This briefing looks at the position of a pension scheme trustee company that is a subsidiary of the employer.
It considers the implications for such a trustee company of the obligations under the UK CRC Energy Efficiency Scheme (the CRC Scheme).
Carbon reduction commitment – impact on pension trustee companies
Broadly, groups of companies are given obligations under the CRC Scheme, including registering and purchasing allowances sufficient to meet the companies’ annual carbon emissions from energy consumption. The CRC Scheme came into operation on 1 April 2010, though was substantively amended in 2013 with the intention of simplification. The First Phase (previously known as Phase One) ran until 31 March 2014. The Initial Phase (previously known as Phase Two) began operating from 1 April 2014 and will run until March 2019.
Following a consultation in November 2013, changes have now been made to the CRC Scheme to incentivise the uptake of on-site renewable energy, exclude metallurgical and mineralogical processes, clarify the way in which the CRC Scheme applies to landlords and tenants, and allow more flexibility for a subsidiary company to participate in the CRC Scheme independently from its parent organisation (termed ‘disaggregation’). These further changes came into force on 1 April 2014, in time for the commencement of the Initial Phase.
Liability on a trustee company
The obligations under the CRC Scheme are applied to groups of companies. Rather unusually, the legislation makes each company in a group jointly and severally liable for the obligations of the group. In addition, directors of a company in a group can be liable in some circumstances.
It will often not be absolutely clear if any such liability on the trustee company (or its directors) is covered by any indemnity out of the pension plan’s assets under the rules of the pension plan or by any indemnity from the employers. If the indemnity applies, this may encourage the relevant authority to look to the trustee (or its directors) if a liability arises. Alternatively, if the indemnity does not apply, the trustee and its directors may be concerned that they have a liability but no matching assets.
Steps to take?
There are various steps that the trustee can consider to deal with this:
- seek an indemnity from the employer to cover any liability – this provides protection while the employer is solvent (the employer can be asked to estimate what amounts the group is paying under the CRC Scheme);
- ‘disaggregate’ the trustee company’s CRC Scheme group registration, so that it participates in the CRC Scheme in its own right and is no longer jointly liable for the obligations of the employer’s CRC Scheme group;
- de-group the trustee company so that it is no longer a group company. The implications of such de-grouping would need to be considered. It could have a knock-on effect on other areas (eg investment, insurance, etc). This is unlikely to be necessary given recent amendments to the CRC Scheme which allows ‘disaggregation’ as noted above; and/or
- amend the plan indemnity to clarify that the trustee shall have no claim on the pension scheme’s assets regarding CRC Scheme liabilities.
- We suggest that the trustee’s steps are:
- to check on the size of the potential liability;
- if this is significant, ask the employer for an indemnity;
- consider whether to ‘disaggregate’ the trustee from the group and notify the Environment Agency at any point during the first scheme year of the Initial Phase (which runs from 1 April 2014 to 31 March 2015); and
- keep the matter under review.
If the plan holds any direct investment in land, the implications of this on the group’s CRC Scheme position should also be considered.
CRC Scheme: nature of liability
The relevant legislation is the CRC Energy Efficiency Scheme Order 2011 (SI 2010/768) as amended by the CRC Energy Efficiency Scheme (Amendment) Order 2011 (SI 2011/234), which came into force on 1 April 2011. The 2010 Order was further amended by the CRC Energy Efficiency Scheme Order 2013 (SI 2013/1119) which came into force on 20 May 2013. The 2013 Order replaces the 2010 Order, except in respect of certain provisions which are necessary for completion of the First Phase of the Scheme. References below are to articles in the 2013 Order. Further changes have also been brought about by the CRC Energy Efficiency Scheme (Amendment) Order 2014.
The CRC Scheme is a mandatory climate change and energy saving scheme that first came into force in the UK on 1 April 2010. The Qualification Year for the Initial Phase is 1 April 2012 to 31 March 2013 and the deadline for registration for the Initial Phase was 31 January 2014. The entire registration process, which can take a number of weeks, must have been completed by the registration deadline.
Application of CRC Scheme
The CRC Scheme applied to an ‘undertaking’ or a ‘group of undertakings’ (each as defined), those which, in the relevant qualification year (which is 1 April 2012 to 31 March 2013) for the electricity measured by a Settled Half-Hourly Meter (SHHM), had a total annual electricity consumption of over 6,000 megawatt-hours, excluding certain types of electricity use (eg for domestic accommodation) – see arts 3 and 24 and para 1 of Sch 3. (At 2012/13 market rates, depending on electricity pricing arrangements between customers and utilities, this is equivalent to an annual electricity bill of between about £500,000 and £700,000.)
