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					                     The Pensions Regulator: Anti-avoidance
                     powers
                     Standard Note:       SN/BT/4368
                     Last updated:        21 November 2008
                     Author:              Djuna Thurley
                     Section              Business and Transport Section


The Pensions Regulator (TPR) was introduced by the Pensions Act 2004 as part of a
package of measures to protect the benefits of pension scheme members and to make
pension provision easier for employers. The legislation also established the Pension
Protection Fund (PPF) to provide compensation to members of final salary pension schemes
that wind up underfunded on the insolvency of the employer. The Government recognised
the potential for “moral hazard” i.e. that there might be an incentive for “unscrupulous
employers” to “dump their pensions liabilities, under the assumption that the PPF would pick
up the tab”. 1 It therefore introduced “anti-avoidance powers” aimed at preventing this. TPR
has the power to issue a:

    -    Contribution Notice to an employer (or someone associated with them) who is
         involved in an act or a deliberate failure to act to prevent recovery of a pension debt,
         or otherwise than in good faith, to prevent the full amount of the pension debt
         becoming due;

    -    Financial Support Direction requiring the recipient to put in pace appropriate financial
         support for a pension scheme. This power arises where a sponsoring employer is a
         “service company”, or is insufficiently resourced. 2

Amendments to these powers are to be introduced by the Pensions Bill 2007-08. These were
felt to be needed in the light of operational experience and in response to developments in
the market. The focus of this was the “launch of new business models, which among other
features, may look to sever the link between the employer and the pension scheme in order
to operate well-funded occupational pension schemes for profit.” 3

This note looks at the anti-avoidance powers and the recent amendments to them. A further
important area of TPR’s work is covered in SN/BT/4877, Pension scheme funding
requirements.

1
    Pensions Bill Deb, 27 April 2004, c768
2
    Pensions Act 2004, s38 and 43
3
    DWP, ‘The powers of the Pensions Regulator. Amendments to the anti-avoidance measures in the Pensions
    Act 2004’, April 2008, para 2
This information is provided to Members of Parliament in support of their parliamentary duties
and is not intended to address the specific circumstances of any particular individual. It
should not be relied upon as being up to date; the law or policies may have changed since it
was last updated; and it should not be relied upon as legal or professional advice or as a
substitute for it. A suitably qualified professional should be consulted if specific advice or
information is required.

This information is provided subject to our general terms and conditions which are available
online or may be provided on request in hard copy. Authors are available to discuss the
content of this briefing with Members and their staff, but not with the general public.
Contents

1   Establishment of the Pensions Regulator (tPR)           3
    1.1    The need to reduce the risk of ‘moral hazard’    4

2   TPR’s anti-avoidance powers                             6
    2.1    Contribution Notice                              6
           Employer debt                                    7

    2.2    Financial Support Direction                      8
    2.3    Restoration Order                                9
    2.4    Clearance statements                             9
    2.5    Further reform                                  10
           Revised guidance on clearance                   12
           Consultation on anti-avoidance powers           13
           Amendments to the Pensions Bill 2007-08         15

3   Role of trustees in relation to detrimental events     19
    3.1    TPR’s power to appoint independent trustees     20
           Amendment to Pensions Bill 2007-08              22




                                             2
    1        Establishment of the Pensions Regulator (tPR)
The Pensions Act 2004 introduced a number of measures aimed at improving the protection
of pension scheme members’ benefits and making provision easier for employers. One of
these was the establishment of a new Pensions Regulator (TPR) to replace the previous
Occupational Pensions Regulatory Authority (OPRA). 4

The legislative framework previously in place led OPRA to direct its effort towards “high
volumes of relatively low value reports and breaches”. TPR was intended to take a “risk-
focused and proactive approach”. 5 It would:

                •   have statutory objectives that set a clear framework for its activity and provide
                    an overarching definition of its functions;
                •   establish a high profile in the community it regulates;
                •   be provided with a responsive and proportionate regulatory ‘tool kit’, including
                    powers to sanction, which will enable it to take a targeted and appropriate
                    approach to breaches of pensions legislation and to other matters of conduct
                    that pose a risk to members’ benefits;
                •   work with the pensions industry to help improve standards in scheme
                    administration; and
                •   encourage compliance with regulatory provisions by, for example, undertaking
                    compliance visits and providing guidance and educational material.

            22. The aim of our approach is to create a Pensions Regulator that is able to tackle the
            areas of greatest risk, providing better protection to pension scheme members, and be
            a respected and authoritative force in the regulated community. Greater flexibility and
            proportionality will benefit both those the Pensions Regulator seeks to protect and
            those who provide and administer work-based pension schemes. 6

TPR’s objectives under the legislation are to:

        •   protect the benefits of members of occupational pension schemes;
        •   protect the benefits of members of work-based personal pension schemes;
        •   reduce the risk of situations arising that may lead to compensation being payable
            from the Pension Protection Fund (PPF);
        •   promote, and to improve understanding of, the good administration of work-based
            pension schemes. 7

The legislation gave the Pensions Regulator a significantly wider range of powers and
responsibilities than OPRA. 8 For example, OPRA “had no powers to act against employers’
attempts to avoid meeting their pensions obligations. And it had no duty to do so.” 9 TPR was
to be:



4
    Part 1, Pensions Act 2004
5
    DWP, ‘Simplicity, security and choice, working and saving for retirement: action on occupational pensions’,
    June 2003, Cm 5835 http://tinyurl.com/db3x2v (UK Govt Web Archive, retrieved 25 February 2009)
6
    Ibid
7
    Pensions Act 2004, section 4; http://www.pensionsregulator.gov.uk/aboutUs/ (retrieved 14 November 2008)
8
    The Pensions Regulator, ‘Annual report and accounts, 2005-06’, p3;
    http://bit.ly/21pC4R (UK Govt Web Archive, retrieved 27 August 2009)
9
    NAO, ‘The Pensions Regulator: Progress in establishing its new regulatory approach’, HC 1035, Session
    2006-07, 26 October 2007; http://bit.ly/19M5ns (UK Govt Web Archive, retrieved 27 August 2009)



                                                        3
         Provided with a responsive and proportionate regulatory ‘tool kit’, including powers to
         sanction, which will enable it to take a targeted and appropriate approach to pension
         scheme members, and be a respected and authoritative force on the regulatory
         community. 10

1.1      The need to reduce the risk of ‘moral hazard’
Other measures introduced by the Pensions Act 2004 included the creation of the Pension
Protection Fund (PPF) to provide compensation to members of defined benefit pension
schemes which wind up underfunded on the sponsoring employer’s insolvency. 11

The Government recognised that the introduction of the PPF created a potential “moral
hazard.” In other words, it might provide “unscrupulous employers” with an incentive to
“dump their pension liabilities, under the assumption that the PPF would pick up the tab.” 12

In particular, the Government was concerned that the employers might seek to use
“company structures and business transactions as a cover for side-stepping their pension
obligations in the form of the debt due from the employer under section 75 of the Pensions
Act 1995.” 13 Section 75 of the Pensions Act 1995 14 provide for the calculation of the debt
owed by the employer to a pension scheme in certain circumstances, for example, if an
employer becomes insolvent, withdraws from a multi-employer scheme, or if a scheme is
wound up.

