HIG Group recently agreed a settlement with The Pensions Regulator (tPR) following a challenge to its 2011 pre-pack administration of Silentnight, the UK bed manufacturer. TPR's case was that HIG acquired the employers' bank debt and used its position as lender to bring about the unnecessary insolvency of the employers, then taking steps to buy the employers' business at an undervalue as part of the administration process that followed.
The tPR's full intervention report is well worth reading. It alleges that HIG managed events to limit Silentnight's refinancing options by acquiring debt from Clydesdale Bank and used a revolving credit facility payable on demand (together with a £5m fee for which is had paid only £1.25m) to deliberately place Silentnight into administration in order to purchase the business at an undervalue with the intention of leaving the pension scheme behind.
When Silentnight's defined benefit pension scheme was severed from the business, the scheme would probably become the responsibility of the Pension Protection Fund (PPF). One of tPR's statutory objectives is to limit calls on the PPF. Among tPR's anti-avoidance powers it can demand a financial contribution from any party associated with a transaction which is likely to result in a material detriment to the ability of pension scheme members to receive their full pension benefits.
TPR's support had previously been sought by HIG to a Company Voluntary Arrangement but tPR had declined to back the CVA unless the PPF received 33% of the equity, rather than the 10% on offer. A warning notice was issued by tPR in 2014 seeking £17.2m and then unusually, a second warning notice was issued in 2016 for the considerably higher amount of £96.4m, representing the buy-out deficit. This could have refinanced and supported the scheme, such that it would have been able to provide the full benefits to its members.
HIG, after initially seeking for the second warning notice to be overturned in a judicial review, offered a settlement of £25m, which was accepted by tPR. When combined with the proceeds of the insolvency process, payments to the Scheme amounted to approximately £35m. That figure remains insufficient to provide members with their full benefits and so the Scheme, which has 1,200 members, is expected to transfer to the PPF.
What can we learn?
£25m is considerably short of the £96.4m demanded under the second warning notice. It is difficult to be definitive about the lessons to be learnt, since the merits of weaknesses of tPR's arguments were not publicly tested. TPR decided that an immediate payment into the Scheme of a lower amount was preferable to the time, cost and risk of prolonged litigation.
TPR is being put under ever increasing pressure to check any corporate behaviour that could be detrimental to pension members receiving their benefits, following high profile cases such as the collapse of BHS and Carillion.
TPR's new teeth
Any weaknesses in tPR's existing powers are likely to have been addressed in the recently passed Pension Schemes Act 2021. This Act strengthened tPR's anti-avoidance powers, created specific criminal offences (unlimited fines and up to seven years' imprisonment) and strengthened information-gathering powers. It is unclear whether Silentnight remains a good deal notwithstanding the £25m settlement: recent annual profits of £7m suggests that HIG may still be in the money, although note that tPR's actions was brought against executives rather than the company itself, and the further possibility of criminal sanction should definitely make future investors think twice.
Scrutiny of transactions where a defined benefit pension scheme is adversely affected is being ramped up. Defences are available but it is imperative that those involved in such transactions take advice and be prepared to answer the questions of an ever increasingly powerful tPR.