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The Pension Protection Fund and Contingent Asset Certification 2012/13 – New Requirements and greater flexibility.

Background

In recent years Contingent Assets have become an increasingly common method by which sponsoring employers have managed the cost of occupational pension schemes, the availability of a contingent asset to a scheme’s trustees usually resulting in a reduction in the Pension Protection Fund levy, a cut in the funding level a scheme needs to aim for or both.

To ensure that an existing contingent asset or a new contingent asset is recognised by the Pension Protection Fund (“PPF”) for the 2012/13 levy year Trustees need to recertify the existing contingent asset or certify the new contingent asset via the Pension Regulator’s online Exchange service by no later than 5 pm on 30 March 2012.

Before they commence this process both trustees and employers should be aware that the PPF has introduced a new requirement for certification with regard to Type A contingent asset (guarantees from other group companies) and has announced new proposals on how it intends in future to analyse the strength of guarantors in relation to the guarantees that they provide.

The Revised Contingent Asset Guidance 2012/13

The PPF Final Levy Determination for 2012/13 was published on the 13 December 2012 and includes a number of key changes on how the PPF shall approach Contingent Assets from 1 April 2012.

1. The Board of the PPF has introduced a new requirement for both the certification of new Type A contingent assets and the recertification of Type A contingent assets for the levy year 2012/13. For these assets certified on the Exchange no later than 5 pm on 30 March 2012 Trustees will now have to certify that they:
 
“have no reason to believe that each guarantor, as at the date of the certificate could not meet its full commitment under the contingent asset”.

The PPF guidance confirms that trustees will not usually be expected to conduct a covenant review for each certification. However, the PPF does expect the trustees to take “proportionate and reasonable steps” to reassure themselves as regards the guarantor’s financial standing “as at the date of the certificate”.

As a minimum we recommend that trustees should note this new requirement and make a formal decision on whether further information or advice is required with regard to the financial strength of the guarantor.

2. For the levy year 2012/13 trustees now have the option of certifying a lower amount than the face value of the Type A contingent asset, or of only reporting the most substantial guarantors if they do not feel that can provide the new certification as highlighted above.

This more flexible approach by the PPF recognises that the re-certification of contingent assets could be difficult in those circumstances where the guarantor’s position has changed. However, Trustees should approach this option with caution and seek advice if they consider this approach as the PPF retains the discretion to refuse the partial recognition of a contingent asset.

3. From 1 April 2012 the PPF will commence its own analysis of guarantor strength based on publicly available financial information, comparing it with the deemed value of a Type A contingent asset for levy purposes. If the PPF consider the guarantor to be of limited strength, it will seek additional evidence from the trustees, before deciding whether to reject a contingent asset.

In this first year the PPF will give the benefit of the doubt to schemes and their guarantors and will only challenge guarantees where the guarantor’s net assets are somewhat below the sum guaranteed. It is the PPF’s expectation that requirements for future years will be tightened.
 
4. The definition of “Employer’s Associate” has been amended so that an entity which satisfies the PPF Board of a sufficiently strong connection to an employer, independent of the existence of the contingent asset, would be recognised as an associate. This represents a relaxation of the PPF’s former requirement that the guarantor to a contingent asset must be an “associate” of a scheme employer as defined in section 435 of the Insolvency Act 1986 and will allow more companies to provide Type A contingent asset guarantees.  The new definition can be found at paragraph 4 of the Contingent Asset Appendix.
 
If you are preparing to recertify a Type A contingent asset or plan to enter in to a new Type A contingent asset for the levy year 2012/13 we would be happy to review the new PPF requirements in respect of your specific requirements. Please contact Pitmans Pensions team or your usual Pitmans contact.

David Hosford
Partner
T: +44 (0) 118 957 0363
E: dhosford@pitmans.com
 
David Loosemore
Solicitor
T: +44 (0) 118 957 0240
E: dloosemore@pitmans.com

Abolition of Protected Rights from 6 April 2012

1. Background:

1.1 In 2005, the Pensions Commission recommended abolishing the option for schemes to contract-out of the State Second Pension (‘S2P’) on the protected rights basis.  The reasons were the complexities caused by administering protected rights and the lack of member understanding.

1.2 The result is that protected rights will be abolished on 6 April 2012 and this applies to all pension schemes.   All rules and references to “protected rights” in pensions-related legislation will either be repealed, or where appropriate, amended.

1.3 On abolition, protected rights will cease to exist.  They will become ordinary money purchase scheme benefits.   

1.4 Contracting-out in final salary schemes on the reference scheme basis is not subject to change.

2. Why abolish contracting-out on the protected rights basis?

2.1 By removing the option of contracting-out of S2P, it is hoped that complexity in the pensions system will be removed.   There will no longer be the need to track protected rights separately and scheme administration will become more manageable, simplifying record keeping and the processing of benefits and transfers.

2.2 In addition, there are currently a number of restrictive rules applying to protected rights.  For example, the annuity bought with protected rights funds must include an attaching survivor’s pension of at least 50% of the member’s pension. These requirements will disappear from 6 April 2012, providing welcome flexibility for members.

3. Increased NI costs and impact on employer contributions

3.1 When contracting-out on the protected rights basis, employees and employers pay reduced NI contributions in exchange for giving up accrual of the S2P. The contracted-out scheme then invests the rebates on behalf of each employee. The current rebates mean that employees pay 1.6% lower NI contributions and employers pay 1.4% lower NI contributions. In addition, HMRC pays further age related rebates into the scheme.
 
3.2 With effect from 6 April 2012, NI contributions will revert to standard rates and the rebates from HMRC will cease. Employer and Employee contribution rates usually include the contracted-out rebate.

3.3 This means that contributions into DC schemes after 6 April 2012 will reduce, with a corresponding reduction in the rate at which funds accumulate.

3.4 For DB schemes, this which means that after 6 April 2012 employer contributions will increase. Employers are likely to wish schemes to continue contracting-out on the COSR basis after 6 April 2012 in order to maintain the rebate.

