The Pensions Regulator: Imposing Joint and Several Liability for Pensions Liabilities
Investigations by the Pensions Regulator have dealt immense damage to companies' reputations in the past. What are its moral hazard powers, and how can organisations mitigate the risk of an intervention?
Anne-Marie Winton, Partner at Arc Pensions Law LLP, examines the role of the Pensions Regulator in imposing joint and several liability on group companies.
Defined benefits (or final salary) pension schemes are often a group’s largest unsecured UK creditor by far, possibly representing hundreds of millions of pounds of contingent liabilities for the group employers who participate in the scheme.
In law, these liabilities sit solely with the companies who have joined the scheme by entering into a formal deed of adherence or participation with the scheme’s trustees. Usual privity of contract rules apply. However, it is possible for the Pensions Regulator (“TPR”) to shatter privity and impose joint and several liability on other group companies – anywhere, worldwide. Examples of countries where TPR has sought to use its UK powers include Bermuda, Canada, and Russia, as well as the UK of course. The source of these wide-ranging powers, known as “moral hazard” or “anti-avoidance” powers is the Pensions Act 2004. Potential targets are those group companies who are “connected and/or associated” with an employer in the scheme (broadly those who can exercise one-third or more voting control). Directors and shareholders can also be at risk of being ordered to pay money into the scheme, without any allegations of fault or bad faith being needed.
Many household names have been the subject of (often, adverse) Government and press attention in relation to their underfunded defined benefits schemes, almost inevitably combined with some form of investigation or intervention by TPR having taken place or about to take place. TPR has itself faced extremely public criticism for, in effect, failing to intervene early and forcefully enough to stop weak and failing businesses from collapsing before they have taken steps to support their pensions liabilities. This led it to launch a 3 year plan in 2018 with the aim of taking a clearer, quicker and tougher approach to driving up standards in the pensions sector. In particular, TPR’s Chairman said that we could expect to see a more vocal Regulator, intervening quickly and decisively through use of its moral hazard powers.
Examples of countries where TPR has sought to use its UK powers include Bermuda, Canada, and Russia
But why the interest by Government in private companies’ corporate behaviour? This is because TPR was set up under the Pensions Act 2004 to be a “referee” in relation to regulating the UK’s workplace pension schemes, and it needs to be seen to use the full range of its statutory powers as a referee in order to fulfil its statutory objective of protecting the benefits of scheme members.
In practice, the very occasional use (or threatened use) of TPR’s moral hazard powers are made public when it publishes reports under section 89 of the Pensions Act 2004. These reports are designed to educate and encourage best practice from employer and groups (and those who advise them) in supporting their scheme long-term, even in challenging situations. And COVID-19 has of course increased the pressure on employers not to default on meeting their pensions liabilities.
Taking a look at some of the section 89 reports from 2020 throws a light on TPR’s likely behaviour and its clearer, tougher, quicker approach. These covered the distressed cases of Arcadia, House of Fraser and Bernard Matthews. The focus of the reports broadly was: (1) had any corporate activity had taken place which made the scheme employer(s) less able or potentially less able to meet their financial obligations to the scheme; and (2) if so, was it reasonable for TPR to require a third party target to step into that employer’s shoes to fund the scheme and/or guarantee the liabilities of that employer?
In all three cases, TPR investigated over periods of time from months to just over a year (which is “quicker” in TPR terms), and required statutory disclosure of thousands of documents at times (which may equate to it being ‘tougher”), but in the end did not use its moral hazard powers. However, TPR’s intervention facilitated an improved mitigation offer to the trustees of Arcadia’s schemes, sufficient to get them to vote in favour of the rent reducing Company Voluntary Arrangement. It satisfied itself that the administration and sale of House of Fraser to Sports Direct on one day was not designed simply to dump the scheme on the Pension Protection Fund (the lifeboat for the defined benefits schemes of insolvent employers). And it thoroughly kicked the tyres on the attempted rescue of Bernard Matthews, which started with private equity investment in 2013 taking security ranking ahead of the pension scheme, and ended with a pre-pack in 2016.
Its conclusions were that the terms of the original investment was not materially detrimental to the pension scheme, the 20% high-risk interest rate was in line with what was on offer in the private equity market at the time and negotiated on an arm’s length commercial basis, and that the subsequent decline in the business were due to external events, not the actions of the investor. It accepted that the investor necessarily wanted to maximise the return on its investment when its turnaround attempts came to an end, but that there was nothing untoward in carrying out a pre-packaged administration to do this.
It is probably not possible to overestimate the potential reputational damage of being on the “wrong end” of an investigation by the Pensions Regulator (just ask Sir Philip Green). But this risk can be mitigated by groups taking the right advice at the right time (which is likely to involve a number of commercial and legal areas), and involving all relevant pensions stakeholders (trustees, TPR and PPF) as transparently and early as possible if there appears to be any risk that the employers may or are becoming less able to continue to meet their liabilities to the scheme whether due to corporate distress, or simply vanilla corporate activity like payment of dividends granting security ahead of the scheme or even internal group reorganisations.