Defined benefit (DB) pension schemes often pose significant risk in corporate transactions and restructurings. It has therefore long been the case that sponsoring employers must carefully consider the impact a transaction or restructuring will have upon their pension arrangements (past and present) – particularly DB schemes - and whether mitigations are needed to avoid any detrimental impact.
It's prudent to draw attention to the remit and expectations of The Pensions Regulator ("TPR") here. If pension benefits are put at risk, or sponsoring employers fail to financially support their schemes, The Pensions Regulator is able and willing to employ its range of anti-avoidance powers to protect members' benefits and the interests of the Pension Protection Fund ("PPF"). Employers with DB schemes are subject to TPR's anti-avoidance powers, but so, too, are those associated or connected with the employer. The most recent regulatory intervention report from TPR is a good example of this.
Background
Through a series of corporate restructurings, a DB scheme's sponsoring employer, Newburgh Engineering Co Limited, transferred most of its assets and provided ongoing financial support to other entities within its wider corporate group, amounting to over £16million. It later went into administration, at which time its DB scheme had around 100 members and, according to the last valuation prior to its insolvency, had an estimated funding deficit of over £2million and a section 75 deficit of nearly £9million.
As a result, the sponsoring employer was unable to financially support its DB scheme as the other entities within the group had received, to the scheme's detriment, significant benefits from the employer. In its report, TPR repeatedly stated that no proper mitigation was given to either the sponsoring employer or the DB scheme: if the £16 million had been made available to the scheme's trustees, the scheme would likely have been able to proceed to buyout.
TPR's intervention
Ultimately, a full and final settlement was reached by all parties involved, signifying the importance of being proactive and cooperative when faced with regulatory action. TPR initially issued warning notices to the relevant entities, indicating that it would seek to use its anti-avoidance powers by issuing financial support directions. These would have required the entities to put in place arrangements to financially support the scheme. However, upon receipt of the warning notices, the entities approached TPR to discuss a potential settlement.
TPR emphasised in its report that it will consider 'reasonable' settlement options in line with its statutory objectives to protect the interests of scheme members as well as the PPF. In this case, although less than half of the section 75 debt was returned to the scheme via the settlement, this was considered 'reasonable' as it represented all the cash assets of the entities as well as 80% of their estimated available assets.
Key takeaways
Part of TPR's reasoning for publishing regulatory intervention reports is to deter and increase awareness of unacceptable behaviours, as well as to provide guidance and good practice for trustees and sponsoring employers. This latest report serves as a useful reminder that TPR will not hesitate to use its anti-avoidance powers to protect pension benefits, so sponsoring employers should take advice when considering any action that may materially impact their DB pension schemes.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
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