Section on FSD look-back period updated to reflect amendments introduced by the Pensions Act 2011 (see Practice note, Pensions Act 2011: overview, Pensions Regulator's powers (www.practicallaw.com/2-504-5144)).
A quick guide to the power of the Pensions Regulator to impose a financial support direction under the Pensions Act 2004.
The Pensions Regulator (www.practicallaw.com/9-201-5137) has the power to impose a financial support direction (FSD) (www.practicallaw.com/5-201-5525) where the employer of a defined benefit (DB) pension scheme (www.practicallaw.com/0-107-7545) is a service company or insufficiently resourced. The FSD may require the employer, and those associated or connected to the employer, to put in place financial support for the scheme while the scheme is in existence.
This note sets out a summary of when the power can be exercised and what an FSD may require. For a closer look at the Regulator's anti-avoidance powers, see Practice note, Pensions Regulator: anti-avoidance powers (www.practicallaw.com/2-205-4995). For links to further materials on this area, see Further reading below.
The Regulator may issue an FSD if, at any time falling within the FSD look-back period (the "relevant time"), the employer in relation to a DB pension scheme is either:
A service company.
Insufficiently resourced.
The Regulator may also issue an FSD in relation to a work-based pension scheme (www.practicallaw.com/6-205-9095) that has received a bulk transfer from another scheme if the criteria for an FSD would otherwise have been met in relation to the transferring scheme. This power applies to any transfer on or after 14 April 2008.
The power to impose an FSD is a "reserved regulatory function" and can only be exercised by the Determinations Panel of the Regulator.
The FSD look-back period is the period of 24 months ending when the Regulator issues a warning notice in relation to the FSD.
Two recent amendments have been made to the FSD look-back period:
Before 3 January 2012, the FSD look-back period ended on the date that the Regulator issued its determination in relation to the FSD.
The look-back period was increased from 12 months to 24 months on 6 April 2009, but transitional provisions applied for determinations in the period between 6 April 2009 and 6 April 2010, when the 24 month period was reduced by a period equal to the number of complete months between the time of the determination and 6 April 2010.
An employer will be a service company if it is a company in a group of companies and its turnover contained in the latest available statutory accounts is solely or principally derived from amounts charged for providing the services of its employees to other group companies.
An employer will be insufficiently resourced if the value of its resources is less than 50% of the employer debt (www.practicallaw.com/0-206-2072) due from the employer to the scheme, as estimated by the Regulator and either:
The value of resources of a person who is connected or associated with the employer when added to the resources of the employer is at least equal to 50% of the estimated employer debt.
At any time falling on or after 14 April 2008, the aggregate value of the resources of two or more persons who are connected or associated with the employer and with each other when added to the resources of the employer is at least equal to 50% of the estimated employer debt.
The Regulator can only impose the requirements of an FSD on a person where it considers that it is reasonable to do so. In determining whether it is reasonable, the Regulator must have regard to any matters it considers relevant, including:
The target's relationship with the employer.
The value of any benefits received by the target from the employer (directly or indirectly).
Any connection or involvement the target has had with the scheme.
The target's financial circumstances.
An FSD may be issued to any person who was, at the relevant time, any of the following:
The employer in relation to the scheme (defined widely to include all employers participating in the scheme at the relevant time and former employers).
An individual who was associated with the employer (who is an individual), unless the only association arose from employment.
A company that was connected with or associated with the employer.
The FSD must identify all the persons to whom it is issued and will require the target(s) to secure that:
Financial support for the scheme is put in place within the period specified in the FSD.
The financial support remains in place while the scheme is in existence (that is, until it is wound up).
The Regulator is notified in writing of the following events in respect of the financial support as soon as reasonably practicable after the event occurs:
any employer-related notifiable event that occurs in relation to a party named in the financial arrangements approved by the Regulator (see Practice note, Pensions Regulator: employer reporting requirements (www.practicallaw.com/8-205-3969));
any insolvency event (as defined under section 121 of the Pensions Act 2004) that occurs in relation to a person named in the FSD; and
any failure to abide by, or any alteration of, the financial arrangements approved by the Regulator.
The financial support arrangement must be approved by the Regulator. Financial support can include an arrangement under which additional financial resources are provided to the scheme or, where the employer is a member of a group of companies, an arrangement where the holding company is liable, or all group companies are jointly and severally liable, for all or part of an employer's pension liabilities. An employer's pension liabilities include any liability for employer contributions and any liability for a debt (including an employer debt) which is, or may become due, from the employer to the scheme.
If a person fails to comply with the terms of an FSD, the Regulator may issue a "non-compliance contribution notice" requiring them to pay a specified sum to the scheme. The notice can require the payment of all or part of the employer debt due at the time of the non-compliance or, if no debt was due at that time, the amount the Regulator estimates would be due.
The Regulator may only issue a notice in these circumstances if it considers it is reasonable to do so. In assessing reasonableness, the Regulator must consider whatever factors it considers relevant and, in addition to the factors it must consider when deciding whether to impose an FSD (see Reasonableness test above), the Regulator must also consider:
Whether the target has taken reasonable steps to secure compliance with the FSD.
The relationship between the target and any other companies or individuals that were party to the financial support arrangements put in place under the FSD.
A non-compliance contribution notice cannot be issued if the PPF (www.practicallaw.com/7-205-4059) has assumed responsibility for the scheme.
The Court of Appeal decision in Bloom and others v Pensions Regulator and others [2011] EWCA Civ 1124 has clarified the treatment of contribution notices and FSDs in corporate insolvency (see Legal update, Ranking of liabilities under Financial Support Directions and Contribution Notices in insolvency proceedings (Court of Appeal) (www.practicallaw.com/1-509-3833)). The court held that, where an FSD is issued to a company after it enters administration, the liability under any subsequent contribution notice will rank as an expense of the administration, and so will enjoy an elevated priority in the order of debts that are paid form the remaining assets. Permission to appeal to the Supreme Court has been granted by the Court of Appeal.
Although the full impact of the decision is not know at present, given the sums involved in pension deficits, this has the potential to cause problems for restructuring professionals. It also raises issues for employers of ongoing DB schemes. When obtaining new (or renewing existing) borrowing, lenders may require more favourable terms to reflect the priority now given to FSDs.
The Regulator has the power to provide advance clearance in relation to FSDs. By giving clearance, the Regulator confirms that it will not seek to issue an FSD in relation to a particular transaction. But the Regulator will not be bound by clearance if the circumstances described in the clearance application differ from the actual circumstances, and that difference is material to the exercise of the Regulator's powers.
For more information, see the following practice notes:
Pensions Regulator: anti-avoidance powers (www.practicallaw.com/2-205-4995).
Pensions Regulator: clearance applications (www.practicallaw.com/2-205-5042).
Pensions Regulator powers: practical issues for company directors (www.practicallaw.com/8-386-6113).
Pensions Regulator: Determinations Panel procedure (www.practicallaw.com/2-382-1085).
For flowcharts setting out the statutory requirements for the exercise of the Regulator's anti-avoidance powers, see Pensions Regulator: anti-avoidance powers flowchart (www.practicallaw.com/1-500-4931).
To date, the Regulator has issued FSDs in relation to Sea Containers, Nortel, Lehman Brothers and Box Clever (see Practice note, Pensions Regulator: anti-avoidance powers, Regulator's use of anti-avoidance powers (www.practicallaw.com/2-205-4995)).