Pensions have been firmly in the headlines this week, with key figures from BHS being grilled by MPs over their role in the retailer’s collapse leaving a buyout pension deficit of over £570m. The position of the Pensions Regulator (TPR) has also been the subject of widespread scrutiny, with suggestions that it may force BHS’s former owner, Phillip Green, to pay more into the scheme. Against this backdrop, we take a look at TPR’s anti-avoidance powers and consider what it can – and can’t – do in such cases.
History of the Pensions Regulator’s anti-avoidance powers
TPR’s anti-avoidance powers were introduced by the Pensions Act 2004 and represented a significant strengthening of its ability to intervene where schemes were thought to be at risk of abandonment. The purpose of these powers is to reduce claims on the Pension Protection Fund (PPF), which provides compensation for underfunded schemes whose employer has become insolvent.
TPR has only exercised its powers seven times in the decade or so since they were introduced, and only once in the last six years. Its stated position is that these powers will only be used as a last resort. However, it is clear that the powers have in many other cases acted as a sufficient deterrent to force employers to reach a deal with trustees.
Summary of Key Powers
The two main anti-avoidance powers of TPR are:
- To issue a contribution notice requiring a specified sum of money to be paid to the scheme (or the PPF, if it has taken on responsibility for the scheme); or
- To issue a financial support direction (FSD) requiring the recipient to put in place ongoing financial support for the scheme, which must remain in place for the life of the scheme.
A contribution notice is a one-off requirement to pay a contribution to a pension scheme. Before TPR can issue a contribution notice, there are a number of hurdles that must be cleared. The primary requirement is that there has been an act, or a deliberate failure to act, and one of the following tests is met:
- The material detriment test. The act or failure occurred on or after 14 April 2008 and had “a material detrimental effect” on the likelihood of accrued scheme benefits being received.
- The main purpose test. The act or failure occurred on or after 27 April 2004 and the main purpose, or one of the main purposes, of the act or failure was to prevent the recovery of all or part of an employer debt due to the scheme, to prevent the debt becoming due or to compromise, settle or reduce that debt. This may relate to a series of events that can be regarded as an "act", and is not limited to a single event or step.
In addition to meeting one of these tests, TPR must also be satisfied that the target was a party to, or knowingly assisted in, the act or failure; that the target was the employer, or connected or associated with the employer, at any time on or after the act or failure first occurred; and that it is reasonable to require the target to pay the sum set out in the contribution notice.
TPR has six years from the occurrence of the act or failure to act to issue a warning notice.
Financial support directions
A financial support direction, or FSD, is a requirement to put in place ongoing financial support for a pension scheme. TPR can issue an FSD where an employer is either a service company, or “insufficiently resourced.” An employer will be insufficiently resourced if:
- The value of its resources is less than 50% of the estimated employer debt of the scheme; and
- The resources of a person (or the combined resources of two or more connected people) connected to or associated with the employer, when added to the resources of the employer, are at least equal to 50% of the estimated employer debt.
TPR must also be satisfied that it is reasonable to impose the requirements of the FSD on the target. It only has two years from the date the target stops being connected or associated with the employer to issue an FSD.
While TPR’s powers have been in existence for many years, the instances of them being exercised are few and far between. Opinions vary as to why TPR has not made greater use of its powers. Some attribute this to the statutory hurdles that must be cleared, particularly the all-encompassing “reasonableness” requirement which involves a fact-heavy, subjective assessment. The legislation sets out a number of factors TPR may take into account, such as the target’s financial circumstances or degree of involvement in any act or failure to act, but it is unclear what weight should be placed on different factors. It must also be demonstrated that the specific amount of each contribution notice for each target is reasonable, which some view as an unnecessary constraint on TPR.
This also leads to difficulties for parties to legitimate corporate transactions, who are looking for certainty as to how TPR might respond. It is possible to apply in advance for clearance for such transactions, but often commercial considerations and tight timescales make this an unattractive option, and clients are looking to their advisers for guidance on the risks of TPR intervention.
In the case of BHS, it is clear that the Pensions Regulator has been heavily involved in the scheme for some time. Different accounts have been given of the role it played leading up to BHS’ insolvency, and we have no clear indication of whether it intends to exercise its anti-avoidance powers against any current or former owners of BHS. One thing, however, is certain: the BHS pensions saga is far from over.