July 20, 2010
Historic liabilities arising from defined benefit pension schemes continue be a significant feature of the corporate landscape in the UK. The Pensions Regulator has sweeping powers to make orders to ensure that historic liabilities are adequately provided for. Under the Pensions Act 2004 the Pensions Regulator has the power to make orders that could have extra-territorial application and effect.
The Pensions Regulator has, for the first time, exercised its enforcement powers to require a Dutch parent company to make a sizable lump sum contribution to make good the deficit in the pension scheme of its UK subsidiary.
The Pensions Problem
During the last 10-20 years a large number of employers in the UK have scaled back their employee pension arrangements. At one time, it was common for employers to offer defined benefit pension arrangements, with scheme assets held in trust and sponsored by the employer. A typical scheme might have provided a pension on retirement equivalent to two thirds of final salary after forty years service. As a result of disappointing returns on equities and increased life expectancy in recent years, many of these schemes carry very significant deficits. Many private sector schemes have closed to new members or to future service accrual but the funding of these schemes in respect of their historic liabilities remains the ongoing responsibility of the sponsoring employer.
The Pensions Regulator – Moral Hazard Provisions
The Pensions Act 2004 created a form of statutory insurance in the form of the Pension Protection Fund to provide a minimum pension to all pension scheme members in the event of insolvency of the sponsoring employer. In order to protect the fund and prevent sponsoring employers of pension schemes from walking away from their liabilities, the legislation also created a new Pensions Regulator with far reaching powers. These included powers to issue:
Both powers may only be exercised when it is reasonable to do so having regard to specified factors. Significantly, the powers allow the Pensions Regulator to "pierce the corporate veil" by issuing notices not just to sponsoring employers but also to group companies and certain other associates. Contribution Notices go even further and can be issued personally to directors.
Both Contribution Notices and Financial Support Directions can be issued against non-UK entities although there remains the practical issue of whether they would ultimately be enforced by overseas courts.
A Contribution Notice could accelerate payment of the entire employer debt. By contrast, Financial Support Directions are more flexible in the financial support that can be provided .
The First Contribution Notice
The First Contribution Notice has recently been issued against a Dutch company called Michel Van De Wiele NV ("VDW"). In 1998 VDW acquired a loss making English company called Bonas Machine Company Limited ("Bonas"). Bonas sponsored a pension scheme which in 1998 had a deficit of £285,000. In an attempt to turn Bonas around, VDW moved Bonas’s manufacturing operations to Belgium, only retaining its R&D facility in the UK. However these measures were not successful and Bonas continued to incur losses. By November 2005 the pension scheme deficit had increased significantly.
In August 2006 a "pre-pack" administration was proposed, whereby the business and employees of Bonas would be transferred to a newly incorporated company and the pension scheme would be left as an unsecured creditor of Bonas. Shortly afterwards the pension scheme entered into an assessment period with a view to being admitted to the Pension Protection Fund.
The Pension Regulator imposed a Contribution Notice requiring VDW to make a lump sum contribution of £5 million to the fund. This was the amount required to purchase annuities to provide members with the benefits to which they would have been entitled to receive under the Pension Protection Fund.
In deciding to issue a Contribution Notice, the Pension Regulator’s Determinations Panel was strongly influenced by the fact that that VDW had given the trustees the impression that it would continue to support the scheme and had failed to notify the Regulator of the proposed restructuring as it was required to do. The Pension Regulator also considered making a Contribution Notice personally against the controlling shareholder and director of VDW but decided not to do so on the facts.
VDW is appealing against this decision.
In the five years since the so called "moral hazard" provisions of the Pensions Act 2004 were introduced this is the first Contribution Notice that has been issued. There have only been two Financial Support Directions issued including the recent Financial Support Direction issued against 25 companies in the Nortel group around the world.
This is not the reflection of a toothless regulator but rather that settlements have been reached against the backdrop of these powers in the vast majority of cases. The case is a reminder that the Pensions Regulator will exercise its powers if settlement terms cannot be reached and will seek to enforce its determinations against overseas companies.
Those involved in assessing UK based corporate targets should obtain expert legal and actuarial input at an early stage to assess the financial risks associated with any pension schemes operated by the group. Those considering restructuring activities, including internal restructuring, within groups that include defined benefit pension schemes should tread carefully.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have. Please feel free to contact the following attorneys in the firm’s London office:
Daniel E. Pollard (+44 20 7071 4257, [email protected])
James A. Cox (+44 20 7071 4250, [email protected])
James Barabas (+44 20 7071 4253, [email protected])
Wayne McArdle (+44 20 7071 4237, [email protected])
© 2010 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.