Pensions law: Doyle Clayton

Pension schemes, as an unwanted headache for UK corporates, has long since ceased to be a new phenomena. The last 20 years has seen a mix of erratic investment performance, increased longevity – and, in a number of cases, schemes being poorly managed – resulting in massive pension deficits which companies are forced to wrestle with. In a broad sense, we have seen pensions transition from life as an HR benefit, to today a long-term legacy liability sitting on a sponsoring company’s balance sheet. In practice, the presence of a defined benefit pension deficit is effectively a major, often unsecured creditor of a company which can impact on a wide range of corporate activities and attract significant personal liability for directors.

office-space-1744803Way back when – the 1980s…

To better understand the context in which UK pension schemes operate, stepping back in time some 30 years will be useful. This was an era of pinstripe suits, long liquid lunches and light touch regulation, and much of the origin of today’s pensions law is rooted in the Trinity Mirror pension scandal of the late 1980s.

Hands up who remembers Captain Bob and his boat? Robert Maxwell, erstwhile Labour MP, captain of industry and owner of the Mirror Group, had, over a period of years, used his company pension funds as a source of working capital for his business empire. This saw him making a series of loans to other business and investments into listed companies which Maxwell himself owned. In today’s world, that looks irresponsible at best, and at worst, represents market manipulation. However, at the time, there was nothing on the statute book to prevent Maxwell engaging in these highly questionable practices – until of course his empire started to topple, loans went unpaid and the pension funds were left high and dry without the funding to pay their members’ pensions. The political fall-out from Maxwell unsurprisingly ran for years, and in the early to mid-90s, the government legislated to introduce minimum funding standards for pension schemes and statutory protections for members’ accrued benefits in pension arrangements. This was followed by the Pensions Act 2004, which introduced the Pensions Regulator, who was equipped with a series of ‘moral hazard’ powers designed to ensure that companies adequately focused on their pension obligations, with the objective of preventing a Maxwell-type scandal happening again.

Step up the Pensions Regulator

Over a decade since it came into existence, the Pensions Regulator, which replaced the Occupational Pensions Regulatory Authority (OPRA), has become increasingly active. Its range of powers enabling it to take action against companies and individuals which it suspects are guilty of pensions avoidance are set to grow further but include the ability to request information, attend premises and seize documents and bring criminal prosecutions for non-compliance with its requests. However, for the purposes of this article, I want to focus on two powers – the Regulator’s ability to issue Financial Support Directions (FSDs) and Contribution Notices (CNs) which require the recipient to put additional financial support in place for a pension scheme. FSDs can be issued on a ‘no-fault’ basis, where the pension scheme is ‘insufficiently resourced’ by reference to the company’s net assets. CNs, by contrast, are issued in relation to a particular event which is ‘materially detrimental’ to the position of the pension scheme as a creditor of the company. The Regulator’s focus here is on so-called ‘Type A’ corporate activity – essentially corporate events which would have the effect of reducing the net assets available to the pension scheme in the event of an insolvency. Examples of Type A activity include an increase in debt within a group, business or asset sales out of the employer, the declaration of large or unusual dividends, and so-called ‘phoenix’ restructuring events.

Know your pension scheme trustees. Although pension scheme trustees are legally obliged to act independently of the company and in line with their fiduciary duties to members, increasingly, pension scheme trustees are sophisticated, professional independent trustees.

Importantly, CNs and FSDs can be issued to a wide range of recipients, including, in some circumstances, individual directors – in other words, the corporate veil will not, in itself, act as a shield for a board if the Regulator believes it has cause to engage its powers. Although the Regulator has only issued CNs and FSDs sparingly since coming into existence in 2006, it has successfully used the threat of these powers to achieve significant settlements and positive outcomes for pension arrangements. Fast forward to the present, the challenges of promoting good corporate behaviour around pension schemes remains very much on the agenda with a series of recent high-profile cases (most recently, Carillion) thrust into the media. With Carillion in particular, the directors were criticised for having declared substantial dividends in the lead up to insolvency, despite the pension scheme remaining heavily underwater. And across the legal industry, there has been a recognition that a certain amount of revisiting of the Pensions Regulator’s powers is needed.