3.5 Employers may therefore wish to review contribution rates that apply to their scheme after 6 April 2012.

4. What will trustees need to do?

4.1 Where scheme rules have incorporated the protected rights provisions into the rules themselves rather than just referring to the relevant legislation, the scheme rules will have to be amended to remove any such references.  The DWP has issued draft regulations for consultation providing an amendment power under section 68 of the Pensions Act 1995 without the necessity to consider restrictions on changes affecting accrued rights under section 67 of the 1995 Act or the scheme amendment power. It is proposed that the amendment power to remove scheme rules relating to protected rights is exercised by the trustees by resolution. 

4.2 The draft amendment power is very wide but there might be cases where it is not sufficient to amend scheme rules.  Accordingly, scheme rules will need to be reviewed to determine if any changes are required, and if so, whether the statutory amendment power provided by the DWP will be sufficient.

4.3 The power provided is time limited; trustees will have until the end of a three year transitional period (6 April 2015) to make amendments to their rules.  The draft regulations permit the trustees’ resolution to be signed now or after 6 April 2012 – in each case the effective date can be 6 April 2012. 

4.4 The three year transitional period will allow for the payment of final year’s rebates and the late payment or recovery of recalculated rebates due to adjustments to individuals’ NI records.  At the end of this transitional period,  HMRC will no longer track protected rights, so trustees should ask their administrators to ensure that all records are correct prior to this date.

4.5 Under the amended Disclosure Regulations, trustees must inform members that the scheme is no longer contracted-out within one month after 6 April 2012.  Trustees will also have a period of four months following 6 April 2012 to inform members of the effect of the abolition of contracting-out, namely, the removal of protected rights and basis for future accrual of scheme benefits.  Alternatively, this information can be provided by the trustees within the year leading up to the abolition date.

4.6 Trustees may want to consider additional information to include in this announcement, for example, explaining in more detail why protected rights are no longer referred to.

4.7 Member booklets will also need to be reviewed to make sure they are appropriate following the abolition.

5. Do contracting-out certificates need to be varied or surrendered and how do schemes elect to contract-out on the COSR basis?    

5.1 For DB or DC schemes ceasing to contract-out on the COMP basis, there is no need for trustees to formally surrender their contracting-out certificate; they will all be cancelled automatically on 6 April 2012.

5.2 If a DB or DC scheme currently contracted-out on the COMP basis wants to become a COSR scheme, the normal “election” processes apply.

5.3 If a COMB scheme ceases to contract-out on a COMP basis, there is no need to surrender or vary the mixed benefit contracting-out certificate in relation to the DC section or to obtain a DB only contracting-out certificate. The existing certificate will remain valid for that section of the scheme which remains contracted-out on a COSR basis.

5.4 Practical assistance in managing the run-up to April 2012 is being publicised via HMRC’s series of ‘Countdown Bulletins’.

This note only applies to pension schemes that are currently contracted-out of the State Second Pension on the protected rights basis.

Summary and action points for trustees

• Protected rights in all schemes to be abolished from 6 April 2012; schemes will no longer be able to contract-out on a money purchase basis from that date.
• Seek legal advice as to whether the scheme rules need to be amended. If yes, pass trustees’ resolution to remove protected rights provisions from the scheme rules.
• For schemes ceasing to contract-out, inform members that the scheme will no longer be contracted-out after 6 April 2012, and the effect that this will have.
• Ask the scheme administrator to ensure that all records relating to protected rights benefits are up to date.  
• Consider the need to update the member booklet and other member literature.

We would be very happy to review your scheme rules on this issue. Please contact Pitmans Pensions team or your usual Pitmans contact.

David Hosford
Partner
T: +44 (0)118 957 0363
E: dhosford@pitmans.com

Symon Rowley
Director
T: +44 (0)118 957 0301
E: srowley@pitmans.com

This article first appeared in Solicitors Journal www.solicitorsjournal.com

Nortel and Lehman decision is upheld

The Court of Appeal has upheld the decision of the High Court in the matters of Nortel GMBH and Lehman Brothers International (Europe) (both in administration).  The High Court had decided that liability under a Contribution Notice issued by the Pensions Regulator against a company in administration or liquidation, in relation to liabilities of a defined benefit pension scheme, is an expense of that insolvency process.  Accordingly, this further extension of the types of expenses that have super-priority an insolvency process is confirmed. 

This decision will be of enormous concern to office holders who may find themselves with insufficient funds available, after payment of Contribution Notice liabilities, to fund their own remuneration and to floating charge holders and unsecured creditors who will find the funds available to them to satisfy their claims depleted.

Financiers will need to factor into lending decisions the possibility of substantial liabilities, not shown on a company’s balance sheet that would, if they arose, have priority over much of the secured and all unsecured lending.

Industry groups will continue to lobby the government for a change in legislation.  The government will have to balance protecting pension schemes, and therefore the Pension Protection Fund, at the cost of trade creditors and even HMRC and stifling investment and lending into groups with a final salary pension scheme.

Paymex Repayments Guidance

R3, the Debt Resolution Forum and other recognised professional bodies have issued a guide to the practical implications of the decision in Paymex Limited –v- The Commissioners for Her Majesty’s Revenue and Customs.

In this case, the First Tier Tax Tribunal held that the services of a company that arranged and implemented individual voluntary arrangements (“IVA”) were exempt from VAT since these services constituted negotiation in relation to debts and handling of payments, which attract the exemption under Article 135(1)(d) of Council Directive (EC) 2006/112/EC.  The Tribunal held that the question of whether a supply is exempt depends upon an objective economic assessment of the nature of the supply being made and not the nature of the taxable person making the supply. 

HMRC has confirmed that it will not be appealing the decision and will pay claims for overpaid tax falling within the findings of the Tribunal decision in this case.  Refunds must be treated as third party funds and paid into the relevant estate accounts or, where a case is closed, into client account, to be distributed without delay.

As it is the nature of the supply that needs to be considered in order to determine whether the supply is exempt from VAT, it appears that services relating to Company Voluntary Arrangements and Partnership Voluntary Arrangements could also be exempt.  However, HMRC has said that it will only consider refunds within the scope of the Paymex decision and, therefore, this will only apply to IVA’s.

