Carrington Wire Defined Benefit Pension Scheme was set up for the benefit of the employees of Carrington Wire Limited; a Yorkshire based company engaged in the sale and supply of steel and wire products. Carrington, which started to wind down its business at the end of 2009, was at that time owned by Severstal, a Russian based international steel company. The scheme’s liabilities were guaranteed by Severstal’s parent company.
Severstal had assured both the scheme’s trustees and the Pensions Regulator that it would continue to support the scheme and take no steps to terminate the guarantee covering the scheme’s liabilities. However, in June 2010, unbeknown to both trustees and the Regulator, Severstal sold Carrington to a shell company that was unable to support the scheme. This sale terminated the Severstal parent company guarantee at a time when the scheme had a deficit of circa. £20 million and the lack of prior notice to the trustees and the Regulator prevented any steps being taken in advance of the sale to secure its financial position.
Having been unable to persuade Severstal to voluntarily contribute to the scheme, the trustees encouraged the Regulator to exercise its “moral hazard powers”, designed to prevent employers from deliberately avoiding their obligations by requiring them to financially support a pension scheme.
In November 2012, the Regulator issued a warning notice to three potential ‘targets’, indicating its intention to issue contribution notices in connection with the scheme. This included two businesses domiciled in Russia – PAO Severstal and OAO Severstal-Metiz. Carrington ultimately became insolvent in December 2012.
The procedure for issuing a Contribution Notice is detailed on the Regulator’s website. It allows both Targets and other directly affected parties (which included the trustees and the Pension Protection Fund (the PPF) in this case) a period within which to review and comment on the arguments set out in the Warning Notice. Thereafter, the Regulator decides whether there are sufficient grounds to put the matter to its decision making panel, the Determinations Panel.
A contribution notice requires a specified amount of money to be paid into a pension scheme by an individual or a company. As detailed in the Pensions Act 2004, a contribution notice can be issued where the person was a party to an act or deliberate failure to act which was either materially detrimental or which had a main purpose of preventing the recovery of or reducing the amount of a section 75 debt.
Following representations made by the various directly affected parties, including the Russian companies, the matter was passed to the Regulator’s Determinations Panel in June 2014. An oral hearing was scheduled to take place in January 2015.
Shortly before the hearing was due to take place, an offer was made by the Russian companies to pay the sum of £8.5 million to the scheme. The Regulator agreed that if that sum was paid, it would withdraw its case against the Russian companies. The funds have subsequently been paid to the scheme and, accordingly, the Regulator is no longer seeking contribution notices in relation to the Russian companies and this brought an end to the proceedings against them. A hearing in relation to the third target is expected to take place later this year.
According to a press release issued by the Regulator, the settlement sum and the funds sought from the third target will not be sufficient to allow the scheme to avoid entry into the PPF. In view of the scheme’s lack of funds, it is currently being assessed for entry in to the PPF to pay members’ benefits, albeit at a reduced level. The scheme’s deficit as at May 2014 was in the region of £27million. The Regulator expects the scheme to complete its assessment period and enter the PPF once the case is concluded.
Examples of the Regulator having to exercise its moral hazard powers are quite rare. Usually the threat of invoking its powers is enough to bring potential respondents to the negotiating table. This case has raised some interesting questions over the powers of the Regulator to enforce its powers against overseas companies and this uncertainty may have led to the settlement which turned out to be at a level insufficient to prevent the Carrington scheme entering into the PPF. As the case has settled, the issue of enforceability overseas remains to be tested in another case in the future.