The Pensions Regulator has taken the rare step of publishing a case study illustrating how and when it will intervene if a scheme’s employer and trustees are unable to agree a schedule of contributions.
The case study relates to the Docklands Light Railway (DLR) pension scheme. It shows that the Regulator is willing to exercise its statutory intervention powers, but appears to see this very much as a last resort, particularly where it believes scheme rules give trustees power to impose a contribution rate. The DLR case study illustrates that where a funding agreement is reached late, the Regulator will expect the scheme to be put in as good a position as if the agreement had been reached on time. Where the employer is a franchisee, the upcoming end of the franchise is a relevant factor for trustees to take into account. But this does not mean the trustees should necessarily assume that all employer support will fall away at the end of a franchise.
Legislation requires scheme trustees to periodically (normally every three years) obtain an actuarial valuation of the scheme and to put in place a schedule of contributions. Whether trustees can impose the employer contribution rate or require employer agreement will depend on the wording of the scheme rules. If a schedule of contributions is not agreed within the statutory deadline, the Pensions Regulator has various powers to intervene.
The DLR case study and the Regulator’s approach
In the DLR case, the trustees were unable to agree the contribution rate with the scheme’s employer, the operator of the DLR franchise, by the statutory deadline of 30 June 2010. After discussions between the parties, facilitated by the Regulator, failed to reach agreement, the Regulator issued a warning notice on 31 August 2012 with a view to exercising its statutory powers.
A complicating factor appears to have been a lack of agreement between the parties as to whether the scheme’s contribution rule allowed the trustees to unilaterally impose a contribution rate. The Pensions Regulator was particularly reluctant to intervene, as it believed the wording of the rule gave the trustees power to impose a contribution rate. The scheme trustees eventually made a unilateral contribution demand on the employer and issued court proceedings. The employer defended the proceedings and appears to have disputed the existence of a unilateral trustee power to set contributions.
In November 2014 the parties settled the court proceedings on terms (backed by a parent company guarantee) which agreed contributions designed to clear the deficit by January 2018 with over half the amount paid by January 2016. In the light of this the Pensions Regulator decided not to exercise its statutory powers.
Two key points made by the Regulator in the DLR case study are:
- where a statutory deadline is missed, the Regulator will be concerned to ensure that the scheme is put in the position it would have been in had the deadline been met; and
- where the employer is a franchisee with a fixed term franchise, this is a relevant factor for trustees to take into account when setting contribution rates. But this does not necessarily mean that the trustees should assume that all employer support will fall away at the end of the franchise.
One of the Regulator’s aims in publishing the DLR case study was presumably to show that it is willing to exercise its statutory powers to intervene in funding disputes. However, the DLR case study illustrates a very strong preference on the part of the Regulator for contribution rates to be set by the relevant parties without the Regulator using its powers. In this case, there appears to have been a gap of two years between the first missed deadline and the Regulator’s warning notice.
It may be that agreement would have been reached more quickly had all parties agreed on the correct interpretation of the scheme’s employer contribution rule. The drafting of such rules varies between schemes. It is vital for parties to funding negotiations to understand the terms of their contribution rule (including any possible areas of ambiguity) because the wording of the rule can fundamentally affect their negotiating position.
The Regulator’s DLR case study is of particular note for franchisees and their schemes. Trustees should understand whether an employer is participating in the scheme as part of a fixed term franchise arrangement. Franchisees should be alert to the possibility that the terms of their franchise may prompt trustees to seek higher pension contributions than would otherwise be the case. Given the scope for costly disputes to arise over pension contribution rates, the pension provisions of any franchise agreement should be regarded as a key element to the commercial deal.