Duty of Good Faith in IVA’s

In Kapoor –v- National Westminster Bank plc the debtor proposed an Individual Voluntary Arrangement.  He procured that one of his friends, an unconnected person, would pay a sum to a connected creditor, being more than the return in the Individual Voluntary Arrangement, in return for an assignment of part of the debt (thereby constituting an equitable assignment).  The friend then voted in favour of the IVA and outweighed the votes of other creditors opposed to the proposal. 

The Court of Appeal held that an equitable assignee of a debt could vote upon an IVA proposal.  However, it held that the debtor had a duty to be open and transparent in return for avoiding the investigations that would be likely in the event of a bankruptcy.  The assignment was on terms that were not commercial and was effected for the sole purpose of securing the approval of the IVA against the wishes of the general body of creditors.  On those grounds the IVA approval was revoked.

No Extension of Invalid Administration Appointments

There have been a number of cases recently looking at whether procedural irregularities may render an administration appointment invalid.

The case of Re Frontsouth (Witham) Limited is another in this line of cases.

An extension of the period of the administration had been obtained, purportedly, with the consent of the charge holders.  However, one charge holder had acknowledged the request for consent but had not given a full response.  

On the second application to the Court to extend the administration, the absence of the charge holder’s consent came to the court’s attention.

Paragraph 77(1)(b) of Schedule B1of the Insolvency Act 1986 provides that the administrators’ term of office may not be extended after the expiry of that term. If the first extension was invalid then the term of the administration would have expired and the Court would lack the jurisdiction to extend the term of office unless the defect could be remedied. 

This was particularly problematic since, during the extended periods of the administration, properties had been sold. 

The administrators asked the Court to use Rule 7.55 of the Insolvency Rules 1986 to find that the appointment was valid notwithstanding the procedural error.  Rule 7.55 provides that no insolvency proceedings shall be invalidated by any formal defect or irregularity unless the Court considers that substantial injustice has been cause by the defect or irregularity which cannot be remedied by Court order.

The Court refused to make an order extending the administration.

During the course of giving judgment, the Court referred to decisions made in earlier cases where the court had been asked to waive or remedy a defective and invalid administration appointment.

In Re G-Tech Construction Limited (“G-Tech”) and in Re Kaupthing Capital Partners II Master LP (“Master”), the wrong form of Notice of Appointment of an Administrator was used.  In Re Blights Builders Limited (“Re Blights”), an out of Court appointment was made at a time when a winding up petition was in existence (of which the shareholder appointing was unaware) such that the appointment should not have been made. In none of these cases did the Court consider itself able to waive procedural requirements and find that the appointments were, nevertheless, valid.

In Frontsouth, the Court also considered that rule 7.55 could not be used.  Firstly, where an appointment is invalid there are no “insolvency proceedings” and therefore Rule 7.55 has no application.  This reasoning was also applied in Re G-Tech and in Master. The Court also considered that Rule 7.55 was not to be used to remedy a fundamental flaw such as a failure to satisfy a procedure prerequisite for an appointment, thereby rendering a mandatory requirement optional.

In both Frontsouth and Re Blights the Court noted that Rule 7.55 is a strange provision in itself since it suggests that where the invalidity of an appointment causes prejudice, it can be remedied by Court order.

Having had the application to extend the administration refused, the administrators asked the Court to make a back dated administration order and then immediately extend the period of it. 

However, a question arose as to the ability of the administrators to apply for an administration order.  They applied on behalf of the company, in their capacity of shareholders of the company’s parent company (over which they were also appointed as administrators).  However, the company’s Articles of Association provided that the business of the company be conducted by its Directors.  On that basis the Court saw difficulty in making the order on the shareholder’s application.

In any event, an application for an administration order was then made by a qualifying floating charge holder such that the Court did not need to consider the point further.  This issue is, nevertheless, worthy of note, given the decision of the Court in Minmar(929)-v- Freddy Khalatsschi in which an administration appointment made by the directors of the company was considered to be invalid since the decision to appoint was not reached in accordance with the provisions of the Articles of Association.

These cases bring to light the importance of ensuring strict compliance with the Insolvency Act and Rules when making an appointment.  The requirements are mandatory and Rule 7.55 is not a “slip rule” under which mistakes can be remedied.

Security over Principal’s Assets is No Defence to Statutory Demand

In White –v- Davenham Trust Limited, the Court clarified the principle that a statutory demand served upon a guarantor could be set aside, in circumstances where a demand, if made against the principal debtor, could have been set aside.

In this case the debtor was a company.  A debt due to the creditor (D) had been secured by fixed and floating charges over company assets.  The shareholder and director of the company (W) had guaranteed the company’s liabilities. The company went into administration and D wished to rely upon the guarantee to recover sums due from W.  D served a statutory demand on W.

The Insolvency Rules 1986 state that, where a creditor has security over a debtor’s assets for repayment of a debt (and has not waived that security) any statutory demand served should state the full amount of the debt and value of the security and claim only the unsecured balance.  If it does not then the statutory demand may be set aside.

W claimed that, as D could not issue a statutory demand against W, unless it waived its security over the company assets or valued the security, it would be unjust for D to be allowed to proceed with a statutory demand against W.

The Court of Appeal held that a creditor can choose how to recover a debt due to it.  It could pursue a guarantor notwithstanding that it has not pursued the principal debtor.  The existence of security over the principals’ assets did not affect this.  Therefore the statutory demand served upon W would not be set aside.

The Court considered the case of Remblance –v- Octagon Assets Limited where a statutory demand issued against the surety was set aside on the grounds that the principal debtor had a counterclaim that would not have been available to the surety.

In the case of W, the Court considered that a statutory demand could be set aside where there was a dispute that affected the amount claimed, such that the surety’s debt would otherwise be greater than the sum due from the principal debtor.  However, this was not the case here.

