On 2 November 2016, the Pensions Regulator (tPR) (the regulator of work-based pension schemes in the UK) sent warning notices to Sir Philip Green (soon to be Philip Green?), Taveta Investments Limited, Taveta Investments (No. 2) Limited, Dominic Chappell, and Retail Acquisitions Limited in relation to the BHS pension schemes. In the notices, tPR sets out evidence to support the exercise of its anti-avoidance powers (also known as “moral hazard” powers) to seek redress for the 20,000 members of the underfunded schemes.
tPR’s moral hazard powers were introduced to stop employers from walking away from a funding deficit in a defined benefit pension scheme. The provisions aim to ensure that the employer, or other companies in the group, can be held responsible for the shortfall.
tPR can require employers to put in place financial support arrangements for underfunded pension schemes or to make cash payments to the scheme. To do this, it must believe that there has been an act that detrimentally affects the scheme in a material way or that the scheme is insufficiently resourced and thinks it is reasonable to impose such an obligation on the employer. Furthermore, the powers can also be used in respect of individuals or companies which are connected or associated to the employer (including individuals such as directors and their spouses or civil partners), who were party to the act.
What may come as a surprise to employers, is the large range of transactions that could attract tPR’s attention, for example:
- sales and acquisitions
- corporate refinancing
- intra-company loans
- a return of capital leading to a reduction in the overall assets of the employer or the wider employer group, such as special dividends or share buy backs.
What should employers do?
It is essential to understand how the company’s financial position compares to any pension scheme deficit and to the company’s ability to continue funding scheme liabilities. If a transaction could have a materially detrimental effect, employers will need to consider whether to mitigate it and/or make a clearance application to tPR. A clearance statement from tPR gives assurance that, based on information provided, tPR will not exercise its moral hazard powers.
When undertaking a transaction that may impact on the pension scheme, employers should:
- take advice from professional advisers
- manage any conflicts of interest or duty that arise
- discuss proposed transactions and clearance procedures with the trustees
- ensure that any applications for clearance are full and accurate
- record and retain all decisions that impact the scheme, including company minutes, resolutions and internal correspondence.
Partly due to high profile pensions cases like BHS, the Government has said that it intends to present a green paper “on the challenges facing defined benefit pensions in the winter". It is aware of the "understandable concern … expressed in many quarters about the impact on employers of defined benefit pension schemes, and the sustainability and security of the defined benefit system". Employers with defined benefit pension schemes should brace themselves for more change.