27 April 2004 - New powers for Pensions Regulator to improve pension protection
A new package of measures designed to stop employers side-stepping their pensions obligations was announced today by Pensions Minister, Malcolm Wicks.
The new clauses introduced by Government amendments to the pensions bill, aim to address the risks of so-called moral hazard, particularly those posed by unscrupulous employers who might seek to use company structures and business transactions as a cover for avoiding their pension obligations and dumping their liabilities on the new Pension Protection Fund.
Malcolm Wicks, Pensions Minister said:
“The new clauses should act as a deterrent to employers who are considering dodging their pension obligations. They will also provide reassurance to responsible employers that their levy payments will not be subsidising unscrupulous employers.
“Mitigating the risks of moral hazard is one of the biggest challenges we face in introducing the Pension Protection Fund (PPF). But we are confident that the package we are proposing today will safeguard the integrity and sustainability of the PPF and avoid placing an unfair burden on responsible levy payers.”
The first of the new measures will allow the new Pensions Regulator, where it identifies that an act (or failure to act) has taken place with the main purpose of avoiding pension obligations in the form of the debt due from the legal employer under Section 75 of the 1995 Pensions Act, to require a person or company who has been involved in such an act to pay a contribution into the pension scheme.
The Government is aware of possible cases where it appears that some employers may have already taken action aimed at dumping their liabilities on the PPF. This is in spite of Andrew Smith, Secretary of State’s clear warning on 11 June 2003 that “We will have to introduce protection against engineering designed to circumvent the intent of our proposals.” This power will thus apply to actions taken after 11 June 2003.
There may also be circumstances where, as a result of legitimate actions, not aimed at avoiding pension liabilities, schemes with a solvent group of companies could end up with a sponsoring employer who is unable to meet its pension liabilities. So, the second new provision announced today will give the Pensions Regulator the power to require that ‘financial support arrangements’ are put in place in cases where restructuring has left either service companies or subsidiaries with pension obligations that they can’t meet.
Notes for editors
[an error occurred while processing this directive]- An explanatory note on the new clauses is attached.
- The Pensions Bill was published on 12th February and can be found at http://www.publications.parliament.uk/pa/cm200304/cmbills/057/2004057.htm
- “Working and saving for retirement: Action on Occupational Pensions” was published on 11 June 2003 and copies can be found at: http://www.dwp.gov.uk/consultations/consult/2002/pensions/actionplansummary.pdf (109KB)
Explanatory notes
There are a number of forms of moral hazard that need to be addressed. The Bill already includes measures designed to protect the Pension Protection Fund (PPF) against actions taken by schemes in order to increase the benefits that could be payable by the PPF in the form of the admissible rules and ‘recent discretionary increases’ provisions in Schedule 7. Imposing a cap on the level of compensation payable to those under normal pension age also avoids any potential perverse incentives upon key decision-makers to allow companies to go into insolvency. Furthermore, the Bill includes provisions designed to guard against manipulation of schemes to gain eligibility for the PPF, under clauses 115 [Schemes which become eligible schemes] and 116 [New schemes created to replace existing schemes].
The new clauses are designed to protect the PPF and scheme members from another type of moral hazard – the risk posed by unscrupulous employers who might seek to use company structures and business transactions as a cover for side-stepping their pension obligations in the form of the debt due from the employer under Section 75 of the 1995 Pensions Act.
The Section 75 debt falls upon the person who counts as the “employer” for the purposes of the pension scheme and Section 75. Particularly where that employer is part of a company group, there are a number of ways in which that group can ensure that, before the scheme is wound up or the sponsoring employer becomes insolvent and a s75 debt is triggered, the company which is the legal “employer” is put in a position where it cannot afford to pay the debt. Even if the rest of the company group is fully solvent the trustees cannot recover the debt from any other companies in the group and the scheme members will be left in what may be a very badly funded scheme. The risk largely relates to schemes where a number of companies (often within a ‘group’ structure) participate and pool their liabilities together (referred to as “multi-employer” schemes) but can also affect single employer schemes.
The actions which might be taken by company groups could include withdrawing funding for the “employer” company, selling off its assets, paying a large dividend to strip out any assets in the company, or transferring the employees to another company (such as a service company) which then becomes the “employer” and which has never traded or had any assets to speak of. Such actions could occur just before the winding up of the scheme or the insolvency of the sponsoring employer, or well in advance with a view to disguising the purpose of the action.
These new clauses will be operated and enforced by the Pensions Regulator in the context of meeting its objectives to reduce calls on the PPF and protect the benefits of scheme members. It is envisaged that the Regulator will work very closely with the PPF – probably through a joint ‘early warning’ team – in operating the functions which will be so crucial in protecting the PPF from abuse. The powers are reserved to the Determinations Panel and exercised by standard procedure; they are also subject to the powers to vary and revoke contained in clause 75.
The powers need to be exercisable by the Regulator, as the very nature of the actions which they are designed to capture is such that manipulation could occur some time before the PPF would normally get involved in a scheme as a result of an employer insolvency. Moreover, the Pensions Regulator will have the intelligence and expertise as a result of its day to day work monitoring pension schemes to pro-actively deal with the risks of moral hazard.
Financial support arrangements (2nd power)
There are a range of reasonable and flexible financial support arrangements that a group can put in place in order to comply with the direction – for example, the ultimate holding company could agree to meet the scheme’s pension liabilities. So the requirement will not place a heavy burden upon responsible employers who have no intention of avoiding their pension liabilities, but anyone who fails to comply with a direction to put in place financial support could be required by the Regulator to pay a contribution to the pension scheme.
Malcolm Wicks also announced that the Government plans further reform Regulations governing the position in relation to the application of debt on withdrawal from associated multi-employer schemes (associated multi-employer schemes usually consist of several subsidiaries of one company). In the future, when a participating employer withdraws from a multi-employer scheme with associated employers, a full buy-out debt should be triggered unless appropriate financial support is put in place (in which case a ‘scheme-specific’ debt will be payable). This will ensure that there is comprehensive protection for scheme members and the PPF against employers who would seek to rid themselves of their pension liabilities.
For further information please contact Vicki Kennedy on 020 7238 0640
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