As a result of the simplification of the CRC Scheme by the 2013 Order, the rules regarding an organisation that qualifies for the Initial and subsequent Phases are as follows:
- Qualification is assessed only on electricity supplies through SHHMs. Organisations do not have to consider supplies through other types of Half Hourly Meter when deciding if they qualify. This is unlike the First Phase, where organisations had to take account of supplies through SHHMs, Non-settled Half Hourly Meters and ‘Dynamic Supply’.
- Unconsumed supplies can only be deducted from supplies when assessing qualification for the Initial Phase provided that the unconsumed supply is metered.
- Unlike in the First Phase, supplies to Climate Change Agreement facilities and EU ETS installations are excluded when assessing qualification.
- Supplies that an organisation requests to be delivered to another organisation will be the responsibility of the requesting organisation. In the First Phase this point was unclear.
Where an entity such as the trustee company is part of a ‘group of undertakings’ for the purposes of the consumption requirements referred to above, all members in that group are subject to the relevant CRC Scheme requirements – see art 24. The group test is based on the test for parent and subsidiary undertakings contained in the Companies Act 2006 (see para 1 of Sch 4). All entities meeting the group test will be grouped together regardless of whether or not their parent undertaking has any presence in the UK. However, companies are entitled to ‘disaggregate’ for their group, and participate independently. Importantly, the 2013 Order has made the rules on organisational structures more flexible: there is now no minimum threshold for disaggregation, so any group may disaggregate subsidiary undertakings or groups of subsidiary undertakings of any size. The remainder of the group will still have to participate in the CRC Scheme even if it no longer meets the qualification amount of 6,000 annual megawatt-hours.
Disaggregation is now available at any point during the first year of a phaseand also on an annual basis pursuant to the 2014 Amenment Order.
CRC Scheme Obligations
The CRC Scheme imposes a range of obligations on undertakings (including groups of undertakings). The key aspects of the regime are set out below.
Undertakings that qualify for the CRC Scheme (‘participants’) must have registered for the Initial Phase by 31 January 2014 using the CRC Registry. Undertakings which participated in the First Phase of the CRC Scheme had some details auto-populated in the Registry, however they will have needed to re-enter their organisational structure. This is because in the First Phase, undertakings were required to identify ‘significant group undertakings’ in their structures. For the Initial Phase onwards, these are replaced by ‘participant equivalents’. A significant group undertaking or participant equivalent is a single undertaking that, were it not part of a group, would have qualified for the CRC Scheme in its own right.
The First Phase of the CRC Scheme started on 1 April 2011. The 2010 Order required participants to purchase sufficient ‘allowances’ from the government in July 2012 (which were unlimited and available for £12 each during The First Phase) to cover the amount of CO2 they emitted in the UK in the preceding Scheme year. There was a further retrospective sale of allowances for 2012/2013 emissions in July 2013. In the Initial Phase, there will be two sales per scheme year: one cheaper prospective or ‘forecast’ sale and one more expensive retrospective or ‘buy to comply’ sale. Applications for the prospective sale in April of the relevant year (eg in April 2014 for the 1 April 2014 to 31 March 2015 year) and applications for the retrospective sale will take place in June of the following year (eg June 2015 for the 1 April 2014 to 31 March 2015 year). The price applicable to the retrospective sale will be higher in order that there can be a trading of allowances on a secondary market.
The Environment Agency previously published annual league tables ranking the CO2 efficiency performance of all participants. The 2013 Order abolished the league tables, and instead provides for the publication by the Environment Agency of annual reports regarding the operation of the CRC scheme. The first annual report was published in November 2013 and contained unranked information about participants obtained from information submitted annually by participants in compliance with the CRC Order.
The key point at which a participant faces liability is at the end of each year, when participants have to surrender sufficient allowances to cover the carbon emissions of the year to the relevant administrator (the Environment Agency in England). Civil penalties apply if insufficient allowances are surrendered, which may consist of having the failure publicised by the relevant administrator, blocking a participant from trading allowances, and fines at a rate significantly higher than the price per allowance.
During the Initial Phase, the requirement for predicting likely emissions in order to buy sufficient allowances in the prospective sale may result in participants overestimating the allowances required in order to avoid having to ‘top up’ in the more expensive retrospective sale. These allowances can be sold to other participants on a secondary market.
