On 16 November, the Determinations Panel of the Pensions Regulator published its reasons for using its powers, under section 7(3)(c) of the Pensions Act 1995, to appoint independent trustees to the GEC 1972 Plan (also known as the Telent pension scheme). In order to exercise its powers of appointment, the Regulator had to be satisfied that it was necessary in order to "secure the proper use or application of the assets of the scheme."
The decision was made in light of Pension Corporation's (PC) offer for Telent plc. In essence, the scheme's existing trustees and the Regulator were concerned that PC would, in due course, use its position as the employer in relation to the scheme to take control of the scheme's investment strategy, to the potential detriment of the interests of the scheme's members. The trustees were anxious to preserve the independence of the scheme's investment strategy and keep it separate from the scheme's employer.
In response, PC argued that it was inappropriate for the Regulator to act in anticipation of future potential detriment; the Regulator could and should refrain from acting until such a situation actually arose.
The trustees cited evidence in PC's literature, certain statements and in its past actions in relation to the schemes of other employers it had acquired, to argue that the approach of PC to the Telent pension scheme created a fundamental conflict of interest. This conflict required action from the Regulator now, in order to protect the scheme and the interests of members.
The Panel considered situations where a conflict of interest might arise:
- The use by Telent plc, if controlled by PC, of the power to appoint its directors to the trustee board where there was a risk that those appointees would wish to implement PC's investment strategy.
- The new trustees would have a conflict of interest when deciding on whether to appoint PC as the scheme's investment manager.
- If PC was appointed as the scheme's investment manager or its personnel were involved in decisions on investment policy, a conflict of interest could arise on every occasion that PC provided investment advice to the scheme.
The Panel concluded that there was a realistic prospect that the above conflicts could arise and that no arrangements had been put in place for managing these conflicts. The Panel noted that PC's business is the management of pension schemes with a view to making profits for its investors.
The Panel was also concerned by the language used by PC to describe its business; in particular the use of the terms "control" and "own" in relation to the scheme. In light of this, the Panel considered that the "relationship between the Employer/PC and the scheme would be fundamentally different…from a typical employer/scheme relationship…because of PC's business model …and because of the unusual ratio between active and deferred members."
This decision demonstrates that the Regulator will act to protect scheme independence, especially where an employer (or, as in this case, a prospective employer) has business objectives which involve that scheme. It was also relevant that the Telent scheme's active membership is proportionately small (only 1,000 of 62,000 members are actives). However, it also remains the case that the Regulator does not exercise its powers lightly and that this is a very rare example of intervention through the use of its statutory powers.