Court Refuses Relief for a Transaction at an Undervalue

In Trustee of Gordon Robin Claridge –v- Claridge & Claridge the Court was satisfied that there had been a transaction at an undervalue when a bankrupt husband allowed his wife to use his half share in a loan to renovate her property. However, the Court did not set aside the transaction.

The Judge exercised his discretion on the basis that the bankrupt’s wife had spent the money, thinking that she was entitled to do so and there was no evidence that the renovations had increased the value of the property.

The Court followed the 2007 case of Singla –v- Brown which is authority for the proposition that that the Court has a discretion not to order relief where justice requires it.

The Singla case concerned the purchase of a property in joint names followed by a severing of the joint tenancy and the transfer of 49% of the bankrupt’s interest to the joint owner.  The evidence showed it was always the parties’ intention that the property be owned beneficially by the transferee alone and it was clear that the transfer had been entered into to reflect this intention. The property had been purchased in joint names solely at the insistence of the mortgage company.

The decision in Claridge is likely to come under criticism as this does not appear to be the kind of exceptional case where the Court should use its discretion in this way.  In Singla an order setting aside the transaction would have resulted in an unintended windfall for the bankrupt and his creditors.  This Claridge case does not seem comparable with these facts.

For further information on this article, please contact Pitmans Insolvency & Restructuring team.

Denise Fawcett
Partner
T: +44 (0)207 634 4642
E: dfawcett@pitmans.com

The Court of Appeal has upheld the decision of the High Court in the matters of Nortel GMBH and Lehman Brothers International (Europe) (both in administration) and other companies.  The High Court had decided that liability under a Contribution Notice issued by the Pensions Regulator against a company in administration or liquidation, in relation to liabilities of a defined benefit pension scheme[1], is an expense[2] of that insolvency process.  Accordingly, the Court of Appeal has confirmed the further extension of the type of expenses that may be considered to have the priority given to an expense of an insolvency process. 

This decision will be of enormous concern to office holders who may find themselves with insufficient funds available, after payment of Contribution Notice liabilities, to fund their own remuneration and to floating charge holders and unsecured creditors who will find the funds available to them to satisfy their claims depleted by the prior satisfaction Contribution Notice obligations.

The liability in question arises out of the provisions of the Pensions Act 2004.  The Act gave the Pensions Regulator (tPR) the power to impose a Financial Support Direction (FSD) upon a company connected and associated[3] with an employer of a defined benefit pension scheme[4].  This power was given to tPR, in particular, to assist the members of an underfunded pension scheme where the employer is a company with no or few assets but is within a group of companies that have assets that the employer has no direct recourse to where the “rich” group companies benefit from the activities of the “poor” employer.  Service companies are specifically referred to in the Act as falling within the reach of tPR but any employer within a group may have the characteristics (of being “insufficiently resourced”) that may expose the rest of the group to becoming a target for tPR’s use of these “moral hazard” powers. 

Companies within the relevant group can be required, by tPR, to provide support to the pension scheme by issuing an FSD against them.  tPR does not specify the support required but this may, for example, be in the form of a guarantee and/or security. If the recipient of an FSD fails to provide support to the pension scheme, then tPR can issue a notice requiring payment of a sum up to the full amount of the pension scheme liability.  This notice is a Contribution Notice.

In the case of Lehman Brothers the liability to the scheme is £125 million.  In Nortel it is £2.1 billion.  An FSD has not yet been issued by tPR in relation to most of the parties to the appeal but Warning Notices setting out tPR’s intention to do so are currently the subject of an appeal to the Upper Tribunal (Tax and Chancery Chamber).

In an administration or liquidation assets are realised and distributed to creditors in an order prescribed by the Insolvency Rules 1986.  Expenses of the insolvency process have priority over other creditors save for those with fixed charges. 

The payment obligation imposed by a Contribution Notice is not stated, in the Pensions Act 2004 nor in insolvency legislation, to be a debt provable in an insolvency process.  The question for the Court was as to whether the obligation is nevertheless provable and, therefore, an unsecured claim or should be treated as an expense of an insolvency process or fall into a “black hole” only being paid in the highly unlikely event that funds are available after payment of expenses, charge holders and unsecured creditors.

A provable debt is one which a company is subject to at the date of liquidation or may become subject to pursuant to an obligation arising before that date[5]. 

The types of payments becoming due, in the course of an administration, that are treated as expenses has been clarified and some would say extended through case law, from Toshoku[6] in 2002 to Goldacre (Offices) Ltd –v- Nortel Networks UK Ltd[7] in 2009. In the latter case it was decided that rent obligations of a company, although obligations of the company subject to lease entered into prior to its administration, would be an expense of an administration if they fell due during the process and whilst the administrators were deemed to be using the premises for the purpose of the administration.

Before the High Court, it had been determined that, in certain situations, a Contribution Notice would be provable in an insolvency process.  This would be the case where an FSD was issued in an administration of a company and a Contribution Notice followed after the company had moved from administration into liquidation or if the Contribution Notice followed the FSD and the company then moved into liquidation.  The Contribution Notice would arise in the liquidation from a pre-existing obligation and was therefore a provable debt in the liquidation but not the administration.  This was not the subject of the appeal.

The appeal was around the issue of categorising the Contribution Notice liability where liquidation does not follow the administration or liquidation does follow but the FSD and Contribution Notice are issued in the liquidation and not the prior administration.  The High Court held that the Contribution Notice would, in these circumstances, be treated as an expense giving the obligation under it “super priority”.  In the appeal the Nortel administrators argued that the liability was a provable debt.  The Lehman administrators argued that it fell into a black hole.

The High Court and the Court of Appeal considered whether the fact that an FSD may arise from circumstances that exist prior to any insolvency process meant that the resulting Contribution Notice was a contingent claim in existence at the time of the insolvency, rendering it a provable debt.  Both Courts found that it did not.  It was considered that there was insufficient certainty that tPR would use its discretionary powers to render a company liable for an obligation to a pension scheme that, up until its powers were invoked, only the employer company could have been liable for.  The Court of Appeal did not consider whether the obligation could have arisen earlier than upon the issue of an FSD, for example, at the time that tPR’s Determinations Panel determines that the FSD should be issued or upon the earlier issue of a Warning Notice.