Civil penalties may also be imposed on a participant for a range of offences, such as failing to register, failing to comply with annual reporting requirements, providing inaccurate information and failing to maintain records.
The trustee’s potential scope for liability
If the employer or parent has been CRC Scheme registered it is likely that the trustee (as a subsidiary) forms part of the employer’s CRC Scheme group. Unless the trustee is disaggregated, this exposes it to joint and several liability in respect of the liabilities of other members of the CRC Scheme group – see Art 8.
It should be noted that this only applies to civil penalty-related liabilities – the CRC Scheme creates a number of criminal offences (eg knowingly filing misleading information), but the joint and several liability provisions do not apply to criminal offences.
In line with the analysis above, the key types of liability that the trustee could therefore assume under the CRC Scheme include:
- liability for the cost of allowances for carbon emissions for which the plan (and, potentially, all members of the employer’s group) are responsible, which are payable on an annual basis in arrears; and
- the cost of meeting any civil penalties imposed on any members of the employer’s CRC Scheme group regarding any non-compliance with the CRC Scheme (eg failure to provide annual reports).
Indemnification – pension scheme liability out of the fund?
In this section, we look at whether the pension scheme could end up with a payment obligation that relates to the employer’s CRC Scheme liabilities, given that the trustee is a subsidiary of the employer (and provided that the trustee is not disaggregated).
As discussed above, under the CRC Scheme Order the group members are jointly and severally liable.
Indemnities in trust deeds often permit the trustee (and its directors) to have an indemnity:
- out of the assets of the plan for liabilities incurred in good faith, etc; and/or
- from the employers, again for liabilities incurred in good faith to the extent that such liabilities cannot be recovered from the fund or from a third party.
Depending on the wording of the indemnities, it may well be that the trustee has no direct right to recoup any liabilities from either the plan or the employers resulting from the employer group’s CRC Scheme obligations (eg if the indemnities only allow it to reimburse itself out of trust assets for liabilities ‘arising out of or in connection with the Plan ...’).
However, if the trustee (acting in its capacity as trustee of the plan) has electricity consumption for CRC Scheme purposes (eg if it has entered into electricity contracts for direct investment property held in its own name), it may be more difficult to argue that there is no right of indemnity out of trust assets for that CRC Scheme liability. The Environment Agency has published guidance on the application of the CRC Scheme to trust structures generally and the only assets believed to be relevant are real property and shareholdings in companies that own real property.
Position of the trustee directors
If there is no indemnity out of the assets of the pension plan, this could leave the trustee directors in a difficult position. The trustee could have a liability, but no matching asset in the form of the indemnity from the assets of the pension plan.
This could potentially cause issues for the trustee directors – if a liability ever arose on the employer group, this could leave the trustee company technically insolvent (as it could not pay). The directors may become concerned that they are directors of an insolvent company.
To provide more protection for the pension plan and the trustee (and for the directors of the trustee, who could, in certain circumstances, have personal liability for CRC Scheme obligations), while seeking to reduce any risk that liabilities resulting from other members of the employer’s CRC Scheme group could be met from the pension plan’s assets, the trustee could agree with the employer (for example):
- to be given an indemnity from the employer essentially so that, in practice, while the employer remains solvent, the trustee (and its directors) will have no liability for the CRC Scheme obligations (or no liability beyond that relating to the plan’s own electricity consumption);
- to disaggregate the trustee from the employer so that it is no longer jointly liable with the remaining members of the employer’s CRC Scheme group for any obligations or liabilities of the group. If the trustee is disaggregated, it is possible for any subsidiaries of the trustee to remain with the employer’s CRC Scheme group in order that the trust becomes liable exclusively for its own obligations;
- to de-group – for example, enough of the shares in the trustee could be transferred to (say) the trustee’s directors (and other amendments could be made to the trustee’s structure) so that the trustee no longer constitutes part of the employer’s CRC Scheme group.
However, the implications of such de-grouping would need to be considered. It could have a knock-on effect on other areas (eg investment, insurance, etc);
- to amend the indemnity provisions in the plan’s trust deed (set out above) to clarify that the trustee shall have no claim on the pension scheme’s assets for CRC Scheme liabilities. However, the trustee may then have a CRC Scheme liability for which it has no assets (and the trustee’s directors could still, in theory, be personally liable if certain requirements under the CRC Scheme legislation are met). As a result, the trustee’s directors may prefer the option in the first bulleted point above to be used in conjunction with this point, if this is to be used.