To mitigate the risk of this, the Government introduced amendments to the Pensions Bill
2003-04. At Commons Committee stage, an amendment was introduced to enable TPR to
issue a “Contribution Notice” where it identified that an act or failure to act had taken place
with a view to avoiding an employer’s debt to the scheme:

         When the regulator identifies that an act or a failure to act has taken place with a view
         to avoiding a section 75 liability, the new clauses will allow it to require a person or
         company involved in that action to pay a contribution into the scheme. The contribution
         required will replace the section 75 debt, which could otherwise have been recovered
         from the legal employer. The maximum contribution that the regulator can require will
         be calculated by reference to the section 75 debt that might otherwise have been
         recoverable from the employer had it been triggered at the time of the act concerned. 15

In addition, tPR would have the power to issue a “Financial Support Direction”, requiring
strong employers within a group to support the pension schemes of weak employers in the
group. These could be used in cases where employers have not deliberately restructured in
order to avoid pension liabilities, but where the structure devised for perfectly legitimate
reasons in practice has the effect of channeling all the liabilities into the weakest company
within the group. The then Pensions Minister, Malcolm Wicks, explained when this might
occur:



10
     DWP, ‘Simplicity, security and choice. Working and saving for retirement. Action on occupational pensions’,
     2003
11
     Part 2, Pensions Act 2004This is covered in more detail in SN/BT 3917, Pension Protection Fund
12
     Pensions Bill Deb, 27 April 2004, c768
13
     Pensions Bill Deb, 27 April 2004, c767
14
     And the regulations made under it. See, in particular, The Occupational Pension Schemes (Employer Debt
     and Miscellaneous Amendments) Regulations 2008 (SI 2008 No. 731)
15
     Ibid, c769



                                                         4
         There may be circumstances in which, as a result of actions that may well have been
         perfectly legitimate and not aimed at avoiding pension liabilities, schemes end up with
         a participating employer who is financially weak and unable to meet its pension
         liabilities. In particular, that may apply in the case of the debt on the employer imposed
         under section 75 of the 1995 Act in the event of the scheme winding up or the
         sponsoring employer becoming insolvent.

         An example of that is the use of service companies, often as part of entirely legitimate
         group arrangements. Such entities frequently have no material assets and their sole
         revenue comes from amounts charged to other group companies for the service of the
         employees, pursuant to inter-company agreements. If the parent company wishes to
         dump its pension liabilities, it can simply terminate its agreement with the company and
         wind both it and the scheme up. The service company will have no assets with which
         to pay any section 75 debt due. Similarly, the participating employer may, by chance,
         be a weak member of the group, equally unable to meet any debt and suitable to be
         sacrificed by the parent in order to reduce the group's pension liabilities. I am sure that
         hon. Members will agree that, in general terms, sponsoring employers of pension
         schemes should be genuine entities carrying on a material trading activity or holding
                                                                                          16
         material assets, so that the employer guarantee of the scheme is meaningful.

At Report stage in the Commons the Government introduced a further power, allowing TPR
to impose a “Restoration Order” directing that the position of a scheme be “restored where
the scheme has entered into a ‘transaction at an undervalue’ within a two-year period leading
up to an insolvency event”. Malcolm Wicks explained what this could involve:

         A transaction at an undervalue is exactly what it says—a transaction involving scheme
         assets that results in the scheme receiving no consideration, or consideration that is
         less than the market value, in return. That could include, for example, trustees being
         persuaded to purchase a property on the basis of planning permission for a
         development that does not actually exist, or a director of a company persuading
         trustees to offer him a transfer on a very generous basis to prevent his benefits being
         reduced by the compensation cap should the scheme enter the PPF.

         There is currently provision in insolvency legislation retrospectively to undo
         "transactions at an undervalue" involving company assets, which occur in the run-up to
         insolvency. New clauses 12 to 16 introduce similar provision in respect of transactions
         involving scheme assets, in order both to protect scheme members from having the
         assets of their scheme unfairly depleted and to guard against the possibility of the PPF
         having to assume responsibility for such schemes where it otherwise would not have
         done so. 17

In the Lords concern was expressed that the anti-avoidance powers could deter individuals
from rescuing companies in difficulties, and block merger and restructuring activity. The then
Parliamentary Under Secretary of State, Baroness Hollis, explained that there would be
consultation with industry on the moral hazard provisions over the summer. 18 On 25 October
2004, the Government published a report on the results of this consultation. 19 Amendments
would be made to the moral hazard provisions, the main ones being:




16
     SC Deb (B) 27 April 2004, cc 780-781
17
     HC Deb, 18 May 2004, c899-900
18
     See e.g. HL Deb, 8 July 2004, ccGC 202, 213
19
     DWP, ‘Consultation on the moral hazard clauses in the Pensions Bill’. ‘Report for Grand Committee’. October
     2004 http://bit.ly/dXKzl (UK Govt Web Archive, retrieved 27 August 2009)



                                                        5
         •    Time limit: The Pensions Regulator can look at acts or failures to act that have
              occurred not more than six years before the determination to issue a contribution
              notice in relation to that act or failure to act.

         •    Acts or failure to act covered by clause 39: To recognise situations where
              pension liabilities may be putting companies and, therefore, employment at serious
              risk. The Regulator will need to consider the purpose of the action – to take into
              account any adverse affect on employment.

         •    Clearance: Where companies are undergoing restructuring and want clarification
              on the effect of the legislation, the Regulator will provide a clearance procedure.
              The Regulator must make decisions in relation to clearance as soon as reasonably
              practicable but will not be bound by any clearance statement if there is a material
              change in circumstances, or if the circumstances described in the application are
              not real.

         •    Scope of financial support directions: It is not the intention that individual
              directors or shareholders would be liable for any pension deficit. Therefore the
              majority of individuals will be excluded from the scope of the financial support
              directions. 20

     2       TPR’s anti-avoidance powers
TPR has a range of powers to help it meet its objectives of protecting scheme members’
benefits and the Pension Protection Fund (PPF). 21 For example, regardless of any planned
transactions, all Defined Benefit schemes are subject to scheme specific funding
requirements. 22 The two main “anti-avoidance powers” available to the Pensions Regulator
are power to issue a Contribution Notice and or Financial Support Direction. 23 TPR also has
the power to appoint independent trustees to a scheme where satisfied that this is necessary
to ensure proper administration of the scheme or the proper use or application of the
scheme’s assets (see section 4 below).

2.1      Contribution Notice
Briefly, TPR can issue a Contribution Notice:

         to an employer or someone associated with the employer who is involved in an act or a
         deliberate failure to act to prevent recovery of a pension debt, or otherwise than in
         good faith, to prevent the full amount of the pension debt becoming due. A Contribution
         Notice requires the recipient to pay a specified amount of money to the pension
         scheme. 24

A decision to issue a Contribution Notice must be made by the determinations panel of the
Pensions Regulator. 25 The same applies to decisions to issue a Financial Support Direction
or Restoration Order. The determinations process is explained on TPRs website. 26


20
     DWP Press Release, 25 October 2004. ‘Results of industry consultation on moral hazard clauses in Pensions
     Bill’ http://bit.ly/YhHZS (retrieved 27 August 2009); See also, HL Deb, 1 November 2004, c25-29
21
     http://www.thepensionsregulator.gov.uk/about-us/our-powers.aspx
22
     This is covered in more detail in Library Standard Note SN/BT 4877, ‘Pension scheme funding requirements’
23
     DWP, ‘The powers of the Pensions Regulator. Amendments to the anti-avoidance measures in the Pensions
     Act 2004’, April 2008, para 1.23;
     http://bit.ly/25fxFW (UK Govt Web Archive, retrieved 27 August 2009)
24
     Ibid; Pensions Act 2004, s38
25
     Pensions Act 2004, s9-10; Schedule 2