Having decided that a Contribution Notice did not, when issued against a company in administration or liquidation, create a provable debt in that process, the Court was left with a choice of either deciding that the obligation created had super-priority and therefore greater priority than the scheme debt held as against the employer or was neither a debt nor an expense and therefore had lower priority than the scheme debt held.  Neither the High Court nor the Court of Appeal considered either conclusion to be satisfactory, particularly when comparing the purpose of an FSD and Contribution Notice i.e. protecting scheme members, against the competing interests of unsecured creditors. 

Both Courts considered that the position as decided in Toshoku was to be applied to the circumstances before them.  In Toshoku the Court found that tax liabilities imposed by statute were  an expense of an insolvency process where the relevant statute specifically intended and provided that the obligation would be imposed upon a company in insolvency.  In Nortel and Lehman it was acknowledged that the Pensions Act 2004 did no such thing and left it to insolvency law to determine the priority of a Contribution Notice.  However, it was considered to be highly likely that that the regime would be used in the case of an insolvent employer and a real risk that other potential targets in the group would also be insolvent at the time that tPR came to use its powers.  For that reason the obligations of a company under a Contribution Notice imposed upon it whilst in an insolvency process is an expense of that process.

Office holders of group companies in the same situation will need to consider applying to the Court for an order varying the order of priority of expenses or face difficult decisions as to how to progress an insolvency where office holder remuneration and expenses may not be paid.  It was acknowledged by the High Court that, unless the order in which expenses are to be discharged is varied by the Court, the decision in this case could deal a crippling blow to the rescue culture in cases where defined benefit pension schemes are involved.

Financiers will need to factor into lending decisions the possibility of substantial liabilities, not shown on a company’s balance sheet that would, if they arose, have priority over lending secured by a floating charge and all unsecured lending.

The main beneficiary of this decision is likely to be the Pension Protection Fund (PPF), the government’s lifeboat for pension funds which would otherwise foot the bill for underfunded schemes with an insolvent employer.
 
It is expected that the decision will be appealed to the Supreme Court.  Various sector groups will continue to lobby for a change to pensions and/or insolvency legislation.  The government will have a difficult policy decision to make, supporting business and the rescue culture or pension scheme members and the PPF.  For now, its pension schemes 1 – business and rescue culture 0.

Denise Fawcett
Partner
T: 020 7634 4642
E: dfawcett@pitmans.com

1 A defined benefit pension scheme (or final salary scheme) is a benefits funding method in which the liability to the scheme is based on the benefits that would arise if the scheme were to be discontinued on the valuation date and the contribution rate is that necessary to cover the cost of benefit payments due.
2 Expenses are defined in Rule 12.2(1) of the Insolvency Rules 1986. Also see Rule 4.218 Insolvency Rules 1986 in relation to liquidation expenses and Rule 2.67 Insolvency Rules 1986 in relation to administration expenses.
3 Sections 249 and 435 Insolvency Act 1986.
4 Note that an FSD can also be imposed upon the employer itself.
5 Rule 13.12 Insolvency Rules 1986.
6 Re Toshoku Finance UK Plc [2002] UKHL 6, [2002] 1 WLR 671
7 [2009] EWHC 3389 (Ch), [2010]Ch 455

With the increase of defined benefit schemes closing to future accrual, the Pensions Regulator (tPR) has published a statement, aimed at trustees and their advisers, emphasising the significance of identifying which employers are legally obliged to stand behind their schemes – the statutory employer(s).  From November 2011 onwards, it will be an explicit requirement for trustees to document the statutory employer(s) of their pension schemes in their on-line Scheme Returns.

For the majority of schemes, identifying the scheme’s statutory employer will be fairly simple. However, factors such as a group restructure, the scheme’s structure, changes to future accrual and whether employers have left in the past (with or without having discharged their liabilities) are likely to require a detailed analysis of whether that particular employer fits within the statutory definition.  Trustees and employers may need legal advice as the definition of statutory employer is detailed in legislation and can be complex.

Understanding the nature and extent of the obligations both past and current employers owe to the scheme is essential because a statutory employer of a scheme is legally responsible for:

• Meeting the scheme funding objective of the pension scheme
• Paying the section 75 debt when an employment cessation event occurs on employer departure from a multi-employer scheme, on a scheme wind-up or employer insolvency
• Triggering entry to a Pension Protection Fund (PPF) assessment period on insolvency.

Not all employers associated with a scheme will necessarily be statutory employers.  In order to be certain of the statutory employer(s) of the scheme, the trustees may  request information from the employers. This identification exercise may take some time and unexpectedly discover additional employers which meet the statutory definition or possibly reveal changes to employers the trustees had assumed were legally responsible for their scheme.

TPR’s report makes it obvious that trustees need to be clear about their current position, and be vigilant about any changes that could separate the scheme from its statutory employer(s). For example, where an employer substitution takes place, the new employer may not meet the statutory definition.   Employers will also need to be certain about the identity of statutory employers because of the potential impact on the PPF levy and on company balance sheets.

If trustees are uncertain as to the identity of the statutory employers of their schemes they need to take advice now.  Trustees have a legal obligation to complete their Scheme Returns and failure to do so could result in fines.

For further advice or information please visit Pitmans Pensions Service, or contact:

Parminder Latimer
Director
T: 0118 9570324
E: platimer@pitmans.com

The case of Bridge Trustees has re-examined and cast doubt over how the law defines what is a money purchase benefit and what is a final salary benefit, particularly in hybrid schemes where the lines between the two can be unclear. In response, the DWP is proposing to introduce new legislation to clarify the position, and this may mean that some money purchase arrangements will become subject to some or all of the legislation that applies to final salary schemes.

