20/05/09 Anti-Avoidance: “Material Detriment Test” Code of Practice
20 May 2009
Overview
The Pensions Regulator has published its response to consultation on the draft “Material Detriment Test” (“MDT”) Code of Practice, and has finalised the Code which has been laid before Parliament.
The Code and the MDT test are expected to come into force at the end of June 2009.
“Material Detriment Test”
The MDT was introduced by the Pensions Act 2008. The new test will enable the Regulator to issue a Contribution Notice (“CN”) where the Regulator is of the opinion that the MDT is met in relation to an act or failure to act. The MDT is met if the Regulator is of the opinion that the act or failure to act has detrimentally affected in a material way the likelihood of accrued scheme benefits being received.
The Code of Practice sets out the circumstances where the Regulator expects to issue CNs on the MDT. These have been slightly amended from those contained in the draft Code following comments received in the consultation period and are as follows:
1. The transfer of the scheme out of the UK jurisdiction.
2.The transfer of the sponsoring employer out of the UK jurisdiction or the replacement of the sponsoring employer with an entity that does not fall within the jurisdiction.
( This has been amended to cover the possibility of dissolving or removing one employer and replacing it with another.)
3.“Sponsor support” is removed, substantially reduced or becomes nominal.
(“Employer” has been replaced by “sponsor”. The former reference to “severing” of employer support has been removed to avoid confusion.)
4.The transfer of the scheme liabilities to another pension scheme or arrangement which leads to a significant reduction of the sponsor support in respect of those liabilities, or funding to cover those liabilities.
( The concept of “sufficient employer support” was considered to be too vague, and has been amended to a test of “significant reduction”.)
5.A business model or the operation of the scheme which creates from the scheme, or which is designed to do so, a financial benefit for the employer or some other person, but where proper account has not been taken of the interests of the scheme members, including where risks to members are increased.
( Although many of the respondents to the consultation raised concerns that normal transactions could fall foul of this circumstance, the Regulator does not believe that this is the case and has left this virtually unchanged.)
Comment
Although clarification of the circumstances in which the Regulator may consider using the MDT test is to be welcomed, it should be noted that the list of circumstances is not exhaustive. The consultation response states that in exceptional circumstances the Regulator may wish to act outside the specific circumstances set out in the Code. However, it would still be necessary for the Regulator to meet all the underlying legal requirements and show why it was reasonable to be acting outside the Code.
Further guidance on the application of the MDT is to be published in the future, and it is hoped that this will precede the date that the Code comes into force.