The Determinations Panel of the Pensions Regulator has issued its first "moral hazard" sanction, in the form of a financial support direction ("FSD") against Sea Containers Limited ("SCL").

What is a financial support direction?

A FSD is an order that financial support (for example, a parent company guarantee) be put in place for a defined benefit pension scheme. It is not a demand for an immediate cash payment into the scheme.

An FSD can be issued to any company which is associated or connected with any employer in relation to a scheme (but not to individuals). It can only be issued if the employer in question is "insufficiently resourced"; specifically, where the value of its "resources" is less than the amount required to cover 50% of the buy-out deficit in the pension scheme.

Imposition must be reasonable

The Pensions Act 2004 provides that the Regulator can only issue an FSD where it believes that it is reasonable to do so. In determining reasonableness, the Regulator must have regard to:

  • The relationship between the person and the employer.
  • The value of any benefits received by the person from the employer.
  • Any past or current connection/involvement of the person with the scheme.
  • The person's financial circumstances.

The interests of the scheme's members and anyone else who appears to be directly affected by the exercise of the power to impose an FSD.

The most contentious aspects of the SCL case arose from the interpretation of this concept of reasonableness.

SCL: the facts

Broadly, SCL (a Bermuda-based company) set up a service company in the UK which was an employer in relation to two defined benefit pension schemes. SCL itself had participated in one of the UK pension schemes until recently; it had been represented on the trustee body of the other.

The trustees of the UK schemes approached the Regulator amidst concerns about the level of financial support available to the schemes following SCL's withdrawal from participation from one of the schemes and the publication of trading statements made by SCL.

During its investigations, the Regulator was concerned by SCL's failure to provide detailed financial information and details of its proposals to restructure the corporate group.

There were two further complicating factors in this case. Firstly, SCL went into Chapter 11 bankruptcy during the negotiations with the Regulator; and, secondly, SCL is based outside of the EU, which could have given rise to jurisdictional issues. However, although the Panel dealt with the effect of the Chapter 11 proceedings at some length, it appears that SCL did not challenge the jurisdiction of the Regulator to impose an FSD on a company based outside of the EU.

The decision: it was reasonable to impose an FSD

Counsel for SCL argued that there was no evidence of SCL deriving benefit from its UK service company, and, therefore, that the imposition of an FSD would be unreasonable. The Determinations Panel examined this relationship and concluded that SCL did, in fact, derive benefit from the UK service company, on the grounds that:

SCL received services from its UK company but did not pay for these services directly (instead, inter-company balances were created which recorded the debt, but SCL did not have to pay off the debt within any prescribed time).

The service company's position in the SCL group structure meant that SCL was able to benefit from the favourable Bermudan tax regime whilst retaining a European trading base.

The Panel also concluded that:

  • SCL was closely connected to both schemes.
  • SCL had substantial assets.
  • The fact that SCL was in Chapter 11 bankruptcy did not mean that the imposition of an FSD was unreasonable. In particular:
    • The issuing of an FSD would not infringe the automatic stay which is part of the protection provided to companies in Chapter 11 proceedings.
    • The schemes' trustees would be able to rely on the FSD to prove a claim in the Chapter 11 proceedings.
    • Failure by SCL to obtain the approval of the US Bankruptcy Court to a claim based on an FSD would not place SCL in an impossible position. Enforcement of the FSD through the Regulator issuing a contribution notice (an order that a specific sum of money be paid into the scheme(s)) would, technically, still be possible, but SCL would be able to raise the Bankruptcy Court's position in argument before the Panel.

This analysis is surprising in that the Panel appears to be issuing an FSD and yet admitting that the chief means of enforcement may be inappropriate. Nevertheless, it is clear that the Panel does not view the existence of Chapter 11 proceedings as fatal to its power to issue an FSD.

  • The trustees would not be put in a position of "super priority" as a result of the FSD; rather, they would rank equally with other unsecured creditors of SCL.
  • The Panel rejected suggestions that it had acted prematurely in issuing the FSD, citing a lack of urgency in SCL's approach generally throughout the negotiations.