On 29th June 2010, the Pensions Regulator (tPR) published its first determination imposing a £5 million Contribution Notice (CN) against a company in relation to its defined benefit (or final salary) pension scheme obligations.
The determination to issue a CN was made against Belgium-based Michel Van De Wiele (VDW), which put its UK subsidiary Bonas UK into a “pre-pack” administration in December 2006 and bought back the business later without its pension liabilities. TPR found that VDW had not engaged openly with the pension scheme trustees or tPR.
Bonas UK Limited was the sponsoring employer of the Bonas Group Pension Scheme (the Scheme) and a wholly owned subsidiary of VDW. The Scheme entered the Pension Protection Fund (PPF) in November 2008. The PPF was established to provide compensation to members of defined benefit schemes where the employer has become insolvent and the scheme has insufficient assets to provide benefits at PPF levels of compensation. The PPF is funded by levies paid by employers of ongoing defined benefit schemes. One of the statutory functions of tPR is to protect the PPF by reducing the risk of calls on the PPF.
The Pensions Act 2004 gave tPR “moral hazard” powers to protect members and the PPF where employers avoid meeting their pension scheme liabilities. One of the sanctions is a CN which requires a specified amount of money to be paid into a pension scheme by an individual or a company. In this case, a determination to issue a CN was made because VDW’s main purpose of putting Bonas UK into administration was to prevent it having further liability to the Scheme and prevent the recovery of the whole or part of the statutory debt due from the employer under section 75 of the Pensions Act.
tPR found that:
- VDW avoided informing the trustees of the Scheme and tPR about the pre-pack which was driven by VDW as a result of the unsustainable Scheme liabilities,
- VDW was prepared to walk away from the Scheme taking a calculated risk of CN being sought by tPR later rather than have a CN imposed during any negotiations with the trustees and tPR before the pre-pack, and
- VDW retained the business while avoiding the pension liability.
The full deficit stood at some £23 million, however tPR made the determination of approximately £5 million as this represented the amount required to guarantee the PPF level of benefits.
It is understood that VDW is contesting this decision.
The Administration pre-packaged sale is a common method of achieving rescue of an insolvent business. This case shows that tPR is not willing to allow companies to simply walk away from their pension scheme liabilities whilst effectively allowing the PPF to foot the bill for providing members’ benefits. TPR’s attitude appears to be hardening, so great care should be taken to follow the proper processes with the scheme trustees and tPR if a pre pack or other insolvency is planned. In addition the tougher attitude may feed through to other corporate activity, and pensions implications of transactions involving employers which sponsor defined benefit pension schemes will need to be carefully considered. In particular tPR’s clearance procedure (in which it gives confirmation that it would not issue a CN) will need to be explored.
We regularly advise clients on pensions implications of this sort of activity and if these issues affect you, please contact one of our pension team members who would be delighted to assist.
For further information please contact Parminder Latimer, +44 (0) 118 957 0324 or platimer@pitmans.com.
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