1. The Facts of the Bridge Case

1.1. The Bridge Case concerned an occupational pension scheme known as the Imperial Décor Pension Scheme (the “Scheme”) which had wound up with a deficit of £40 million. The Scheme originally provided final salary benefits only, however, through various restructurings began to include money purchase benefits for some members. The first restructuring introduced additional contributions by members which were known as VIP Benefits and were considered to be money purchase benefits by the Trustees. These were annuitised internally using tables of factors periodically supplied by the Scheme’s actuary. The second restructuring created a further tier of ‘Money Match’ Benefits. Money Match Benefits were also considered to be money purchase benefits, relying on contributions made on a member’s behalf, however, total contributions were credited to a Guaranteed Investment Fund (the “GIF”) whereby the Scheme undertook to provide a minimum guaranteed rate of return.

1.2. With a £40 million deficit in the Scheme on winding up, the statutory priority order was to come into play under section 73 PA 1995. The question essentially put before the court was whether or not the VIP Benefits and the Money Match Benefits were correctly treated as money purchase benefits. Being excluded from the section 73 priority order, this would mean money purchase members would receive the full benefits relating to their contributions. If not, these benefits would be subject to the priority order and the contributions would be shared amongst members along with other assets held by the Scheme.

2. Arguments Put Forward by the Secretary of State (DWP)

2.1. Following decisions at First Instance and in the Court Appeal to allow treatment of the VIP and Money Match Benefits as money purchase benefits, the Secretary of State on behalf of the Department for Work and Pensions joined the case in order to support the appeal against the previous judgements.

2.2. The main thrust of the argument put forward by DWP was based on the KPMG Case decision and was as follows:

2.2.1. The promise of future benefits is the hallmark of defined benefit schemes; the equilibrium of assets and liabilities is the hallmark of money purchase schemes and the reason why they are largely excepted from the operation of section 73 and 75 of PA 1995;

2.2.2. the Court of Appeal’s decision in the KPMG Case confirmed that a money purchase benefit should be the direct product of the contributions and calculated only by reference to the contributions; and

2.2.3. In this case the application of actuarial factors, internal annuitisation of benefits and the provision of a minimum rate of return meant that the benefits in question were not a direct product of the contribution and were calculated by reference to other factors. Due to the GIF, assets and liabilities in the money purchase section may not match. On this basis the VIP and Money Match Benefits did not fall within section 181(1) PSA 1993.

3. Decision and Findings of the Supreme Court

3.1. The Supreme Court upheld the decisions at First Instance and the Court of Appeal and went slightly further than just distinguishing the KPMG Case, overruling the judgement in part.

3.2. The Supreme Court differed from the proposition in the KPMG Case. It ruled that reference to “calculated by reference to” in the definition of money purchase benefits under section 181(1) PSA 1993 does not mean “calculated only by reference to” in the sense that the benefit in question must be the direct product of the contributions (as was held in the KPMG case). This narrowed the scope of the definition in the statute.

3.3. The KPMG case was correctly decided on its facts but distinguished on the basis that the methods of calculating benefits in the scheme in that case created too wide a discontinuity between the quantum of contributions and the benefits entitled to through actuarial building blocks being added into calculations each time a contribution was made and wide discretionary bonuses being applied.

3.4. In Bridge, the GIF mechanism did not unhitch a member’s eventual benefits from that member’s total contributions, it merely provided a yield of guaranteed interest, fixed by an objective test.

3.5. Further the application of actuarial factors and internal annuitisation in the Bridge Case was not inconsistent with money purchase benefits. While it is not necessary for a money purchase scheme to have an actuary, the use of actuarial tables were only used at the final stage, to calculate pension, rather than to project future benefits. The Supreme Court agreed with the deputy judge’s view that the distinction between internal and external annuities would produce insupportable anomalies.

3.6. Per Lord Mance’s dissenting judgement, a limitation on the above is that PSA 1993 will not be seen as embracing liabilities which are not matched with any specific asset held by a scheme within the definition of money purchase benefits under section 181(1). This will likely mean that where any money purchase section has deficient assets, the extent to which liabilities exceed assets will be outside the concept of money purchase benefits and fall within the funds available under the priority order of section 73 PA 1995.

4. Impact of the Decision in Bridge and the New Legislation Proposed in Response

4.1. The Bridge Case has exposed failings in the drafting of the legislation and the interpretive requirements that need to prop up the principles therein.

4.2. In relation to the revaluation of deferred pension this issue is likely to arise where a member challenges the basis on which his entitlement to benefits should be calculated. In contrast, winding up/section 75 debt cases such as Bridge and KPMG will more often involve a challenge by pensioner members who will have priority over deferred and active members and seek to improve the chance of recovering benefits by drawing the money purchase pot into the funds available to them. Alternatively, an employer may challenge its obligations to fund benefits by claiming that they are money purchase benefits and therefore outside the scope of section 75, as in KPMG.

4.3. The potential impact of the decision is difficult to measure, given the number of schemes with hybrid arrangements and the additional benefits and rules linked to money purchase sections is unclear.

4.4. Further, the case has not drawn a clear distinction to mark where the exemption from section 73 PA 1993 will end. This problem will apply also to revaluation of deferred pension under section 83 – 86 PSA 1993. Given this blurred concept, it would be wise for schemes to take care when offering any DB element to benefits (eg. In ill-heath or death benefit provisions). Essentially any salary related provision may push all benefits into the scope of the section 73 priority order.

4.5. Following the Bridge Case, the Department for Work and Pensions has issued a statement that the Government intends to draft legislation clarifying the dividing line in this area. It will take effect retrospectively from 27 July 2011 or earlier. The likely effect of the new legislation is that schemes will face a strict approach as Government’s intention appears to be that any schemes that can potentially have a funding deficit will no longer fall within the statutory definition of a money purchase scheme. The impact of the new legislation is unclear while it remains undrafted, however it seems likely that some money purchase schemes could become subject to some or all of the legislation that applies to defined benefit schemes.

For further information please visit Pitmans Pensions Service, or contact:

Parminder Latimer
Director
T: 0118 9570324
E: platimer@pitmans.com

Richard Jakubowski
Solicitor
T:  0207 6344640
E: rjakubowski@pitmans.com

The Issue

The Agency Workers Regulations come into force on 1 October 2011 and will change the way in which the hospitality sector view agency workers.

