Pensions Regulator forces pension scheme back to the UK

The Pensions Regulator (TPR) in the UK announced in September its new, tougher regulatory approach. But a TPR intervention report – about the Martin Currie Retirement and Death Benefits Plan (the Plan) – also published in September, shows how TPR has increasingly been prepared to use its powers to protect a defined benefit (DB) scheme. As reported previously in Commercial Risk Europe , the Plan was a DB pension scheme sponsored by Martin Currie Investment Management Limited (MCIM), a UK-based fund manager. On 1 January 2014, the Capital Requirement Directive IV came into effect, imposing a more stringent capital reserving framework that would have placed MCIM in temporary breach, which in turn could lead to Financial Conduct Authority intervention. To avoid this, MCIM asked the trustees of the Plan to enter into a flexible apportionment arrangement (FAA), transferring the Plan to another employer. The trustees took legal and covenant advice and the FAA was implemented in September 2014: The new employer for the Plan was Martin Currie Holdings Limited (MCH), the non-trading, ultimate holding company based in Bermuda MCIM provided a guarantee to the Plan of up to the lesser of £26m or 110% of the Plan's Pension Protection Fund (PPF) liabilities The Plan would benefit from ‘earn-out’ provisions under the acquisition of MCIM by Legg Mason. The FAA was notified – as required – to TPR. TPR had no immediate concerns about the funding of the Plan, but was concerned about the following aspects of the restructuring: Replacing a UK employer with a dormant non-UK-resident company The guarantee was inadequate as MCIM would previously have been fully liable for the Plan The earn-out provisions were outside of the Plan's control Although there were no immediate insolvency concerns, TPR was concerned that the Plan might be ineligible for the PPF if MCH became insolvent. TPR considered the mitigation for the change in sponsoring employer was inadequate and started an investigation. This involved use of its wide-reaching powers under section 72 of the Pensions Act 2004 to request information from the employer and the trustees. TPR concluded that the FAA was materially detrimental to the Plan and it would use its contribution notice powers unless action was taken to address its concerns. A contribution notice requires a cash payment to a scheme from the employer or a connected or associated person (which could include individuals). Although the Martin Currie Group did not accept TPR's view, it was willing to address the issue and a revised mitigation package was implemented: The Plan was moved back to the UK, with a UK sponsoring employer MCH provided a section 75 debt guarantee to the Plan with an additional wider group guarantee of 110% of the PPF benefits The earn-out payment was retained Martin Currie Group paid all of the costs of the Plan, and other unspecified restrictions were put in place to protect the position of the trustees and the Plan The Trustees involved in the decision making in 2014 all stepped down and gave undertakings not to act as pension trustees. This matter was brought to TPR's attention by the ‘notifiable events’ regime, which requires certain actions to be reported to TPR. It is currently proposed to strengthen this regime with new requirements to report, including a sale of a material part of an employer, a granting of security in priority to a scheme, or an employer taking pre-appointment insolvency advice. It is further proposed that a buyer should provide ‘a declaration of intent’ regarding any DB scheme on a proposed acquisition. These changes will allow TPR to be more proactive. The majority of cases where formal action for contribution notices (or financial support directions) is taken, relate to insolvency. There was no threat of insolvency here, which again shows the increasing willingness of TPR to take a tougher approach. The governance of the Plan clearly concerned TPR, with the conflicts of interest not being managed. The undertakings given suggest that if a settlement had not been reached, TPR would have sought to disqualify the individuals from acting as pension trustees. As noted in the report, it is the employer who ends up dealing with the consequences of poor governance and the costs associated with it. Finally, this case involved moving the pension scheme around the corporate group. However, employers should be alive to any corporate actions that – although not directly affecting a DB scheme – might have a weakening effect on the employer covenant and therefore be materially detrimental. TPR would be just as concerned about such actions. Contributed by Mark Howard, a partner at Clyde & Co

Pensions Regulator forces pension scheme back to the UK

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