It has been reported that the Pensions Regulator has threatened to use its moral hazard sanctions in order to prompt private equity firm Duke Street to inject £8m into the Focus DIY Pension Scheme, one year after Duke Street had sold Focus to Ceberus Capital Management.

Most of the circumstances have not been disclosed, and are probably likely to remain confidential, so what follows is necessarily speculative. However, it would be possible for the Regulator to threaten to use one of its moral hazard sanctions retrospectively (the Regulator can look back 12 months in respect of financial support directions and six years (subject to a longstop of 27 April 2004) in respect of contribution notices). In order to avoid the imposition of a sanction, a company in Duke Street's position could decide to enter into negotiations with the Regulator and reach a settlement. A sale (or events ancillary to it, such as a refinancing and/or a return of capital to shareholders) which led to a weakening of the employer covenant could be enough to prompt regulatory intervention. In this case, it is thought that the payment of a special dividend by Duke Street (after refinancing Focus with extra debt) triggered action by the Pensions Regulator.

The Regulator has had power to impose its moral hazard sanctions retrospectively since April 2005, so in a sense, this development does not represent a new threat to corporate activity where a company operates a defined benefit pension scheme. However, it does illustrate a (perhaps increased) willingness on the part of the Regulator to use those powers (or at least threaten to do so) retrospectively.

The proposed increase to the Regulator's moral hazard powers reported in our e-bulletin (which also have retrospective effect, albeit to 14 April 2008) will need to be considered by companies contemplating commercial transactions which may have a significant impact on their pension scheme.