                                                       6
Employer debt
The purpose of a Contribution Notice, then, is to prevent avoidance of an employer debt.
Section 75 of the Pensions Act 1995 (and the associated regulations) set out how to
calculate the debt owed by an employer in certain circumstances:

          …for example, if an employer becomes insolvent, withdraws from a multi-employer
          scheme, or if a scheme is wound up. In general terms, the debt is usually the
          employer’s share of the difference between the value of scheme assets, and the total
          sum required to purchase annuities for all scheme members. The purpose of the debt
          is to ensure that all pension promises are met in full at the time when the employer
          stops supporting the scheme. 27

Changes have been introduced to the operation of section 75. From September 2005,
“Approved Withdrawal Arrangements” were introduced. These allowed “a departing
employer’s debt to be reduced where an appropriate guarantee is put in place.” Revised
regulations came into force from 6 April 2008, “designed to strike a balance between
making the previous employer debt regulations more flexible in their operation, and
discouraging the avoidance of pension liabilities by scheme sponsors.” 28

This question of section 75 debt was considered as part of the ‘Deregulatory Review of
Private Pensions’. Employers were concerned about the way in which employer debt
was imposed, arguing that normal corporate activity could be impeded in inappropriate
ways. 29 Chris Lewin and Ed Sweeney, who produced a report on the issue for DWP,
recommended that:

          Where there is a group reconstruction of employers in a multi employer scheme, the
          principle should be established that the debt should not be triggered where the original
          covenant was strong, and if the remaining employers’ covenant remains as strong,
          following the reconstruction, as the original covenant. The judgement as to whether the
          covenant remains intact should be the responsibility of the trustees, after taking
          appropriate professional advice. However, one of us (Chris Lewin) recommends that,
          where the original covenant is potentially weak, provided it remains unchanged after
          the reconstruction, the debt should still not be triggered. 30

In response, the Government said that the purpose of the legislation was to “ensure that an
employer cannot ‘walk away’ from their pension obligations without ensuring they are
properly funded.” This was a difficult area, which it would consider further:

          However, this is a difficult area and it may not be easy to find a way to address this
          without creating loopholes within legislation…the Government intends to work with the
          industry over the coming months to seek a practical solution to the difficulties created


26
     See ‘The Pensions Regulator. Determinations Panel Procedure’, (revised June 2008);
     http://bit.ly/9gYSv6 )
27
     DWP, ‘The powers of the Pensions Regulator. Amendments to the anti-avoidance measures in the Pensions
     Act 2004’, April 2008, para 1.18;
     http://bit.ly/25fxFW (UK Govt Web Archive, retrieved 27 August 2009)
28
     Ibid, para 1.18-21,
29
     Chris Lewin and Ed Sweeney, ‘Deregulatory Review of Private Pensions. A consultation paper’. Para
     107;(March 2008)
     http://bit.ly/9Q0TG (UK Govt Web Archive, retrieved 27 August 2009)
30
     Chris Lewin and Ed Sweeney, ‘Deregulatory Review of Private Pensions. An independent report to the
     Department of Work and Pensions’, July 2007,
      http://bit.ly/hhs8h (UK Govt Web Archive, retrieved 27 August 2009)



                                                      7
        by the current provisions which does not undermine the principle that employers
        should fully meet their pension obligations. 31

The Government is currently conducting an “informal review” of section 75. A formal
consultation may follow. 32

2.2     Financial Support Direction
TPR may issue a Financial Support Direction requiring the recipient to put in place
appropriate financial support for an occupational pension scheme. This power arises where a
sponsoring employer is either insufficiently resourced or is a service company (i.e. one
whose turnover is solely or principally derived from amounts charged for the provision of the
services of employees of the company to other companies in the same group 33 .

TPR issued its first Financial Support Directions (FSDs) in relation to Sea Containers Limited
(SCL) directing it to provide “financial support for the two pension schemes of its London-
based UK subsidiary Sea Containers Services Ltd.” 34 TPR has provided the following
summary:

        Sea Containers Limited, the parent company of a group whose activities include
        container leasing, is registered in Bermuda and until October 2006 its shares were
        listed on the New York Stock Exchange. It wholly owns SCSL, a service company for
        the group, which is based in the UK. SCSL is the principal employer to two pension
        schemes: the 1983 and 1990 schemes. SCSL has been dependent on Sea Containers
        Limited for its funding, and this was recognised, from 1989 onwards, in a formal
        agreement between the two companies whereby Sea Containers Limited undertook to
        indemnify SCSL for certain of its liabilities including pension obligations to its
        employees.

        During the course of 2006, the trustees to both schemes became increasingly
        concerned over the ability of the principal and other participating employers to support
        the schemes financially, and notified TPR of their concerns in June. The trustees met
        with executives of Sea Containers Limited and the company’s advisers in September,
        and were advised of a planned restructuring of the group. However, no proposals were
        made to the trustees regarding future funding for the schemes, and TPR considered
        the possible grounds for issuing a Financial Support Direction (FSD).

        On 15 October 2006, Sea Containers Limited and SCSL filed for protection under
        Chapter 11 of the US Bankruptcy Code. Shortly afterwards, TPR sent out Warning
        Notices to Sea Containers Limited in respect of SCSL’s share of the two schemes’
        buy-out deficits, which estimated the deficits as being approximately £105 million in the
        case of the 1983 scheme, and approximately £22 million for the 1990 scheme.
        At the request of Sea Containers Limited TPR’s Determinations Panel held an oral
        hearing into the case on 12-13 June 2007. The main focus of the hearing was whether

31
    ‘Deregulatory Review – Government response’, October 2007, p15;
   http://bit.ly/VwdpE (UK Govt Web Archive, retrieved 27 August 2009)
32
    HL Deb, 19 November 2008, c1160
33
    Pensions Act 2004, section 43; Explanatory Notes, para 164 and 173
34
    The Pensions Regulator, ‘Regulator uses anti-avoidance powers on Sea Containers’, (PN 07-10), 18 June
    2007; http://bit.ly/9KPbqu
The Pensions Regulator, ‘Regulator issues Financial Support Directions on Sea Containers’, (PN 08/02, 6
    February 0208); http://bit.ly/9nvXa7; The Pensions Regulator, ‘Reasons of the Determinations Panel of the
    Pensions Regulator in relation to the Determination Notices issued on 15 June 2007 re. The Sea Containers
    1983 Pension Scheme and the Sea Containers 1990 Pension Scheme;
    http://bit.ly/cKqQy9



                                                      8
          it was reasonable for TPR to issue financial support directions. The Panel determined
          to issue financial support directions. Sea Containers Limited then appealed to the
          Pensions Regulator Tribunal on 23 July 2007. 35

On 6 February 2008, following the withdrawal of an appeal to the Pensions Regulator
Tribunal, TPR confirmed that SCL would be compelled to provide a form of financial support
for the pension schemes within 30 days. 36

2.3       Restoration Order

TPR can issue a Restoration Order where the assets of a scheme have been reduced by a
transaction whereby scheme assets have been disposed of at less than their true value (a
“transaction at an undervalue”). The power may apply where the employer has become
insolvent or (in the case of a scheme covered by the PPF) where the trustees have applied
to the PPF’s Board for it to assume responsibility for the scheme. The purpose of the order
is to put the position back to what it would have been had the transaction not occurred. 37

