International rescue
The Pensions Regulator is nothing if
not a powerful beast. But as with other large predators, most of its
potential targets keep it at a safe distance, and its moments of
explosive activity are relatively few.
In a time of economic difficulties, pension liabilities have been causing problems for an increasing number of corporates. As assets and trading entities are transferred around groups, often internationally, pension funds are sometimes left exposed, at which point the Regulator will – in theory – take action to see that the risk is limited.
Since opening for business in 2005, the Regulator has not flexed its muscles as much as was generally anticipated. It has rarely used its key powers formally – it has imposed a handful of Financial Support Directives (FSDs) , but has only once gone as far as to impose its most draconian sanction, the Contribution Notice (CN).
'The FSD effectively attempts to see through the Corporate Veil and attach a company to a pension scheme,' explains John Broome-Saunders, Actuarial Director in Pensions at BDO. 'When it is applied, the trustees are obliged to sit down and discuss how to fund the scheme in question. But it's up to them to decide how they do it.
'The CN, on the other hand, leaves no room for flexibility. The Regulator can dictate its own terms – it has the power to insist that specific amounts are paid into the scheme. While it's a convoluted and time-consuming process that wouldn't be undertaken lightly, the knowledge that this power exists is generally enough to deter companies from risking its imposition.'
In fact, the CN was issued for the first time earlier this year. 'It was in respect of a company called Bonas,' confirms Broome-Saunders' colleague Ian Steward. 'After the UK arm went into administration, the CN was issued against the foreign parent company to protect the UK pension fund. In this instance it was successful, although with so little evidence to go on the market's understanding of the realities of how CNs would operate in other cases remains largely theoretical.'
The main question is to what extent the Pensions Regulator has jurisdiction outside the UK. 'This country tends to be favoured as a centre of insolvency legislation for multinationals, as the UK offers the most varied and flexible system,' observes Steward.
'But it's not always certain how far foreign courts will uphold decisions made in the UK. The first ever FSD, against some of the companies in the Sea Containers Group while it was in Chapter 11 in the US, was approved by the relevant authorities in an offshore tax haven; but by contrast current legislation involving Nortel is running into difficulties in both US and Canadian courts.'
The Pensions Regulator put in FSDs on Nortel in both countries, but in each case the judges ruled that since the company was in Chapter 11 in the US and the equivalent in the case of Canada, it was protected from the Regulator by the moratorium on further creditors' actions. The Regulator maintains that the Scheme’s made the relevant claims in the insolvency proceedings by the appropriate deadline and the FSDs are not therefore new creditor actions, and is appealing.
'It's an interesting case,' comments Steward. 'If the FSD can't go in pre-Chapter 11, then it might be an action considered for post Chapter 11, which in practice could immediately make the restructured company insolvent. The Regulator believes that the pension arrangements should be appropriately recognised as a stakeholder in the business and therefore in any restructuring solution.'
So while the Regulator fights its battles around the world, what should companies do to make sure they stay on the right side of it? 'They should look very carefully at their group structure and where the pension schemes sit within that group,' cautions Broome-Saunders. 'DB schemes in particular may be legacy arrangements that are attached to entities that were current 20 years ago but which are less important today. The Regulator, though, has the power to look through conventional limited liability entity status to find other group companies to fund pension funds which may not even be obviously connected to them.'
It's likely that an increasing number of precedents will be set in the coming years. 'The Regulator's actions have so far largely been driven by major insolvencies like Sea Containers, Lehmans and Nortel,' says Steward. 'Until the global economy is on a stronger footing we'll probably see more of these, and each time the Regulator decides to act as a result, it will reveal more about its current thinking. Keeping a close eye on its activities is essential.'
