Vol 8 (2011) - Issue 1

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Overseas Action by the UK’s Pensions Regulator – An Update

Introduction

In our article1 in the fourth issue of last year’s International Corporate Rescue, we outlined the complexities faced by the Pensions Regulator ('TPR') in exercising its ‘moral hazard’ powers under the Pensions Act 2004, in instances where the 'target' is a non-UK resident insolvent entity.

The recent decision of TPR’s Determinations Panel in relation to the Lehman Brothers Pension Scheme sheds more light on TPR’s approach to imposing financial support directions ('FSDs') upon insolvent entities. In particular, the decision:

– confirms that TPR continues to adopt a wide definition of 'benefit' in the hands of an FSD target (this being a pre-requisite of the statutory test of reasonableness in issuing an FSD);

– confirms that TPR will look through complex corporate family structures and impose liability upon indirect parents and related subsidiaries of a pension plan’s sponsoring employer; and

– importantly, demonstrates that TPR does not believe that insolvency of the FSD target is an impediment to the issuance of an FSD, but rather that 'insolvency is a situation where an FSD might be necessary and appropriate in order to protect the interests of members'.

Interestingly, the decision makes no reference to the decisions of the Canadian and US bankruptcy courts in the Nortel case which we referred to in our previous article, and it will be interesting to see how the decision is received by the US courts supervising the Lehman Chapter 11 proceedings.

A brief recap on TPR’s powers

TPR was established by the Pensions Act 2004 and invested with significant powers enabling it to pierce the corporate veil and pursue entities connected to, or associated with, defined benefit pension plan sponsoring employers. The purpose of these sections of the Pensions Act 2004, commonly referred to as the ‘moral hazard’ provisions, was twofold. Firstly, they were intended to ensure that corporate groups 'stood behind' pension promises given to UK employees. Secondly, they were intended to prevent pension liabilities from being 'dumped' upon the newly created Pension Protection Fund (which was itself established under the Pensions Act 2004 and given the power to assume liability (to a limited extent) for the pensions liabilities of insolvent sponsoring employers).

The key species of moral hazard power, and the one that has been utilised in the Lehman Brothers case, is TPR’s power to issue financial support directions (FSDs) under section 43 of the Pensions Act 2004, where the sponsoring employer is either 'insufficiently resourced' or a 'service company'.

In simple terms, a sponsoring employer will be considered to be a 'service company' where its sole purpose is to employ individuals to service the human resources needs of the wider corporate group, and where the only cash flowing through it follows from transmission of salary and payroll costs to those entities within the group which are resourced by individuals employed by it. A sponsoring employer will be 'insufficiently resourced' where its assets amount to less than 50% of the pension plan’s projected section 75 debt2 at a time when the resources of other companies within its group (taken alone or aggregated together) amount to 50% of more of the projected section 75 debt.

FSDs may be issued against any entity which is connected with, or an associate of, the sponsoring employer.