After several vigorous, public criticism of its failure to exercise its powers in high profile cases, the Pensions’ Regulator has its spotlight firmly trained on corporate activity and the impact it has on defined benefit pension schemes. That scrutiny is in addition to the Work and Pensions Select Committee, chaired by Frank Field, who asks public questions of numerous corporates about proposed transactions.
On top of an increased scrutiny and the existing “moral hazard” powers of the regulator, there is also the prospect of new criminal offences and even tougher powers trailed in the Pensions White Paper. Additionally, the regulator was recently successful in an appeal which challenged its ability to impose a financial support direction, in the Box Clever case, where it sought to make a shareholder in a joint venture company responsible for funding that company’s pension scheme.
For corporate groups with a DB pension scheme, it means that now more than ever businesses need to be on the front foot in terms of understanding what might give rise to regulatory intervention.
Role of the regulator
The regulator’s “moral hazard” powers allow the enforcement of liability where actions result in a scheme being less able to meet its benefits in full and to impose group-wide liability for pension scheme underfunding without any question of fault or bad faith arising.
In general, there is no legal obligation on an employer’s wider group, whether in the UK or elsewhere, to rectify the deficit in that employer’s UK defined benefits pension scheme. The regulator, however, can, nonetheless, impose statutory liability where none would otherwise exist, including on companies and, in some cases, on individuals who fall within the statutory tests for being connected or associated with the scheme employer.
Such legal powers were historically inadequately executed by the regulator and instead were deployed as a method to threat.
The regulator has a wide discretion as to when to use its powers and, until now, has been reluctant to do so, preferring to encourage companies and trustees to reach agreement behind closed doors. However, that could now be changing.
The role of the select committee
The regulator is concerned with any activity that means that the sponsoring employer is less able to meet the payments needed to meet any underfunding in its pension scheme. Guidance lists corporate events, known as ‘employer-related Type A events’, could have the effect of weakening the financial support provided by the scheme’s sponsoring employer. These include most types of corporate activity, from changes in ownership, refinancing and group restructures to issuing new equity, payment of dividends and returns of capital to shareholders.
The select committee is interested in a wider range of activity and may contact employers or groups even where no obvious transaction is underway, based on press reports or commentary following the publication of company accounts.
Impacts of changes in pension schemes
Should any corporate activity be considered, it is important to address at an early stage what impact there could be on the pension scheme. If there would be a potential detriment, companies should establish how to mitigate that and engage with the trustees as early as possible.
Where the activity is commercially sensitive, this could involve putting in place formal non-disclosure agreements with the trustees so that discussions can start about the impact of the proposed transaction on the pension scheme before it becomes public knowledge. If it comes to it, an audit trail of this process could provide a statutory defence against the use of some of the regulator’s powers.
Proposals in the recent White Paper and a consultation paper (issued by BEIS on Corporate Governance and Insolvency) place emphasis on a wider consideration of the impact of transactions. Some of the provisions in the White Paper may have retrospective effect, which means that pensions should be considered in the same way that a business will consider how its lenders or shareholders would react to a particular activity.
Failure to ensure equality of treatment of all stakeholders could result in the regulator’s intervention, as well as reputational damage, which is a significant risk to consider.
It is now more important than ever for companies to consider the implications of any amendments on pension schemes and engage proactively with scheme trustees.