2.4       Clearance statements
The clearance procedure was introduced to enable companies undergoing restructuring to
gain assurance that TPR’s “anti-avoidance powers” will not be used in relation to the
transaction. 38 The process has the underlying aim of:

          •   the protection of jobs, particularly where clearance is needed to prevent the
              employer becoming insolvent; and

          •   the continuation of appropriate deal activity involving employers with defined
              benefit schemes. 39

TPR cannot stop a corporate transaction from proceeding but will consider the impact on the
pension scheme:

          We certainly cannot stop a transaction from proceeding – our concern is the impact on
          the pension scheme and its ability to pay members’ benefits. A company considering
          corporate activity can choose to request a clearance statement. We will consider the
          impact on the pension scheme, will want to see that the trustees are involved, and can
          issue this statement where sufficient mitigation has been offered. This gives assurance
          that our powers will not be used after the transaction has taken place. We strongly
          advise seeking clearance where there is an event that may be materially detrimental to
          the ability of the scheme to meet pensions liabilities – such as a change of
          ownership. 40

The following examples give an indication of how the process has worked in practice:


35
      NAO, ‘The Pensions Regulator: Progress in establishing its new regulatory approach’, HC 1035, 26 October
      2007, p24 http://bit.ly/19M5ns (UK Govt Web Archive, retrieved 27 August 2009)
36
      Pensions Regulator Press Release, PN 08/02, 6 February 2008, ‘Regulator issues Financial Support
      Directions on Sea Containers’ http://bit.ly/9nvXa7 (UK Govt Web Archive)
37
      Pensions Act 2004, s52; Explanatory Notes, para 200-04
38
      http://bit.ly/cMzC79 (UK Govt Web Archive; Pensions Regulator, Annual Report and Accounts 2006-07, p4
     http://bit.ly/aPXmAt (UK Govt Web Archive)
39
      Ibid, para 13
40
       Article by Tony Hobman, Chief Executive of the Pensions Regulator in HR Director, issue 38, June 2007,
      http://bit.ly/cnOiOc (UK Govt Web Archive); This is explained in more detail in The Pensions Regulator’s,
      ‘Clearance Guidance’, http://bit.ly/bOyZYA (UK Govt Web Archive)



                                                         9
         Trustees and employers have arrived at a variety of solutions for mitigating the risks
         associated with proposed transactions. In one case, for example, there was a proposal
         to raise additional secured debt to buy out a number of shareholders. This would
         clearly weaken the position of the pension scheme (which as in deficit) was an
         unsecured creditor. The scheme’s trustees were also shareholders and therefore
         conflicted; it was decided that an independent trustee should be appointed, who in turn
         commissioned an independent financial report. As a result, the employer agreed to
         tackle the scheme’s deficit through a combination of an upfront payment and additional
         annual contributions, while money was placed in an escrow account so that matching
         annual payments could be made to shareholders.

         Where the employer cannot commit to tackling a deficit in the short-term, trustees can
         still negotiate for improved security. One case, for example, involved financial
         restructuring and disposal of non-core business, enabling the employer to address
         increasing debt and deteriorating profits. Unsecured debt (which the banks were about
         to call) was replaced with borrowing facilities, a proportion of which was secured.
         Following negotiations, it was agreed that, although the banks would have priority over
         the secured debt, equal security would be given to the banks and the pension scheme
         once the secured debt had been repaid and net debt fell below a specified level for
         three consecutive months. 41

Clearance was refused in two cases in the first year of operation:

         In one of these cases, an arms-length management buy-in, the relatively robust
         position of the pension creditor (which had previously ranked pari passu with all other
         creditors) was considerably diluted by a ‘money out’ deal financed by a bank debt
         secured by fixed and floating charges. The regulator took into account a report from
         the trustees’ financial advisers who were unable to recommend acceptance of the
         proposed transaction, and noted that the trustees were affected by a conflict of interest
         which had not been resolved. Ultimately, the lack of mitigation (for example, through a
         reduced period for eliminating the deficit, or the provision of good security) meant that
         the regulator was not totally satisfied that it would be unreasonable to issue a
         contribution notice or financial support direction.

         The second case was a complex restructuring and sale transaction in which a number
         of employers and schemes were involved. In summary, the affected schemes were not
         offered immediate cash payments towards the reduction of deficits; the only security
         offered to trustees was dependent on the future success of the restructured group. At
         the same time, an exceptional dividend was to be paid to some shareholders and a
         certain amount of secured debt was to be paid down. 42

In 2007-08, TPR received fewer applications for clearance than it had the previous year.
However, the nature of the enquiries became more complex. There were a “significant
number of highly leveraged transactions involving companies with large DB schemes.” 43

2.5      Further reform
TPR has made sparing use of its powers, preferring to concentrate on education and
influence. The National Audit Office said:



41
     ‘Anti avoidance and clearance: the bigger picture’ Article by Tony Hobman, March 2006
42
     Ibid
43
     The Pensions Regulator, ‘Annual report and accounts, 2007-08’, p25;
     http://bit.ly/aPXmAt (UK Govt Web Archive)



                                                       10
         4.17 TPR was given much greater enforcement powers than those of the previous
         regulator. To date it has used education and enablement in preference to enforcement.
         It has not yet felt the need to use its enforcement powers widely considering it more
         proportionate to use the threat of powers to influence the desired behaviour. In
         particular TPR believes the threat of a Contribution Notice or a Financial Support
         Direction has resulted in increases in the funding of pension schemes that are part of a
         corporate transaction. 44

Some have questioned – particularly in the context of high-profile take-over bids for
companies with large pension schemes - whether TPR has the powers needed to protect the
benefits of pension scheme members. An article by two pensions lawyers in the Financial
Times on September 2006, for example, discussed TPR’s powers to act in a take-over
situation:

         Take a situation where a company, after a corporate transaction, for instance to
         acquire another company, has significantly more secured corporate debt. The
         company’s ability to pay future contributions to the pension scheme or fund the past
         service deficits may be severely curtailed. Yet the Pensions Regulator is powerless to
         issue a contribution notice in this situation. It could only do so if it could prove that the
         main purpose of the transaction is the avoidance of pensions debt.

         The Regulator seems reluctant to pus the boundaries of its powers, possibly because it
         wants to avoid a legal challenge to its actions. If the company in our example is
         insufficiently resourced following the corporate transaction, then the Regulator might
         use a financial support direction.

         However, given that the purpose of a financial support direction a company’s resources
         are valued on a prescribed market basis, the threshold for the Regulator to act can be
         too high.

         The Regulator also has the power to give clearance for corporate transactions to go
         ahead without the fear of a contribution notice or financial support direction being
         issued. However, applying for clearance is entirely optional for a company. So in
         practice, corporate transactions can go ahead without involving the Pensions
         Regulator. It is then up to the pension scheme trustees to approach the Regulator if
         there are doubts about the main purpose of the transaction. 45

Following the agreement reached regarding the pension fund in the takeover of Alliance
Boots by KKR, Sir Nigel Rudd (chairman of Alliance Boots) argued that TPR should be given
the power to determine how much money should be placed in a company’s pension scheme
at the time of a takeover bid:

         The Pensions Regulator should be given the power to determine how much money
         should be forcibly placed in a company’s pension scheme at the time of any bid, one of
         the UK’s most prominent business leaders has said.