Take the example of a hotel that uses agency workers to cover the busy summer months. At present agency workers often receive the same basic hourly rates as directly recruited staff but are not given the same benefits (transport facilities, overtime, maternity benefits and bonuses for example). However, from the 1 October 2011 this will change.

The Legal Position

After completing 12 weeks of an assignment, an agency worker will be entitled to the same basic working and employment conditions (including pay, working time and holiday entitlement) as they would have received had they been directly engaged to do the same job. The scope of the Regulations only includes terms which are ‘ordinarily included’ in the hirer’s contracts – for example, as part of a pay scale or company handbook.

Breaks of up to six weeks between assignments with the same hirer will not break the 12 week qualifying period. However, the clock will restart if the worker begins a new assignment with the hirer in a ‘substantially different’ role.

An agency worker’s right to equal pay will not apply when the agency worker is employed on a permanent basis by their agency, receives a minimum level of pay in between assignments and signs a contract with the agency prior to the start of the assignment (this is known as a ‘derogation contract’).

From day one of an assignment, agency workers will have equal access to collective facilities, such as a canteen or transport services; unless different treatment can be objectively justified (cost alone is unlikely to be enough). Agency workers will also have equal access to information on employment vacancies.

Agency workers who believe that they are not receiving equal treatment may ask the agency (and then the hirer if the agency fails to respond within 30 days) for written details of the hirer’s basic working and employment conditions.

A reasonable and practical approach

All organisations need to be aware of what is covered by “pay” in terms of the Regulations. Pay includes holiday pay, overtime, shift allowances, unsocial hours premiums; performance bonuses directly related to the work of the individual agency worker, and lunch vouchers.

Pay excludes occupational pension and sick pay schemes; notice pay; redundancy pay; expenses; loyalty bonuses and benefits in kind such as company car allowances and health insurance.

The hotel would be potentially liable for failing to provide agency workers with the same transport service as direct recruits. If any of the agency workers stayed on and worked for 12 weeks they would also gain a right to overtime for the remainder of their assignment if this is provided to permanent workers.

There would, however, be no obligation to provide the loyalty bonus or pay expenses.

Agency Worker Policy

For those employers who rely on agency workers we recommend that you undertake the following:

- Assess the average length of assignments; the extent to which agency workers and direct recruits are carrying out the same job; and whether agency workers are currently receiving the same pay, working time and holiday entitlement as direct recruits.

- Put systems in place to respond to information requests made by agency workers.

- Ensure that systems are in place to make agency workers aware of job vacancies and to inform them about collective facilities.

- Consider whether to review terms of business with agencies to apportion liability for any employment tribunal claims and to deal with the exchange of information with agencies.

- If seeking to avoid the impact of the Regulations, consider other options such as limiting the length of agency workers assignments (bearing in mind the anti-avoidance provision below), increasing the number of directly recruited fixed-term employees or using in-house staffing banks.

Potential Risks

Agency workers may be awarded unlimited compensation for a breach of the equal treatment rights with both agencies and hirers potentially liable (although the hirer is solely responsible for any claims regarding “day one” rights).

If an employment tribunal finds that assignments have been structured specifically to deprive an agency worker of equal treatment rights (for example by, rotating 11 week assignments in “substantially different” roles) it can make an additional award of up to £5,000.

For further information please visit Pitmans Hospitality Sector, or contact:

David Loosemore
Solicitor
T: +44 (0)118 957 0240
E: dloosemore@pitmans.com

Amanda Dorling
Solicitor
T: +44 (0)118 957 0407
E: adorling@pitmans.com

The Department for Work and Pensions (DWP) has completed its consultation on proposed changes to the regulations governing the amount an employer is required to pay on ceasing to participate in a defined benefit pension scheme. Likely amendments to The Occupational Pension Scheme (Employer Debt) Regulations 2005 will, from the end of this year, offer additional but limited options to companies and corporate groups that have triggered an employer debt on a restructuring or corporate transaction.

Background

Where an employer debt has been triggered under section 75A of the Pensions Act 1995, the Employer Debt Regulations sets out various ways in which that liability may be dealt with. The aim of the regulations is to ensure that scheme members’ benefits are properly funded when their employer ceases to participate in a defined benefit pension scheme.

The regulations have been subject to criticism from corporate groups for a perceived lack of flexibility when restructuring a group or on corporate transactions. Previous attempts at amending the regulations in April 2010 introduced new methods of dealing with section 75 debt but have been rarely used, largely due to the prescriptive and restrictive nature of the conditions to be met.

The New Regulations

Following pressure from the pensions industry, a consultation paper on employer debt was published by the DWP in June 2011. Draft regulations propose the introduction of additional flexibility in dealing with employer debt triggered by corporate restructuring. As well as a number of technical amendments, two new procedures are proposed to assist corporate groups dealing with restructuring and corporate transactions.

The Flexible Apportionment Arrangement

The proposed new Flexible Apportionment Arrangement (FAA) will provide a further mechanism for dealing with corporate restructuring and transactions. It allows the liabilities of a departing employer to be reapportioned to a remaining sponsoring employer (or employers) without a section 75 debt being triggered. Effectively the remaining employer(s) assume all the liabilities of the departing employer which means that there will be no need for the amount of the debt to be certified. Certain conditions will apply in order for the arrangement to be effective:

The current funding test, which must be satisfied for scheme apportionment arrangements under the existing regulations, must still be met. The Trustees must be satisfied that the employer(s) is able to fund the scheme on the current funding basis, and that the arrangement does not weaken the employer covenant such that the security of members’ benefits is reduced.

The trustees and the employers involved must agree to the arrangement.
The whole of the departing employer’s liabilities must be apportioned to the remaining employer(s).

Where an employment cessation event occurs – ie when an employer ceases to employ active members whilst at least one other employer continues to do so – no part of the debt has already been paid before the FAA can be entered into.

The scheme is not in a PPF assessment period and it is unlikely that one will commence within the next 12 months.

