05 July 2010 - Post by:Caroline Overton
The referee cracks down on obvious fouls
Over five years after the introduction of its so-called moral hazard powers, the Pensions Regulator has issued its first contribution notice. Michel Van De Wiele N.V. – the Belgian parent company of insolvent UK subsidiary Bonas UK Limited – has been ordered to pay £5.089 million into the Bonas Group Pension Scheme. This amount would take the scheme to a position of solvency on the PPF funding basis, so avoiding a call on the PPF. This tour de force by the Regulator may suggest a change of tack and new willingness to embrace its powers. To my mind, however, this shows that whilst the Regulator may prefer intervening behind the scenes to exercising its powers, it is not afraid to blow the whistle where there is an obvious foul.
In 2006 the parent company of the loss-making UK subsidiary considered how to reorganise the corporate group, and what its options were in relation to terminating and winding up the pension scheme. The pension scheme had a deficit and was the UK subsidiary’s largest creditor. The company had received clear professional advice as to the size of the deficit, the likely cost of getting the trustees on side, and that “abandoning” the pension scheme and its deficit would risk the involvement of the Regulator.
Nevertheless, the group put the UK subsidiary into a pre-pack administration followed by a swift sale of the business to a new company in the Belgian parent company’s group with the apparent intention that the pension scheme would be admitted to the PPF. There are also suggestions of attempts to get around the trustees by not informing them of the planned administration and asset sale. Basically, the group chose to take the risk of the Regulator exercising its powers rather than to engage with the pension scheme trustees.
The Regulator took the view that walking away without engaging openly with the trustees or Regulator, and retaining the business whilst avoiding the pensions liability, were both acts with the purpose of avoiding incurring a liability to make a payment to the pension scheme and fell within the scope of a contribution notice. The notice was for the amount needed to bring the scheme up to a position of solvency on the PPF basis – meaning that members should get reduced benefits from the scheme but at least at the level that would have been paid as compensation from the PPF.
Is it a surprise?
To my mind, the only surprising aspect is that this is the first time that this situation has arisen and a contribution notice has been awarded. The Regulator has the objective of preventing calls on the PPF, and so where the parent of a scheme sponsor takes a calculated risk to avoid the sponsor’s pension liabilities yet retains the business, an exercise of these powers does seem appropriate. It would seem that the sum of the contribution notice – namely the amount needed to bring the scheme up to PPF solvency – is also wholly reasonable. The Regulator had the power to award a sum of up to the full buyout deficit in the scheme, the amount needed to secure all members’ benefits in full, which would have been about five times greater than the actual sum awarded. Indeed, if the group had chosen to engage with the trustees and Regulator ahead of the pre-pack they may have found that the cost of securing trustee support was somewhat greater than the amount ultimately awarded in the contribution notice.
Certainly, there are some areas of concern:
- the fact that the Regulator gave serious consideration as to whether to award a contribution notice against an individual in addition to against a corporate entity;
- the fact that a pre-pack administration which preserved jobs and the business as a going concern was not sufficient to avoid subsequent pensions liability;
- the fact that the parent was given liability notwithstanding the fact that the sponsoring entity had been loss-making, balance-sheet insolvent, and dependent on the parent company’s support since its acquisition; and
- a niggling concern that the interpretation the Regulator and its Determinations Panel put on their statutory powers to issue the order may not actually work.
However, this determination does show the Regulator adhering to its stated role as being a referee rather than a player, and that it is not afraid to step forward and be counted when its jurisdiction is being flouted.
Caroline Overton is a senior associate at Allen & Overy LLP.