         This should be done to avoid onerous demands for cash from trustees that could block
         transactions, argues Sir Nigel Rudd, chairman of Alliance Boots…




44
     National Audit Office, ‘The Pensions Regulator: Progress in establishing its new regulatory approach’, HC
     1035 Session 2006-07, 26 October 2007; http://bit.ly/19M5ns (UK Govt Web Archive, retrieved 27 August
     2009)
45
     ‘Pensions watchdog has yet to show its teeth: Clive Weber and Christina Bowyer asses the effectiveness of
     the Regulator almost 18 months after its inception, and find it wanting’, Financial Times, 4 September 2006



                                                        11
         “There must be a case for the regulator to have the statutory power to ensure a timely
         agreement,” Sir Nigel writes. “To address this, it is my belief that the regulator should
         be the arbiter of what is reasonable and should have the power to enforce an
         agreement on both the trustees and the company. 46

However, tPR was said to be “wary of receiving these new powers, partly because the
watchdog fears that if a decision was made that led to a shortfall of benefits, then pension
fund members could lodge demands for compensation.” 47

Revised guidance on clearance
On 3 May 2007, TPR issued a reminder on clearance saying that in the case of “highly
leveraged” transactions, “clearance is an appropriate consideration irrespective of the
funding position of the scheme involved”:

         Where there is a significant weakening of employer covenant as a result of a corporate
         transaction, for example where a highly leveraged transaction occurs and/or the assets
         to which the scheme currently has recourse are being removed from the employer
         group, then clearance is an appropriate consideration irrespective of the funding
         position of the scheme involved. In addition, trustees in these sorts of circumstances
         should consider whether to seek a materially enhanced level of mitigation in excess of
                         48
         FRS17/IAS 19.

Charlie Massey, Executive Director for Strategic Development at TPR was reported as
saying that the reminder was not “specifically aimed at private equity deals” but that “a
significant minority of trustees did not understand the need to re-view the employer's
covenant, which was significantly weakened when a new owner piled on debt.” 49 The
Financial Times, however, reported it as a “blow” to private equity firms seeking to buy British
businesses:

         Private equity firms seeking to buy British businesses will be dealt a blow today when
         the pensions regulator says that trustees have a duty to demand substantial assets up
         front to safeguard retirement benefits in the event of a leveraged buy-out. Guidance to
         be issued today will apply even to companies whose pension schemes appear well
         funded in accounting terms. The move will be seen as a tacit endorsement of the
         actions of the J Sainsbury trustees who, faced with a private equity consortium bid,
         insisted on £2bn advance assets to cover a deficit which, in accounting terms, was less
         than £ 500m. It will also strengthen the negotiating hand of trustees when facing future
         buy-outs. 50

Professional Pensions quoted the actuarial director of an investment management company
as saying:

         This is a significant toughening of the regulator’s position. It effectively means that
         defined benefit pension issues need to be considered irrespective of whether the
         scheme appears to be in deficit or not. To date, the mere threat of regulatory
         intervention has resulted in significant additional contributions to DB schemes in order


46
     ‘Pensions regulator suggested as arbiter’. Letter to the Financial Times. 25 June 2007
47
     Ibid
48
     The Pensions Regulator Press Release, 3 May 2007, ‘Regulator issues reminder on clearance
     guidance’, http://bit.ly/aomKnq
(UK Govt Web Archive)
49
   ‘Pensions setback for leveraged buyouts, Financial Times, 3 May 2007
50
   Ibid



                                                         12
         to clear the way for leveraged deals, usually backed by private equity. The surprising
         success of this approach has clearly whetted the regulator’s appetite – the
         announcement is clearly designed to increase the size of those lump-sum
         contributions. This shifting of the goalposts may well be motivated by the regulator’s
         desire to dip its hand further into the apparently deep pockets of private equity houses
         for the benefit of scheme members. 51

Draft revised clearance guidance was issued for consultation on 10 September 2007, with
comments requested by 2 November 2007. The main changes were to encourage a move
towards a more principles-based approach in deciding which events should be considered
for clearance and greater clarify in respect of the mitigation trustees should be looking for. 52
Revised clearance guidance was published in March 2008. 53 A report of the consultation
noted that respondents “generally welcomed the emphasis on a more principle-based
approach”, although there were “concerns about the lack of certainty that a principle-based
approach provides compared to a prescriptive approach.” 54

Consultation on anti-avoidance powers
On 14 April 2008, the Government announced that – in the light of operational experience
and in response to developments in the pensions market - it was proposing amendments to
tPR’s anti-avoidance powers. The then Pensions Reform Minister, Mike O’Brien was
concerned that “emerging business models might not give the same protection for pension
schemes as traditionally provided by a sponsoring employer or insurance capital”. 55 The
consultation document, issued on 25 April, explained that:

         The particular focus of the Government’s attention is the launch of new business
         models, which among other features, may look to sever the link between the employer
         and the pension scheme in order to operate well-funded occupational pension
         schemes for profit. These models, which operate outside the regime regulated by the
         Financial Services Authority, may be detrimental to scheme members’ benefits, and
         have a cost consequence for the PPF which could be transferred to continuing
         schemes through the PPF levy. 56

The Government acknowledged that - despite its reassurance that “the majority of pension
schemes would not be affected by the proposed changes” – it’s announcement had given
rise to concerns that “entirely normal business activities could somehow be affected by these
changes.” 57

The Government’s proposed changes were to:

     •   Enable TPR to issue a Contribution Notice where “the effect of an act is materially
         detrimental to a scheme’s ability to pay members’ current and future benefits.” TPR
         would not longer have to prove intent to avoid funding the scheme. The Government
51
    ‘Regulator toughens stance on clearance’, Professional Pensions, 10 May 2007,
52
    TPR Press Release, Pensions Regulator publishes revised clearance guidance, 10 September 2007
 http://bit.ly/bikl0m (UK Govt Web Archive)
53
    ‘The Pensions Regulator. Clearance Guidance’, (March 2008)
http://bit.ly/cnmfCQ (UK Govt Web Archive)
54
    ‘The Pensions Regulator. Revised clearance guidance’, (March 2008)
http://bit.ly/dq6YiW (UK Govt Web Archive)
55
    DWP Press Release, ‘14 April 2008 - Increasing protection for pension scheme members – O’Brien’
http://bit.ly/1949Em (UK Govt Web Archive, retrieved 27 August 2009)
56
    DWP, ‘The powers of the Pensions Regulator. Amendments to the anti-avoidance measures in the Pensions
    Act 2004’. April 2008, para 2
57
   http://bit.ly/3RnSE (UK Govt Web Archive, retrieved 27 August 2009)



                                                    13
         would consult on how the power should be defined. For example, it could be limited
         to “situations in which the prospective recipient of a Contribution Notice is unable to
         demonstrate the likely consequence of their actions could not reasonably have been
         foreseen.”

     •   Remove the existing provision that a Contribution Notice may not be issued where a
         party has “acted in good faith, but their actions have had the effect of preventing a
         debt becoming due.” This was because operational experience had shown this to be
         “an unhelpful hurdle which would prevent the parties being used in situations where
         parties have simply not considered the impacts on pension schemes.”

     •   Ensure that TPR was not frustrated in its objective to protect pension benefits and the
         Pension Protection Fund by ‘bulk transfers’ of members between pension schemes.