To allow further flexibility in situations where two arrangements are entered into within a short period of time, the new regulations will allow trustees to agree that the funding test has been met in respect of the latest arrangement and therefore the test need not be carried out again.

Extended Grace Period

Under the existing regulations,  if an employer ceases to employ any active members and therefore an employment cessation event occurs, but intends to employ an active member within the next 12 months, the employer may give the trustees a notice called a ‘period of grace’ notice. The notice must be given to the trustees before, on or as soon as possible (and in any event within one month) after the employment cessation event. The effect of the notice is that the employer will be treated as if they were still an employer of active members during the period of grace, and no debt will be treated as having occurred.

The period of grace begins when the employer ceases to employ active members and ends 12 months later or, if earlier, the date the employer employs an active member of the scheme. If the employer employs an active member during the period of grace, the employer will be treated as if the relevant employment cessation event had not occurred. If the employer does not employ an active member within the grace period, the debt will be triggered.

The proposed new regulations will allow the trustees of the scheme concerned, following an employment cessation event, to extend the period during which the employer can employ another active member without triggering the section 75 debt from 12 months to 36 months.

Conclusion

The new measures for dealing with corporate restructuring and transactions appear to offer little by way of a change in the approach to dealing with withdrawal from defined benefit pension schemes. An FAA may offer some increased flexibility to corporate groups but seem little different in practical terms to options available under the existing regulations.

In addition, whilst the proposal is to extend to two months the notice required to take advantage of a grace period, which still requires the employer to commit to employing a new active member within an impractically short timeframe.

The consultation period ended on 10 August with the new regulations due to come into effect from 1 October 2011.

For further information please visit Pitmans Pensions legal department, or contact:

David Hosford
Partner
T: +44 (0)118 957 0363
E: dhosford@pitmans.com

Ben Blunsdon
Director
T: +44 (0)207 634 4276
E: bblunsdon@pitmans.com

Julian Richards
Solicitor
T: +44 (0)207 634 4649
E: jrichards@pitmans.com

Hot topics & employee pensions benefit services

By David Hosford, Parminder Latimer and Symon Rowley

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Bonas Group Pension Scheme – pre-pack administration

The Pensions Regulator (tPR) announced on 9 June 2011 that it has settled its dispute with Michel Van De Wiele NV (VDW) regarding the Bonas Pension Scheme. TPR will now issue a Contribution Notice for £60,000 instead of the £5 million it had originally awarded.

VDW is the Belgium based parent company of Bonas UK. Bonas UK had a defined benefit pension scheme called Bonas Group Pension Scheme which had a deficit. TPR became involved in 2006 when Bonas UK was put into a “pre pack” administration in what seemed to be a way of avoiding the increasing pensions deficit. The business and certain assets of Bonas UK were then brought by a subsidiary of VDW leaving the pension liability behind. TPR issued it’s first ever Contribution Notice on 29 June 2010 for £5 million to VDW on the basis that VDW’s actions came about in order to prevent further liability to the Bonas UK Pension Scheme and also to avoid Section 75 of the Pensions Act 2004, in which tPR can order a company to repay monies to the Scheme.

VDW appealed to the Upper Tribunal (Tax and Chancery) Chamber asking for the Contribution Notice to be struck out. Although this was refused, Warren J’s opinion proved to be helpful in highlighting that the amount that could be sought by tPR by way of a Contribution Notice had to be reasonable given the amount available to the employer after the act or failure to act had taken place. Whilst the Scheme can be compensated for the detriment a Contribution Notice amount cannot go further as to impose a penalty on the VDW for its behaviour. Recovery of further amounts is the domain of a Financial Support Direction (FSD) and the present application did not concern a FSD. However a full hearing did not take place to fully explore Warren J’s opinion as tPR chose to settle.

A Contribution Notice can be issued under section 38 of the Pensions Act 2004 by tPR. It is a demand on either a company or an individual to pay a sum of money into a pension scheme. TPR’s decision to settle has been seen by many to be some what disappointing. TPR was acting under it’s powers granted under Section 38 of PA 2004 as originally enacted. However in 2008 section 38 was amended to include a “material detriment test” (as set out in Section 38A). If tPR believes an act or a failure to act “has detrimentally affected in a material way the likelihood of accrued scheme benefit’s being received”, then the test has been satisfied. In reaching this decision tPR must take into account various factors such as the value of the assets, effect of the act/failure on those assets and so on. This extra limb provided under section 38 provides tPR with further grounds to issue a Contribution Notice to the party in question. Had this test been applicable when tPR issued it’s first Contribution Notice it is questionable whether the same outcome would have been reached. However whether tPR will take advantage of the revised section 38 remains to be seen.

Great Lakes - chapter 11 bankruptcy

In relation to the Great Lakes UK Limited Pension Plan a settlement was again reached before a full hearing with the Determination Panel could take place as reported by tPR on 13 July 2011. TPR decided to investigate two companies – Chemtura Manufacturing UK Limited (CMUK), the sole sponsoring employer to the pension plan and Chemtura Corporation, CMUK’s parent company, after the Trustees of the pension scheme raised concerns in June 2009 to tPR of the Chapter 11 bankruptcy protection that a number of the group companies had filed in March 2009.  As at 30 June 2009 the pension scheme, had a buy-out deficit (i.e. the amount required to purchase benefits in full with an insurance company of approximately £95 million).  TPR investigated and issued a “warning notice” to both companies threatening to issue FSD’s under section 43 of the Pensions Act 2004. However in May 2011 both companies entered into an agreement with the Trustees of the pension plan in which they agreed to pay £60 million into the pension scheme over the next three years plus additional contributions connected to other pension liabilities and security providing protection to the pension scheme going forward. Additionally and an interesting point of note is that the Trustees also agreed to withdraw the pension scheme’s claims in the Chapter 11 bankruptcy and allow the process to continue without delay in exchange for the creditors agreement to be bound by the English regulatory process in relation to the pension scheme debt.

Parminder Latimer
Director
T: +44 (0)20 7634 4625
E: platimer@pitmans.com