05 April 2011 - Post by:Stephen Richards
When my clients enter into transactions or corporate restructurings involving defined benefit schemes the moral hazard powers of the Pensions Regulator are often a worry. They want to know whether the Regulator could use its powers to issue a contribution notice or financial support direction on parties involved in the transaction and what would happen if it did. Contribution notices force an immediate cash payment into a scheme but financial support directions are more about long term support for a scheme where the actual sponsor can’t support the scheme by itself.
Recently the Regulator’s power to issue contribution notices was put under the microscope by the court after a contribution notice of £5 million was issued to the Belgian parent of a UK company, Bonas Machine Company Limited. Here’s a few things we learned:
– It is perfectly fine for the Regulator to issue a contribution notice to someone who has no direct obligation to the pension scheme. Part of the trigger for attracting a contribution notice is being party to an act or failure to act which ticks one of the necessary boxes, either it’s detrimental to the pension scheme or the idea (or “main purpose”) was to block or head off a section 75 employer debt. The court was clear that a failure to act does not require the person to fail to do something he ought to have done, it is merely that a person has seen different possible steps and decided not to take a step which he might have taken.
– The idea behind contribution notices is to provide compensation to the scheme for the losses caused by the act or failure to act: it isn’t a penalty to be imposed on parties. So the Regulator shouldn’t issue a contribution notice for more than the sum avoided as a result of the act (or failure) of the person. That wouldn’t be the case with financial support directions – those are all about giving the scheme support, not compensation.
– Someone not applying for clearance for some transaction does not in itself warrant the Regulator issuing a contribution notice. However, one practical lesson the Bonas situation rammed home was that failure to engage with the trustees or Regulator may not be terribly sensible when seeking to avoid the Regulator’s moral hazard powers.
– “Main purpose” has an objective element. The Regulator can’t decide that the main purpose of an act is to avoid a section 75 debt if it is not actually possible for the act in question to cause a section 75 debt to be avoided. In the Bonas case, the parent company could never have been on the hook for the debt, and manoeuvring to leave the scheme behind in the insolvent business did not change that situation.
I’m sure there’s still more for us (and the Regulator) to find out about the Regulator’s powers. Watch this space.
Stephen Richards is an associate at Allen & Overy LLP.