     •   It would clarify TPR’s powers in two areas:

         -   First, to clarify that the issue of a Contribution Notice can be triggered by a series
             of acts, and not just a single act aimed at avoiding a debt to a pension scheme;

         -   Second, to ensure that the resources of the whole group of companies may be
             considered when judging whether to issue a Financial Support Direction when
             there is an under-resourced employer – rather than requiring the Regulator to
             identify one single ‘person’ which is sufficiently resourced to enable the issue of a
             direction. 58

The amendments would be introduced with effect from 14 April 2008, except for the “series
of acts” amendment, which would be effective back to 27 April 2004 as it is a “clarification of
an existing provision whose effect dates back to this date.” 59 The aim was to ensure “all
pension schemes are treated fairly and prevent any party pushing through transactions which
reduce the security of member benefits without these powers biting on the transaction.” 60

According to the Financial Times, the CBI gave a “decidedly cautious welcome” to the
proposals:

         The CBI acknowledged that it was important that new buy-out mechanisms “are
         appropriately regulated” to protect fund members and the wider business community,
         which would face higher levies to the Pension Protection Fund if uninsured buyouts
         lead to more liabilities falling on the pensions lifeboat. However, John Cridland, the
         CBI’s deputy director-general, said the government “must take care it achieves this
         without ratcheting up the regulatory burden and cost for the majority of businesses.” 61

Brendan Barber, the TUC general secretary, was reported to have said that: "This will help
protect pension schemes against smash-and-grab raids." 62 In its submission to this




58
    ‘Statement on planned DWP consultation on the powers of the Pensions Regulator’,
 http://bit.ly/3MWPIs (UK Govt Web Archive, retrieved 27 August 2009)
59
    Ibid
60
    DWP, The powers of the Pensions Regulator. Amendment to anti-avoidance measures in the Pensions Act
    2004’, April 2008,
   http://bit.ly/25fxFW (UK Govt Web Archive, retrieved 27 August 2009)
61
    Timmins N, ‘Pension regulator gains new powers’, Financial Times, 15 April 2008
62
    ‘Regulator will be able to force buy-out firms to fund pensions, Guardian, 15 April 2008



                                                    14
consultation, the TUC said that a “full review of pensions buyouts models” was needed to
“anticipate any future threats to members’ interests”. 63

Amendments to the Pensions Bill 2007-08
Lords Committee stage
A Government made an amendment to the Pensions Bill 2007-08 at Lords Committee stage
would have provided for a regulation-making power to amend Part 1 of the Pensions Act
2004. 64 Introducing the Government amendment, Lord McKenzie said that most responses
to the April 2008 consultation documents had agreed that the Government was “right to act
and that we must protect members’ benefits and the Pension Protection Fund from new
risks”. However, it was important to ensure the changes were appropriately targeted: 65

          I should like to set out our intentions. The material risk prompting these changes are
          those actions that singularly or collectively weaken the employer covenant standing
          behind the pension scheme. Our consultation set out six features or situations where
          that may occur, including moving the employer or the pension scheme to another
          jurisdiction. In these and similar circumstances, the regulator should not have to prove
          intent but could look at the effect of the action and whether it was detrimental to the
          scheme or the PPF.

          The amendment provides a regulation-making power to amend Part 1 of the Pensions
          Act 2004, but has important constraints on the use of this power. These safeguards
          link the power to material risks to either the security of members’ benefits or the
          protection of the PPF and require the Secretary of State to consult with the Pensions
          Regulator and others. Regulations would also be subject to the affirmative procedure,
          ensuring that both Houses of Parliament would debate any regulations before they
          came into force. 66

Opposition Treasury spokesperson, Baroness Noakes, argued that the powers were
“extraordinarily broad and should be more narrowly drawn”. 67 She argued that the
Government should take the time to consult further on the measure before Report stage:

          That would allow the Department for Work and Pensions to pursue serious discussion
          about the form and content of alterations to the regulator’s powers during the summer
          and early autumn, and I hope that the Government could return on Report with an
          amendment which has more support in the commercial world than this one does. 68

Lord McKenzie responded that the safeguards in the new clause included the requirement to
consult stakeholders, including the regulator and other stakeholders:

          It would clearly not be appropriate to exercise the power if it did not reduce the existing
          material risks or, indeed, if it created serious new risks. 69

He explained why the Government wish to take “broad amending power in primary legislation
to follow with the specific detail of the changes in regulations”:

63
     TUC Press Release, 18 June 2008, ‘TUC calls for full review of buyouts model to safeguard members’
     interests’, http://www.tuc.org.uk/pensions/tuc-14976-f0.cfm (retrieved 23 June 2008)
64
     See HL Bill 79, section 123
65
      Ibid, c1078; DWP, The Powers of the Pensions Regulator. Amendments to the anti-avoidance measures in
     the Pensions Act 2004, April 2008;
     http://bit.ly/25fxFW (UK Govt Web Archive, retrieved 27 August 2009)
66
     HL Deb, 17 July 2008, c1078-9
67
     Ibid, c1082
68
     Ibid, c1080



                                                      15
        First, we wish to give this House sufficient notice of our intent, which an introduction at
        Report stage would not do. There was insufficient time following consultation for an
        alternative legislative approach at Committee. Secondly, we wished to be thorough in
        consultation, and, having consulted widely on our policy intentions, to follow with a
        second consultation on the details in secondary legislation. This would help to mitigate
        the undesirable consequences of regulation, to which the noble Lord, Lord Lucas, and
        the noble Baroness, Lady Noakes, referred this week. Thirdly, we believe that, as the
        DWP does not have a pensions Bill every year—thankfully—the need to react to future
        unforeseen issues in pensions avoidance might be best served in this way. 70

Baroness Noakes also wished to probe the proposal for “statutory defence” against the use
of the new powers in relation to Contribution Notices where a party could demonstrate that
they could not reasonably have foreseen the effect of a transaction. 71 She argued that
hindsight would inevitably be used and was concerned that “ordinary transactions could be
seen to have had the reasonably foreseeable consequence of having a material detrimental
impact on a pension scheme.” 72 Lord McKenzie said the test would be “applied in the
circumstances of the scheme and the employer at the time of the act.” 73

Other issues raised included:

•    The removal of the “otherwise in good faith” defence from the existing test for issuing a
     Contribution Notice. 74 Lord McKenzie explained that the “legal application of good faith”
     served to “set such a high evidential burden that it can be circumvented by those at whom
     regulation is targeted.” However, he would take away points that had been raised “to
     ensure that the approach that we put forward in draft regulations in due course is both
     effective and proportionate.” 75

•    The extent to which regulations to which future sets of regulations under the new clause
     could have retrospective effect. Lord McKenzie there was provision for restrospection
     “only in relation to novel situations of material risk” and that consultation would be
     required before the power could be used to introduce changes. 76 However, he accepted
     in principle that the first set of regulations should have effect from 14 April 2008, and that
     each subsequent set of regulations should have effect from the date on which the
     intention to make those regulations was announced”. 77

•    Whether clearance statements 78 could be re-opened. Lord McKenzie explained that a
     clearance statement would remain in place unless the “circumstances were materially
     different from the content of the application.” 79


69
   Ibid, c1086
70
   HL Deb, 16 July 2008, c1254
71
    DWP, ‘Powers of the Pensions Regulator: Amendments to the anti-avoidance measures in the Pensions Act
    2004. April 2008, p 5, para 9; http://bit.ly/25fxFW (UK Govt Web Archive, retrieved 27 August 2009);
72
   Ibid, c1278-9
73
   Ibid, c1279
74
    DWP, ‘Powers of the Pensions Regulator: Amendments to the anti-avoidance measures in the Pensions Act
    2004. April 2008, Executive Summary, para 5; http://bit.ly/25fxFW (UK Govt Web Archive, retrieved 27 August
    2009); HL Deb, 16 July 2007, c1277
75
   Ibid, c1277
76
   Ibid, c1282
77
   Ibid, c1282; HL Deb, 17 July 2008, c1354
78
    An assurance that the PR’s anti-avoidance powers will not be used in relation to a particular transaction;
    http://bit.ly/bseVOA (UK Govt Web Archive)
79
   HL Deb, 16 July 2008, c1283



