Why getting Section 107 right is fundamental | Pensions and Lifetime Savings Association

Why getting Section 107 right is fundamental

15 September 2020

While Pension Scheme Bill is continuing its route through the parliamentary process, there are still some loose ends to tie up; including section 107. Here, PLSA Chair Richard Butcher, looks at what the implications of that clause could mean for DB schemes.

The Pension Schemes Bill is still winding its way through the parliamentary process albeit getting close to its conclusion. That said, while the champagne is on ice, no one yet has popped the cork. There is still some work to be done.  

One of the most contentious items outstanding is Section 107 – a dry label for a clause that runs to about four pages and that could fundamentally change the face not just of defined benefit (DB) pension schemes but the way organisations with DB schemes do business with others. In the worst extremes it could kill businesses. 

The history is this. The legislators and regulator decided they needed more teeth to go after nasty pernicious employers who, motivated by greed or misaligned incentive, deliberately harmed, denuded or even just weakened their covenant with the outcome of prejudicing the associated DB scheme’s chance of providing all of its benefits. Informally the clause was named after a certain business owner who, while doing nothing illegal, earned the ire of the legislators by paying large dividends in the years before his business went bust (for unconnected reasons). 

The pre-Bill, White Paper, rhetoric was all about being able to fine, criminalise of other wise sanction employers behaving in a similar way. 

Okay, agree or disagree with the principle, it was a deliberate and targeted sanction aimed at a defined cohort who behaved in a specific way. It was widely, if not universally, seen as a good thing. 

Then the Bill arrived. And there seemed to have been some mission creep. In fact, an alarmingly scary amount of mission creep. 

The clause as drafted didn’t just sanction a defined cohort who behaved in a specific way. It potentially sanctions a whole universe of people who behave in, well in many respect, an entirely normal business like way.

The test is this: if you “materially” affect a schemes ability to provide benefits or if you act (or fail to act) with the result that an employer debt is avoided, you ought reasonably to have known this and in the absence of a “reasonable excuse”, you are bang to rights and could go to prison. 

Let me elaborate. Firstly, your actions do not need to be anything to do with the pension scheme per se. So, let’s say, a bank decides not to extend credit to a business with a DB scheme with the consequence its covenant is weakened – well you’re a wrongun. 

You could take the matter to court (rather than just submit yourself immediately to several years sharing a small stone room) but you’d have to prove you had a reasonable excuse. You might well succeed – given you are a bank who accepts and declines applications for all sorts of reasons all of the time – but do you really want to go through that rigmarole much less take that risk?

Secondly, it potentially criminalises entirely normal operations (such as a bank offering or not credit) including a trustee accepting a lower funding settlement or paying an unfunded augmentation, or an actuary or lawyer advising his client, the payment of a corporate dividend or pretty much any corporate transaction involving a DB employer. The impact of s107 extends well beyond the operation of pension schemes into the operations of business. At its worst extreme – it effectively stops business. Stone dead. The sort of stop that is followed by rigor mortis.

The Joint Industry Forum (or JIF) of eight pension associations (including the PLSA) is fighting a valiant rear guard action, but …. well time will tell.  

The drinking of that champagne could be a wild celebration for the delivery of a new Act, but it could equally be a muted sip at the wake of a number of businesses. Make sure you’re telling and mobilising those you deal with to make it the first.

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