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The Pensions Schemes Act 2021 is having an impact on the banking sector, particularly for employers participating in private sector defined benefit schemes. The collapse of household name employers such as BHS and Carillion has highlighted the catastrophic financial impact pension scheme deficits can have on the viability of a business.

Under the Pensions Schemes Act 2021 the Pensions Regulator has been gifted extensive powers to impose financial penalties and gather information on businesses in order to protect pensioners and stakeholders. These new powers are backed up by criminal offences.

The Pension Schemes Act 2021 also introduces new duties for those involved in running pension schemes and gives the Pensions Regulator new powers to protect pension scheme members.

The new legislation does not impinge on 'defined contribution' schemes per se but only on 'defined benefit' schemes. For many of our RP clients, this will include the Social Housing Pension Scheme (SHPS) (even where salary-related accrual has come to an end) and any stand-alone salary-related pension scheme they may sponsor. The Local Government Pension Scheme falls outside of the scope of these new powers.

Lenders have responded by introducing radically extended representations, covenants and events of default regarding borrowers' pension obligations into loan documentation and any RP entering into a new loan agreement or restating an existing agreement will find themselves subject to a raft of onerous far-reaching provisions. RPs need to carefully consider the impact of these new provisions as these are likely to become market standard.

A well organised RP should find that none of these new obligations present them with difficulties as they are already likely to be in compliance. But borrowers need to take care that they are not inadvertently caught out.

As part of the legislative framework under the Pensions Schemes Act 2021, new regulations are due to come into force in October introducing a duty to notify certain information to the Pensions Regulator. This requirement is far reaching and completely new It will impact RPs participating in salary-related pension schemes. The rationale for these new 'early warning' powers is to alert the Pensions Regulator and pension scheme trustees of issues where there may be a weakening of employer covenant to support a pension scheme.

The new duty extends to notifying the Pensions Regulator of "a decision in principle by the employer to grant or extend a relevant security over its assets, where the grant or extension would result in the secured creditor being ranked above the scheme in the order of priority for debt recovery." A decision in principle "means a decision prior to any negotiations or agreements being entered into with another party". Assets include "in relation to the assets of any employer [they] do not include money".

What will be the implication for our clients?

Let's consider the duty to notify within the context of a routine restatement of a borrower's loan facilities. Happy Homes RP entered into a loan agreement with Cash Bank plc, secured by fixed charges over a pool of housing properties. The board reviews its funding needs and on the basis of a valuation uplift re the secured properties, plans to borrow an additional £3million. The Finance Director entered into discussions with the Bank and subsequently signed a term sheet which led to solicitors being instructed to draft a restatement agreement. No new security was required but some of the commercial covenants were amended. In late December, a new restated loan facility agreement was completed by the parties.

Previously, it would not have been necessary to inform the Pensions Regulator or the pension scheme trustees of this amendment and restatement. But now there is an obligation to inform.

At what stage, should the RP inform the Pensions Regulator? The new regulations introduce a two-stage notification process. The first is when a 'decision in principle' is taken. Separately, a notice and accompanying statement has to be provided 'when the main terms have been proposed'. So do they have to notify when the board makes the decision that it should increase its borrowing with the Bank? Or when the Finance Director signs the term sheet? How far back the "decision in principle" needs to extend is nuanced but if it does extend to a verbal discussion by the board then the Pensions' Regulator can expect to be inundated by notifications. What will it then do with that information? How will that information assist it in its regulation of businesses and in its efforts to protect members of the pension schemes? There are some difficult questions that remain to be answered.

The exact content of the notification to the Pensions Regulator also needs to be determined and includes setting out details of any adverse effects on the scheme, any adverse effects on the RP's ability to meet its legal obligations to support the scheme and any mitigating action taken by the RP.

There is also an additional problem for an RP that has issued publicly secured bonds as legislation prohibits disclosing such information other than to those on its insider dealing list. We have not seen any guidance as to how this conflict should be resolved.

Now these regulations have come into effect and until the extent of their application is confirmed, RPs would be wise to err on the side of caution and inform the Pensions Regulator as early as possible of any decision taken in relation to secured lending.