                                                      16
•    The bodies with which the Secretary of State would be required to consult before making
     regulations. Lord Lucas proposed that this should include representatives of pension
     trustees and businesses with final salary schemes. 80 Lord McKenzie was happy to
     accept this in principle. 81

•    Whether the new powers Government was proposing for TPR would “skew” what
     company directors had to consider away from their core statutory duties as stated under
     section 172 of the Companies Act 2006. 82

•    Whether a Contribution Notice might be issued to a person who had been paid a dividend
     with “no intent to reduce the money available to the pension fund but certainly with that
     effect”. 83

•    The possible impact of the changes on “turnaround professionals…parachuted in to deal
     with a company in difficulties and to rescue it.” 84

Report Stage
The Government published its response to the consultation on the amendments to the anti-
avoidance powers on 20 October 2008. 85 At Report Stage on 27 October, Lord McKenzie
explained that in response to concerns that the details of its proposals should be in primary
legislation, the Government was replacing the clause it had introduced at Committee Stage
with more detailed amendments. 86

Lord McKenzie explained that although consultees had expressed support for the
Government’s approach, some were concerned that it was not adequately targeted. He
explained that it was introducing three important filters in the primary legislation to guide the
use of the new power:

        -   TPR would be required to issue a statutory Code of Practice for the circumstances
            in which it expected to use its power.
        -   The amendment would place on the face of the Bill a non-exhaustive list of factors
            that TPR would be required to consider when determining whether an act or
            failure to act was “materially detrimental”;
        -   The Government was amending the “statutory defence.” It accepted that the
            concept of “reasonable forseeability” was too wide to be workable. The new test
            was designed to ensure that a Contribution Notice would not be issued where a
            party had “undertaken due diligence before the act and considered and, where
            appropriate, mitigated the detriment, and could reasonably conclude that the act
            would not be materially detrimental.” 87




80
     Amendments 130FG, 130FH and 130FJ
81
     HL Deb, 17 July 2008, c1354
82
   Ibid, c1267-71
83
   Ibid, c1271-1273
84
   Ibid, c1275-6
85
     DWP, ‘The powers of the Pensions Regulator. Amendments to the anti-avoidance measures in the Pensions
     Act 2004’, October 2008;
   http://bit.ly/pI4xe (UK Govt Web Archive, retrieved 27 August 2009)
86
     Clause 123, HL Bill 79; HL Deb, 27 October 2008, c1430
87
     HL Deb, 27 October 2008, c1432



                                                    17
Draft content for the Code of Practice was published on 20 October 2008. This set out the
circumstance in which TPR would expect to issue contribution notices on the material
detriment test. 88

The Government was also amending the Bill to ensure that the retrospective effect of the
regulation-making power “would apply in a more limited way to subsequent regulations,
which would have effect from the date the Government announce their intention to make
such regulations.” 89 Lord McKenzie explained further the rationale for removing the
“otherwise than in good faith” defence. 90

Opposition Peers welcomed the Government’s change in approach. Baroness Noakes said:

         While the legislation raises issues that we will wish to probe in the remainder of our
         session, we are much happier with its construction – there is not the wide Henry VIII
         power, but a proper employer defence. We have the substance now in primary
         legislation; indeed, we have even got a draft statutory code of practice. 91

Third reading
At Third Reading, Baroness Noakes explained that there were still concerns in the business
community about how the provisions would work in practice. The Government agreed that
there should be a formal review of the provisions within five years of the commencement
date. 92

Baroness Noakes also proposed that TPR’s Code of Practice on “material detriment” should
not be revised for two years. The business community, she said, wanted a reasonable
degree of understanding of what the rules were so that it could plan ahead. She was
concerned at apparent inconsistency between comments made in the consultation document
issued as part of the informal review of section 75 (see page 7 above) and the draft content
of TPR’s Code of Practice:

         The consultation document makes the point that any change to the employer debt
         regime would be targeted at those who provide a strong covenant. It goes on to say
         that the regulator would use its anti-avoidance powers, including the new material
         detriment powers, to protect members’ benefits and the PPF. So far, so good.

         The following sentence in paragraph 14 of the consultation document caught the eye of
         one of my contacts:

              “Indeed the Government considers that such regulatory intervention may be
              appropriate when a reorganisation would have a detrimental impact on the
              pension scheme (for example such as a weakening of the employer covenant
              or the employer’s obligations to the scheme)”.

         This reference to simple “weakening” of the covenant seems to be at odds with the
         quite clear sets of circumstances set out in the code of practice. The nearest
         equivalent in the code of practice is about the,

88
      ‘The Pensions Regulator’s anti-avoidance powers: draft list of circumstances for the Pensions Regulator’s
     proposed 'material detriment test' code of practice’ 20 October 2008;
     http://bit.ly/ai2LxV (UK Govt Web Archive)
89
     Ibid, c1435
90
     Ibid, c1433-4
91
     Ibid, c1436-7
92
     HL Deb, 19 November 2008, c1152-4



                                                        18
              “severing of employer support for the scheme so that employer support is
              removed, substantially reduced or becomes nominal”. 93

Lord McKenzie responded that section 91 of the Pensions Act 2004 allowed Codes of
Practice to be updated. Changes had to be consulted on, approved by the Secretary of State
and the draft Code laid before Parliament. The Government wished to retain flexibility to
respond to the development of structures not already covered. 94


     3       Role of trustees in relation to detrimental events
The Pensions Regulator explains the role of trustees in relation to events that are potentially
detrimental to a pension scheme:

         40. Trustees should identify, at an early stage, any material risks to members’ benefits.
         A deterioration or weakening of the employer covenant could represent a risk to
         members’ benefits. It is therefore incumbent upon the trustees to establish procedures
         to identify and measure these risks, and to take appropriate action. For more
         information on how to monitor the employer covenant, please see paragraphs 153 to
         162.

         41. The scheme, if in deficit on any basis, is a creditor of the employer. Usually
         because of the size of the deficit, it is a material creditor and, although not identical to a
         large unsecured bank loan, particularly because of the long-term nature of the
         pensions obligation it does have many similarities in the form of:

         •    its size relative to other unsecured creditors;

         •    its importance to the company.

         42. When negotiating with an employer, trustees should adopt the approach of a bank
         that has advanced a large unsecured loan. Employers should view the scheme in a
         similar way. For more information on negotiation, see paragraphs 125 to 130.

         43. Throughout negotiations, trustees and employers must be aware of the need to
         maintain confidentiality (paragraphs 131 to 134) and ensure that conflicts of interest
         (paragraphs 135 to 142) are identified and managed appropriately.

         44. Trustees must ensure that they maintain an adequate and current level of
         knowledge and understanding of the nature of the employer–trustee relationship. 95

TPR explains that where trustees “have identified a possible detrimental event, the employer
and trustees should negotiate the most appropriate mitigation” in order to “minimise or
eliminate any detriment to the scheme” cause by the event:

         110. In considering levels of mitigation, it will be important to consider the security that
         currently exists for the scheme, both through the sponsoring employer and in relation
         to parent employers and/or connected and associated parties. Trustees should
         consider that security when determining the appropriate level of mitigation to ensure



93
    HL Deb, 19 November 2008, c1159
94
    Ibid, c1161-2
95
   The Pensions Regulator, Consultation document. Revised clearance guidance, September 2007;
http://bit.ly/aYlanA
(UK Govt Web Archive)



                                                      19
            that the scheme is no worse off as a result of the transaction, taking into account the
            regulator’s powers in relation to financial support directions and contribution notices.