White papers and what’s next for UK pensions regulation?

In March, the Department for Work and Pensions published its long awaited White Paper on Protecting Defined Benefit Pension Schemes. Although the paper does not propose a substantial overhaul of the Regulator’s functions, it strongly focuses on security for pension schemes and reinforces the Regulator’s desire to be more responsive and tougher on pensions avoidance. In particular, it is proposed that as well as issuing CNs and FSDs, in the future the Regulator will have the power to issue punitive fines on any individuals who ‘deliberately put their scheme at risk’. In extreme cases, the Regulator will also be able to criminally prosecute anyone who commits ‘wilful or grossly reckless behaviour in relation to a pension scheme’ and will also be able to propose the disqualification of company directors. This represents a new and potentially robust avenue for the Regulator to pursue directors as well as other individuals who act irresponsibly towards their pension arrangements. The White Paper also expands the Regulator’s current code of practice on scheme funding, introducing new explicit requirements on schemes to comply with specific areas in the guidance, as well as new annual reporting obligations for the chair of the scheme.

Forewarned is forearmed – practical steps

If your company sponsors a defined-benefit pension scheme, then inevitably, pensions issues will be an important operational matter within your business and will often feature as board-level agenda items. In your role as legal counsel, you will often act as the direct reporting line into your board on legal and risk matters. To this extent, there are a number of steps which you should take to ensure that you are fully up to speed on pensions issues so your directors can effectively manage their risk around pensions and minimise the prospect of Regulator intervention either against the company, or them personally:

  • Understanding the anti-avoidance legislation and where it can bite. This is important as the Pensions Regulator has the power to issue measures against parties who are ‘connected to, or associated with’ the employer of the pension scheme in question. This can potentially catch a wide range of stakeholders, including other group companies and boards who, although they do not have any direct connection with the scheme, can still be caught by the scope of the legislation. Also, take time to understand your pension scheme rules, particularly as it relates to scheme funding and where the scheme is in its three-year funding cycle. A well-funded scheme, supported by appropriate security, is far less likely to engage the interest of the Pensions Regulator.
  • Know your pension scheme trustees. Although pension scheme trustees are legally obliged to act independently of the company and in line with their fiduciary duties to members, increasingly, pension scheme trustees are sophisticated, professional independent trustees. This gives boards the opportunity to open up a new line of dialogue with their pension trustees, to regularly share information relevant to the pension scheme, and foster a close working relationship which facilitates a positive mutual understanding of where pensions sits in the business. In turn, an open, collaborative relationship with the trustees is more likely to be viewed positively by the Regulator if directors look to the Regulator to approve a particular corporate event or transaction via clearance.
  • Consider the pension scheme every step of the way. Where the company is planning a corporate transaction that has the potential to be seen as Type A, the directors should carefully consider the likely impact on the pension scheme, and whether the matter requires prior clearance with the Regulator. This is especially important, as the Pensions Act contains a statutory defence for directors against the Regulator issuing them with a CN. Essentially, provided that directors can show that they carefully considered the effect of a transaction on their scheme, and that it was reasonable to conclude the scheme would not be detrimentally affected, they may have the basis of a successful defence against anti-avoidance measures. One approach some employers take is to add pensions as a standing item to their board agendas to guarantee that any pensions risk issues are pre-emptively identified, monitored and managed at an early stage in a transaction.
  • Finally, speak truth to power – often, pensions issues may not be fully picked up and actioned until at a relatively late stage on a deal. As in-house counsel, you should not be afraid to challenge any perceived shortcomings on the part of the board, or a reluctance to fully tackle pensions issues. In particular, the new offences outlined in the White Paper of deliberately putting a scheme at risk, and wilful or grossly reckless behaviour, underpinned by the threat of criminal prosecutions should be enough to focus your directors’ minds on the task in hand.

Partner, Andy Campbell is Doyle Clayton’s Head of Pensions. He can be contacted at or on +44 (0)20 7329 9090.