The UK Pensions Regulator (the Regulator) has been active over the summer, using its powers to issue contribution notices (CNs) and Financial Support directions (FSDs) to protect the members of underfunded UK defined benefit pension plans. These powers allow the Regulator to make parties that are “connected or associated” (a wide definition that includes group companies and directors, and potentially lenders in some cases) with the plan employer liable for the plan’s underfunding. FSDs require support arrangements to be put in place for the pension plan, and CNs require a direct payment of money into the plan. The Regulator can issue CNs in respect of acts that occurred up to six years previously, and FSDs up to two years after connection with the plan has ceased. It must be “reasonable” for the Regulator to act.
Prior to this summer, the Regulator had never issued a CN and had only issued two FSDs (both to the same company). Its uses of both these powers this summer were in situations where the plan employer had entered administration. If a UK employer is subject to insolvency proceedings, including administration (where it is hoped the company can be rescued or the company’s assets sold), and the pension plan is underfunded, the UK Pension Protection Fund (PPF) commences an assessment process whereby it determines whether it can take on responsibility for the pension plan. One of the Regulator’s stated aims is to minimize calls on the PPF.
In June, the Regulator decided to issue FSDs against 25 entities in the Nortel group (including in Canada, the US and Europe) after it entered insolvency proceedings in a number of jurisdictions, including the UK. Nortel Networks UK Limited (Nortel UK) was the plan employer, and the PPF would therefore potentially have to take over the plan.
The Regulator determined, when considering whether it was reasonable to act, that other Nortel companies had received substantial benefits from Nortel UK over the years, such as its services being provided to them at an undervalue and interest-free loans. Management decisions high up the corporate chain resulted in group funds being held back instead of using them to cover the pension deficit. The Regulator also found that the group in reality acted as a single global entity.
It is expected the FSDs will require support to be put in place for the full £2.1bn deficit. Interestingly, the US and Canadian entities had already obtained orders in their bankruptcy courts that any FSD issued would be void, so it will be interesting to see how this plays out.
The Regulator has also now issued its first CN, against Michel Van De Wiele NV (VDW), the Belgian parent company of Bonas UK Limited (Bonas), a UK company with an underfunded defined benefit pension plan.
Bonas was in a precarious financial position, and Bonas and VDW started to investigate ways of keeping the business running while dealing with the issue of the underfunded pension plan. They decided that Bonas would enter into a pre-pack administration, whereby a VDW group company would buy its assets, but the pension plan liabilities would be left behind. The Regulator found that one of the main purposes of this was to prevent the recovery of a debt which was or might become due to the pension plan, and therefore it issued a CN demanding £5m against VDW. £5m was the value of the PPF deficit in the plan (a lower measure than the full buy-out deficit). The Determinations Panel of the Regulator stated that this sum was reasonable because Bonas and VDW had previously considered that paying off the PPF deficit would be the likely price for clearance from the Regulator or agreement with the trustees. In reaching its decision, it took account of VDW’s financial position, its close involvement with the pre-pack sale, its association with the plan through its involvement with Bonas’ finances and its control of Bonas. We understand VDW has appealed the decision.