On 3 September 2015, the Pensions Regulator published a “section 89 report”, setting out its reasoning in deciding whether to exercise its powers in relation to scheme funding arrangements for the Docklands Light Railway Pension Scheme (the “Scheme”).
The Regulator has significant powers with regard to funding under section 231 of the Pensions Act 2004, including the ability to specify how a scheme’s technical provisions are to be calculated and to impose its own schedule of contributions. However, as with many of the Regulator’s powers, the threat of the Regulator imposing its own solution is often sufficient to encourage the parties to reach an agreement acceptable to the Regulator, so there is limited information publically available about how the Regulator will analyse the issues. The purpose of section 89 reports is to address this problem, providing greater transparency about the process that the Regulator will follow when deciding whether and how to exercise its powers. We understand that the Regulator is keen to make greater use of section 89 reports in future, while being mindful of the need to protect parties’ confidential information.
In the case of the Scheme, as is often the case, the statutory employer (Serco) and the principal employer under the rules (DLR) were different entities. The Regulator first became concerned about the Scheme in relation to the actuarial valuation with an effective date of 1 April 2009, which was due by 30 June 2010. Initially, when the valuation deadline was missed, the Regulator facilitated discussions between the trustees and Serco, to encourage them to reach agreement. Eventually, on 31 August 2012, the Regulator issued a “warning notice” as a precursor to exercising its funding powers under section 231 (as referred to above). The warning notice requested the Regulator’s determinations panel to direct the trustees to obtain reports on (i) the scheme’s funding position and (ii) Serco’s covenant, which the Regulator could then use to impose its own funding plan under section 231.
The Regulator’s proceedings were suspended when the parties considered that there was potential to come to an agreement in relation to the valuation, and this suspension continued while the trustees brought court proceedings against Serco seeking contributions under the Scheme’s contribution rule. Eventually, in November 2014, the trustees, Serco and DLRagreed a settlement in relation to the court proceedings. As part of this settlement, it was agreed that Serco, with a smaller contribution from DLR, will eliminate the deficit as reflected in the 2012 valuation by January 2018. Valuations for 2009 and 2012 have been carried out, and recovery plans and schedules of contributions have also been submitted to the Regulator for the Scheme. On this basis, the Regulator has decided not to take further action.
This case is a good example of how the Regulator will approach a situation where parties cannot reach agreement within the statutory deadlines. The Regulator will encourage the parties to come to an agreement before seeking to exercise its statutory powers, which are generally only used as a last resort. It is worth noting that the case ran for some time before the Regulator issued a warning notice. Where parties can show that they are working to reach a solution, and progress is being made, it would be unusual for the Regulator to take further action.
Reading between the lines, this also seems to be an example of the issues that can arise where there is a mismatch between the party responsible for funding the scheme under its rules and the “statutory employer” for the purposes of the scheme funding legislation. This can lead to disputes about which entity should be funding the scheme and it may well be that this was part of the issue in this case.