            111. When a scheme has already gone through the scheme-funding process, trustees
            have the right to reopen a recovery plan by triggering a new scheme valuation at any
            time. If they do so, trustees should take into account the level of detriment arising from
            the type A event, and the fact that, in granting clearance, the regulator forgoes its
            financial support direction and contribution notices. 96

TPR gives an example of the types of mitigation that might be appropriate:

            Types of mitigation

            116. There are different types of mitigation, for example:

            •   additional contributions of cash or other assets;

            •   an improvement in priority; for example, granting a fixed or floating charge to the
                pension creditor, alongside, or in priority to, a lender;

            •   escrow accounts: an escrow account is an arrangement whereby the employer
                pays funds into an account that will pass to the scheme under certain conditions,
                otherwise being returned to the employer;

            •   standby letters of credit, guarantees or insurance: employers may obtain these
                from banks or financial institutions to cover, for example, contributions to the
                scheme and/or the section 75 debt;

            •   negative pledges: a negative pledge is a commitment by the company that
                something will not be done – for example, that no new security will be granted
                without the agreement of the trustees;

            •   parental and intra-group guarantees: where there is a wider employer group, the
                parent company or another company within the group can guarantee, for example,
                the payment of contributions and/or the payment of the full section 75 debt;

            •   joint and several liability: the employers or the wider employer group can be made
                jointly and severally liable for the funding of, or debts due to, the scheme;

            •   performance thresholds: trustees and employers may agree financial thresholds for
                the employer that, if breached, would have to be reported to the trustees. These
                would act as an early warning for trustees of any deterioration or change in the
                employer’s financial circumstances and provide an early opportunity for dialogue;

            •   scheme rule changes: making an amendment to the scheme’s trust deed and rules
                to improve the trustees’ powers – for example, including a new trigger for scheme
                wind-up, such as a change of control.

            117. There may be other forms of mitigation. Which type is appropriate is dependent
            on the relevant circumstances. 97

3.1         TPR’s power to appoint independent trustees
TPR has power under section 7 of the Pensions Act 1995 to appoint independent trustees
where it is satisfied that this is necessary:
96
     Ibid
97
     Ibid



                                                       20
             •   to secure that the trustees as a whole have, or exercise the necessary
                 knowledge and skill for the proper administration of the scheme;
             •   to secure that the number of trustees is sufficient for the proper administration
                 of the scheme
             •   to secure the proper use or application of the scheme’s assets. 98

These powers were used to appoint independent trustees to the Telent Pension Scheme in
2007. 99

        In 2006, Telent (then called Marconi Corporation plc), as principal employer,
        participated in the sale of the majority of the group's businesses to the Ericsson Group.
        As part of the clearance application to the regulator, Telent undertook to set aside a
        sum for the protection of pension benefits under the company's pension scheme. Part
        of this sum was set aside in an escrow account.

        On 25 September 2007, Co-Investment No.5 LP Incorporated (CILP), whose general
        partner is advised by Pension Corporation, announced an offer of 600p per share for
        Telent. CILP has now acquired 29% of Telent's shares. CILP is a special purpose
        vehicle of Pension Corporation.

        The Chairman of the Trustee Board of the GEC 1972 Plan (the Telent pension
        scheme) wrote to the Pensions Regulator on 18 October expressing a number of
        concerns and asking the regulator to use its powers to appoint an independent
        trustee. 100

The determinations panel found that following the takeover of Telent by the Pensions
Corporation, there were three potential conflicts of interest that might arise:

        (i) The use by the Employer, if controlled by [the Pensions Corporation], of the power
        to appoint its directors to the board of the Trustee where there was a risk that those
        appointees would wish to implement PC’s investment strategy;

        (ii) The new trustees, if appointed by PC, would have a conflict of interest when
        deciding whether to exercise their powers of investment and when deciding on whether
        to appoint PC as the Scheme’s investment manager; and

        (iii) If PC were appointed as the Scheme’s investment manager or its personnel were
        involved in decisions on investment policy or its application then a conflict of interest
        could arise on every occasion that PC (or its personnel) provided investment advice to
        the Scheme. 101

It considered that there was It concluded there was a realistic prospect that these scenarios
might occur and therefore that the appointment of independent trustees to the pension
scheme should be confirmed:



98
    Section 7, Pensions Act 1995
99
    ‘The Pensions Regulator Press Release (PN 07-18), ‘Regulator confirms use of powers on Telent pension
    scheme’, 9 November 2007,
http://bit.ly/9XHj4W UK Govt Web Archive); This is covered in more detail in Library Standard Note SN/BT/4368
    ‘Pension schemes and company buy-outs’
100
    TPR Press Release, PN07-18, ‘Regulator confirms use of powers on Telent pension scheme’, 9 November
    2007, http://bit.ly/9XHj4W UK Govt Web Archive)
101
    Ibid, para 21



                                                     21
          The Panel was satisfied that there was a realistic prospect that the scenarios described
          in paragraph 21 might occur, and no arrangements had been put in place for managing
          those conflicts. Accordingly, the Panel concluded that the original appointment of the
          Independent Trustees was necessary under Section 7 (3) (c) of the 1995 Act and
          should be confirmed. 102

On 11 April 2008, TPR announced that an undertaking had been received from the Pensions
Corporation covering a key aspect of the governance of the Telent pension scheme, as well
as other schemes in which Pension Corporation has an interest:

          The undertaking and associated governance documentation address the regulator's
          concerns which led to the appointment of three independent trustees with exclusive
          powers to the scheme in October last year. The new structure will govern the scheme
          after the expiry of the trustee appointment on 18 April. 103

Amendment to Pensions Bill 2007-08
An amendment has been made to the Pensions Bill 2007-08 to revise TPR’s power to
appoint independent trustees. Clause 128 of that Bill would amend section 7 of the Pensions
Act 1995 to give TPR the power appoint trustees where it was “reasonable” to do so, rather
than only where “necessary”. 104 It would also enable the appointment of trustees “to protect
the generality of scheme members.” Introducing the new clause at the Bill’s Committee
stage, the then Pensions Reform Minister, Mike O’Brien said:

          Risks in the pensions environment can change quickly. New clause 23 makes two
          changes. First, it would replace the “necessary” task in section 7(3) of the Pensions Act
          1995 with one of reasonableness, so that the Pensions Regulator may take action to
          appoint trustees where it is reasonable to do so. The “necessary” test was introduced
          in the context of a different regulator and a different market environment. A key
          shortcoming of the former regulator, the Occupational Pensions Regulatory Authority,
          was its inability to respond adequately to the emergence of new risks. The “necessary”
          test requires a high burden of proof that can unnecessarily inhibit appropriate
          regulatory intervention. Reducing that threshold to “reasonableness” provides a more
          appropriate tool for tackling risks to members’ interests. 105




102
      Ibid, para 38
103
      TPR Press Release, PN 08-08, 11 April 2008, Telent pension scheme undertaking received,
      http://bit.ly/9lD2AI (UK Govt Web Archive)
104
      Pensions Bill 2007-08, HL Bill 89
105
      Pensions Bill Committee, 19 February 2008, c535



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