The DWP white paper on the sustainability and future of defined benefit pension schemes is due to be published imminently. It seems likely that this paper will look to introduce additional powers for the Pensions Regulator to allow it to become more proactive in its investigations.
Since our article last summer, A bolder, more effective regulator? we have seen the Regulator edge towards taking a more proactive and authoritarian approach to schemes failing to meet their responsibilities. In this article we take a closer look at some of the more recent high profile cases involving the Regulator (and the Pension Protection Fund (PPF)) which may indicate a further shift towards a stronger, more robust approach to pensions regulation.
The Pensions Regulator
Following on from our previous article in relation to the collapse of BHS, Dominic Chappell (whose company Retail Acquisitions Ltd acquired BHS from Sir Philip Green for £1) was convicted in January of failing to hand over information to the Pensions Regulator when requested.
The Regulator has the power under section 72 of the Pensions Act 2004 to request any information from an individual or company it deems relevant to enable it to carry out its functions. As part of its investigation into the sale (and eventual collapse) of BHS, the Regulator had on numerous occasions requested information and documents from Mr Chappell but he failed to co-operate. He was convicted of three charges of neglecting or refusing to provide information and documents, without a reasonable excuse, and was ordered to pay a £50,000 fine, £37,000 costs and a £170 victim surcharge.
This is the fifth time that the Regulator has secured a conviction in relation to an individual or organisation failing to provide requested information under a section 72 notice. This is important as it demonstrates that the courts recognise the importance of complying with the requests and investigations of the Regulator.
The Regulator continues to pursue separate anti-avoidance action against Mr Chappell.
Construction company Carillion went into liquidation in January after being overwhelmed by debts of £1.5bn, leaving workers concerned for the future of their jobs and pensions. Carillion has a total of 13 defined benefit pension schemes which (according to the company's results) had a deficit of approximately £587m at the end of July 2017.
The news that swiftly followed its collapse was that while the company had been struggling under the weight of large debts, it had continued to pay "bumper dividends" to its shareholders and "generous bonuses" to its directors. In light of this, the Regulator has since launched an investigation into whether it would be appropriate to use its anti-avoidance powers against the individual directors and/or the company to help fund the business' defined benefit schemes and to reduce the risk to the PPF should it need to take on these schemes.
The Pensions Act 2004 allows the Regulator to use its anti-avoidance powers where it believes a company or an individual is avoiding its responsibility to support a pension scheme. The Regulator's anti-avoidance powers include the ability to issue Contribution Notices (directing a company or individual to pay an amount of money to a scheme) and Financial Support Directions (directing associated or group companies to financially support a scheme) . We are currently waiting for the outcome of the Regulator's investigations into Carillion.
However, the Regulator has also been criticised for the way in which it has handled concerns over the Carillion schemes. It has been reported that the Trustees of a number of Carillion's schemes had approached the Regulator about their concern that agreement could not be reached with Carillion in relation to employer contribution levels. While the Regulator was involved in negotiations regarding scheme funding, it chose not to use its power to impose a contribution schedule (which it can do using section 231 of the Pensions Act 2004).
Lesley Titcomb, Chief Executive of the Regulator, replied to these criticisms by stating that the Regulator's power under section 231 is difficult to use but conceded that in relation to Carillion the Regulator should, in hindsight, have brought its powers to bear more quickly. The Regulator is seeking improvements to its power under section 231 (alongside new powers to allow it to be more proactive in its investigations) as part of the DWP white paper.
The Pension Protection Fund
Toys r Us
Whilst it has been a busy time for the Regulator, the PPF has also had some key decisions to make. December 2017 saw the UK arm of American company Toys R Us facing administration after the PPF initially blocked plans for the business to restructure and enter into a company voluntary arrangement (CVA). The PPF was concerned that the company's plans did not provide enough assurances for the pension scheme (which at the time had a PPF-assessed deficit of approximately £30m).
The main purpose of the PPF is to protect the members of defined benefit schemes and its concerns for the future of the company led to the PPF seeking further protection in the form of an additional contribution. The PPF proposed to support the CVA if the company agreed to inject £9m into the pension scheme (£7.3m more than its scheduled £1.6m contribution due this year).
When Toys R Us stated that it would be unable to provide such funds to the scheme, a compromise was agreed whereby the company would pay £9.8m over a number of years (£3.8m in 2018 and a further £6m over 2019 and 2020), have its deficit recovery plan shortened to ten years and seek support from the US parent company for the scheme. Additionally, the trustees were given greater powers should any of the conditions of this agreement not be met.
However, despite the efforts to restructure the company, it was announced in late February that the company had entered into administration, with the likely outcome being that the pension scheme will fall into the PPF (with a deficit of approximately £38m). After this news was announced, Andy McKinnon (Acting Chief Executive of the PPF), stated that this was a disappointing outcome, however the first of the additional payments required by the PPF as part of the restructuring deal had already been secured, putting the scheme into a marginally better position than would have been the case if it had entered administration in December 2017. The PPF's task now is to protect the members of the scheme and to look to secure as much money as possible for the scheme during the administration process.
The pension scheme deficits involved in recent high-profile business failures have presented a tale of two regulators. It seems that the Pensions Regulator has come off worse, despite its promise last year to become a bolder, more effective regulator.
Most pension scheme members probably agree with Frank Field MP, Chair of the Work and Pensions Committee, when he said in relation to the Carillion debacle: "We imagined that regulators regulate, and auditors audit. I suppose the employees, suppliers and pensioners of Carillion, and the public, did likewise. We were told this morning, however, that these highly paid individuals are mere spectators – commentators at best, certainly not referees - at the mercy of reckless and self-interested directors. I fear it is not only Carillion that is built on sand: it is our whole system of corporate accountability."
It looks likely that the Government will have to strengthen the Regulator's arsenal to tackle some sponsors attempts to avoid their pension scheme liabilities and the Regulator will have to use its powers more aggressively.