In a world where The Pensions Regulator can issue contribution notices and financial support directions, putting in place new or additional banking facilities may not be as simple as it was in the past.
The Pensions Act 2004 allows the Regulator to issue contribution notices (requiring the payment of funds to a company's pension scheme) to an employer or a person connected to or associated with it.
Amongst other reasons, the Regulator can do so if: (a) it is of the opinion that it is reasonable to do so; and
(b) the recipient of the notice was party to any act or a deliberate failure to act, the main purpose of which or one of the main purposes of which:
(i) was to prevent the recovery of the whole or any part of a debt which was, or might become, due from the employer in relation to a defined benefit pension scheme under section 75 of the Pensions Act 1995 (deficiencies in the scheme assets, e.g. on employer insolvency); or
(ii) satisfied the 'material detriment test' (i.e. if the Regulator is of the opinion that the act or failure to act has detrimentally affected, in a material way, the likelihood of scheme benefits that have accrued being received).
While this may seem to be targeted at companies that are expressly trying to avoid paying funds to their pension schemes, that need not be the case and the granting of a new security for existing debt (i.e. where the security does not relate exclusively to new funds) would potentially fall foul of the statutory provisions.
Take, for example, a company that has a defined benefit (e.g. final salary) pension scheme with a funding shortfall and which is entering into a new facility with its bank. If the bank has no security over the company's assets, it is likely to insist on it as part of the new package. This may not seem like an uncommon or unreasonable request for the bank to make: so, what's the problem?
As matters stand and assuming that the scheme also does not hold a security, the bank and the scheme would rank equally in the event of the company's insolvency. However, if the security that the bank is requesting is granted, any claim that it would have against the company's assets would rank ahead of any claim by the scheme and this could be viewed by the Regulator as being a course of action one of the main purposes of which is to prevent the recovery of the whole or any part of a debt which was, or might become, due from the employer under section 75 of the 1995 Act.
It is not all doom and gloom, though. The Regulator has the power to issue clearance statements in relation to a proposed transaction, in terms of which it confirms that it will not issue a contribution notice and/or a financial support direction (another form of funding direction that could justify an article to itself).
The Regulator will ask what the scheme trustees' views are on the proposed transaction and will require sufficient information to allow it to consider any application: e.g. information on the funding position of the scheme, details of any employer group structure and, most importantly, an assessment of the relative 'before and after' position of the scheme. In that context, it need not be fatal to a proposal or an application for clearance if the scheme suffers some detriment, provided that it is not "material" – the scheme trustees should and will, of course, seek to avoid it suffering any detriment.
Time should be allowed for the various parties (including the trustees) to obtain and consider advice and to discuss and, hopefully, agree matters, as well as for the Regulator to consider any application. Helpfully, the Regulator is conscious that clearance is usually sought in connection with time-critical matters and does its utmost to deal with applications as quickly as possible and actively assists in progressing matters. Seeking clearance is optional, but many banks will make the provision of new facilities subject to clearance having been obtained.
The key thing to remember is that, with proper preparation and consideration, there is no reason that a balanced proposal cannot be agreed to by scheme trustees and receive regulatory clearance.