Vol 6 (2009) - Issue 3

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The UK Pensions Regulator Strengthens its Powers both at Home and Abroad

The rise of the Pensions Creditor

Since April 2005 and the introduction of the UK Pensions Regulator, pensions has been moved up the corporate agenda both for UK companies and multi nationals. The most significant difference is that the pension scheme is now being treated as the significant unsecured creditor with real power.

When the pensions act 2004 was issued many people questioned the extent of the Pensions Regulator’s powers. Since then we have seen the Pensions Regulator extend its influence and increasingly affect trustees’ behaviour. It has proved it can reach overseas jurisdictions with the Financial Support Direction (‘FSD’) issued against Sea Containers in 2008. On top of this, the Pension Regulator’s powers have recently been extended to allow it to look at the effect of an action (rather than just the intention) when it is looking to exercise its Contribution Notice powers. The Pensions Regulator has also added to the ranks of its legal team. There must be few people left in the UK or overseas who doubt that the UK Pensions Regulator means business.

The background to this move up the agenda were legislative changes in 2003 that saw the pension scheme as a creditor move from having a claim on a fairly weak funding basis to one effectively utilising an insurance buy out basis. This situation was compounded in September 2005 when the legislation was extended so that similar insurance buy out debts would be triggered upon an employer ceasing to participate in a multi employer pension scheme – a quite regular occurrence for large corporate groups and multi nationals.

Tied in with their enhanced liability has been a slew of legislation designed to ensure that pension schemes are funded on a much tougher basis. The Pensions Regulator has been given strong powers to ensure that funding is complied with and that the corporates supporting the pension schemes do not act in a way that is detrimental to the pension scheme’s interests.

The Pension Regulator’s powers to support the creditor

The Regulator’s two key powers, which he has had since 2005, are the Contribution Notice (‘CN’) and the FSD, both of which are explained in more detail below – however the basic principle behind the powers are that:

1 - the CN is effectively a punitive power which the Regulator can use against a connected person who is responsible for the deliberate avoiding of a pension scheme’s liabilities – this order can be for up to the whole buy out amount; whilst

2 - an FSD can be awarded against, typically, a company which is connected or associated with an entity that does not have the resources to meet its pension scheme funding commitments. The company subject to an FSD will be required by the Regulator to put funding in place for the pension scheme if he considers it reasonable to do so.

The extension to the powers and the UK legislator's rationale

Whilst the Regulator’s powers outlined above appear fairly far reaching – the CN power, in particular, is one that applies to acts in which the intention is to effectively weaken the covenant in relation to a pension scheme and put its funding at risk. It is this intention point which has caused major concern for the UK government and the Pensions Regulator.