The Pensions Regulator announced this week that it will not pursue action to impose a Financial Support Direction against US company, Chemtura Corporation and members of its group after a funding settlement, involving the payment of expedited contributions to the pension scheme of its UK subsidiary, was reached with the scheme's trustees. News of this settlement follows quickly on the heels of the Bonas settlement of last month (for our update on the Bonas settlement click here).
The Great Lakes UK Limited Pension Plan is sponsored by Chemtura Manufacturing UK Limited, a solvent UK manufacturing company. The trustees of the Scheme approached the Pensions Regulator in June 2009, concerned about the position of the Scheme after its US parent, Chemtura Corporation, filed for Chapter 11 bankruptcy proceedings in March of that year.
It is understood that at the time of the filing, Chemtura Corporation was in scheme funding discussions with the trustees and the UK company.
Chemtura Corporation was saved from bankruptcy and exited Chapter 11 proceedings in November 2010, before a formal threat of a sanction had been issued by the Pensions Regulator. However, in December 2010 the Pensions Regulator issued a warning notice against Chemtura Corporation and other members of its group, warning of its intention to ask the Determinations Panel to issue a Financial Support Direction (FSD) against them requiring them to put financial support in place for the Scheme.
The matter was due to be heard by the Determinations Panel in June 2011. However, in the intervening period a revised scheme funding package was agreed between the trustees, Chemtura Manufacturing and Chemtura Corporation. The agreed funding package comprised two elements:
- escalated cash contributions to eliminate the scheme funding deficit over three years (£60m over three years with an initial payment of £30m); and
- a guarantee and security agreements provided by other entities in the group, including Chemtura Corporation, to provide support for the Scheme.
In light of that settlement, the Pensions Regulator determined not to proceed with its actions to impose an FSD and commented this week that it had been satisfied that the funding package was "broadly equivalent to what might have been achievable if an FSD had been issued".
It is interesting that the Pensions Regulator's warning notice was issued against Chemtura Corporation and members of its group after those companies had emerged from Chapter 11 proceedings, rather than whilst Chapter 11 proceedings were underway. It appears to us that there could have been two reasons for the exercise of the Pensions Regulator's powers in this way.
One possibility is that the Pensions Regulator did not consider that the Scheme and its UK participating employers received appropriate recoveries in the bankruptcy proceedings and used the threat of an FSD as a means of extracting additional value from the US companies. It is difficult to see how "reasonableness" would have been tested following the resolution of Chapter 11 proceedings had an FSD been pursued, given that all debts would already have been compromised. US companies with UK defined benefit pension schemes may still wish to ensure that regard is had to the interests of the pension scheme trustees in any Chapter 11 proceedings, and not just the interests of bondholders, irrespective of whether a Pensions Regulator warning notice has been issued.
Alternatively, if this was a genuine funding dispute, it might suggest an increased willingness by the Pensions Regulator to use its FSD powers against ongoing companies. The Pensions Regulator has not used its FSD powers in this way to date, notwithstanding that it falls squarely within the scope of the legislation.