16/05/2014

What happened to all the FSD and Contribution Notices?

Matthew Ambler, solicitor in Gordons’ pensions team takes a look at the Pension Regulator’s anti-avoidance powers.

Since amendments were introduced into the Pensions Bill 2004 on 27th April 2004 which allow the then soon to be created new regulatory body (The Pensions Regulator) to use its anti-avoidance powers from that date, some industry commentators have been predicting the dawn of a new aggressive pensions regulatory regime.  At the time it was even suggested that corporate activity would be held hostage by the needs of defined benefit pension schemes.

The Pensions Regulator’s powers to issue contribution notices and financial support directions (its anti-avoidance powers) are undoubtedly part of a formidable armoury.  They can be, and have been, used to pursue employers and connected parties trying to avoid paying their liabilities to defined benefit pension schemes.

But, a decade on (at the time of writing), have the soothsayers been proved correct?  Has the predicted Armageddon occurred?

A TRICKLE OR TORRENT?

Although the names Bonas, Desmond, Lehmans, Nortel and Sea Containers are now part of the pensions lexicon, the Contribution Notices (CNs) and Financial Support Directions (FSDs) they represent are still the exception rather than the rule.  The Determinations Panel of The Pensions Regulator has reported only eight occasions where the anti-avoidance powers have been used (three for CNs and five for FSDs).  Some of these decisions did, of course, involve multiple applications and directions (in the Lehmans reference 44 companies were targeted but only six received an FSD).  Nevertheless, in any objective review, eight determinations are a trickle and not a torrent.

Interestingly the cases brought before the Determinations Panel have a global feel.  The company targeted in Sea Containers was based in Bermuda, the company and individual targeted in Bonas were Dutch and Belgian, the Lehmans targets were based in both the US and the UK and Nortel involved a complex group with a Canadian parent.  Even Desmond involved a Northern Irish business, rather than one based in England or Wales.  Is it unfair to suggest that The Pensions Regulator had an eye on sending a message that it can pursue businesses and individuals anywhere in the world?

Could there also be a reluctance to bring more cases until all the issues connected with the powers are resolved?  Several of the cases already determined continue to play their way through the complex legal processes which govern the anti-avoidance powers (in both the Upper Tribunal and the courts).  While these challenges are not surprising given the sums of money involved and the fact that the powers in question are relatively new, those exercising those powers do not generally welcome an outside review of their decisions.

INFORMAL PRESSURE

Reported cases do not tell the whole story.  Not all investigations end with a formal decision.  Informal pressure can be brought to bear on companies and individuals who appear reluctant to pay at first and satisfactory agreements can be made behind closed doors.  In 2012-2013, The Pensions Regulator investigated 17 anti-avoidance cases, and yet there were no formal determinations.  It has also shown a greater willingness to use its powers under section 72 Pensions Act 2004 to demand information which allow it to carry out investigations and decide whether to pursue an anti-avoidance case (50 such demands were issued in 2012-2013).

Similarly, given the focus on its remit to improve funding and governance and (more widely) to educate trustees of pension schemes so that they are better placed to undertake their role, there was probably an element of sending a message to others through these first decisions.  Few trustees today can be unaware of the need to assess covenants and look at opportunities to take security over connected assets as part of the funding process.  Encouraging more robust funding plans ultimately reduces the need to look elsewhere to pay for the benefits.

THE WIDER PICTURE

The wider picture also plays a part in shaping actions.  For most of the time The Pensions Regulator has been in existence, the UK economy has been in its most turbulent state in living memory.  Pursuing perceived bogeymen is much easier in good times.  When Government policy is to encourage private enterprise to grow the economy out of recession, a regulator which is willing to pursue the companies and individuals the Government needs to do this, is not going to be popular among the political classes.

So where are we a decade on?  Well the powers are there and The Pensions Regulator has shown a willingness to use them.  But so far the dire predictions of corporate meltdown have not proved correct.  Armaggedon?  No.