by the idea that the target of a Financial Support Direction in respect of an under-resourced employer could be any person or persons within a group of companies, freeing TPR of the need to identify one particular target with deep pockets. The fear is that the risk that new borrowing, for example to fund business expansion or refinance corporate debt, could be regarded by TPR as weakening the capital backing for future pension scheme liabilities. The risk of receiving a Contribution Notice or Financial Support Direction in those circumstances is likely to freeze many transactions.

To what extent, if any, the earlier announcement was a kite being flown to test reaction ahead of the condoc is not clear. However, the Government is at least now aware of the concern, and in a statement also issued today seems anxious to reassure businesses that "the overwhelming majority" of pension schemes will not be affected by these changes, which are not intended to catch "entirely normal business activities". It adds that TPR will not withdraw clearance that has already been given (unless the facts prove to be materially different).

TPR, seemingly equally anxious to apply an emollient, has simultaneously put out a statement on use of the amended powers. Emphasising that the voluntary clearance process remains available, and the existing guidance still applies, TPR nonetheless offers a special email address for enquiries about clearance.

Tony Hobman, Pensions Regulator chief executive, said

"We envisage no change to our fundamental approach as a result of the new powers. We believe these changes will affect only a small number of schemes – we do not wish to hamper market activity or innovation."

"We recognise the uncertainty that the retrospective effect of these changes could create, particularly until the new legislation comes into force later this year. We can confirm that, as signalled in the DWP statement today, during this period we will not apply the following amendments to our powers:
• the new alternative test that could trigger the issue of a Financial Support Direction;
• the new alternative test that could trigger the issue of a Contribution Notice; and
• the removal of the words 'otherwise than in good faith' from s.38(5)(a)(ii) of the Pensions Act 2004;

  unless one of the actions or situations listed below is the subject of the proposed use of the power:

  • moving the employer or pension scheme to another jurisdiction;
  • splitting the operating company from the pension scheme without appropriate mitigation for the pension scheme;
  • splitting the assets from the operating company without appropriate mitigation for the pension scheme;
  • transferring scheme assets and liabilities to another scheme which did not have adequate support from an employer;
  • running a scheme for profit without adequate account being taken of member interests;
  • or business models in which risk is predominantly borne by scheme members, but high investment returns would benefit investors."