The collapse of Thomas Cook shows how company boards must give greater attention to how pay and dividends contrast to pension scheme contributions, says Stephen Richards .
Senior management of companies need to be more aware than ever of pensions regulatory risk. The recent Thomas Cook failure has put the spotlight once again on whether corporate actions have had a detrimental effect on a pension scheme.
In the context of strong media criticism of management pay in the years before the Thomas Cook failure, the government has asked the official receiver to look at whether management actions caused detriment to creditors or to the pension schemes.
While I would be surprised if director pay results in direct regulatory action in this instance - particularly as the scheme had a surplus on a Pension Protection Fund compensation basis - it will be interesting to see whether the failure of Thomas Cook results in management pay being reviewed more closely by The Pensions Regulator (TPR) in the future.
The regulator's "tougher" approach to corporate events is changing faster than ever, so it is difficult to predict with certainty how the Regulator will react to any given situation. The change in the regulator's approach has been driven by high-profile corporate failures such as BHS and Carillion.
Further scrutiny of the impact of corporate activity on pension schemes is coming too. The government announced in its response to the Protecting Defined Benefit Pension Schemes consultation that pensions regulation, and the powers of TPR, would be increased. This is expected to include criminal sanctions for individuals who demonstrate "wilful or reckless behaviour" in relation to pension schemes as well as unlimited fines for certain failures.
Management remuneration is not something that the regulator has traditionally focused on. However, the public message given by directors receiving million-pound pay packages in the years before ordinary employees have their pension promises cut is an uncomfortable one.
The public and media reaction to the BHS collapse resulted in the regulator placing dividends under even closer scrutiny, but the regulator has always had dividends on its radar. The government and the regulator may be tempted to break newer ground and take aim at corporate failures where the directors have been handsomely rewarded.
In particular, we live in a time where parliamentary select committees hold high-profile individuals and organisations to account very publicly, particularly when jobs are lost or pension promises unfulfilled. The logical next step for lawmakers would be to enshrine some of the principles coming out of select committee hearings into law.
The regulator has powers, if certain conditions are met, to look behind the corporate veil and impose liability for any defined benefit pension scheme underfunding on companies in a corporate group and, in certain situations, on directors themselves. One factor in determining if such powers can be exercised is whether it is reasonable to do so, which will include an assessment of the value of any benefit received by a person or entity from the sponsoring employer of the pension scheme.
The regulator is more active than ever and will not miss out on opportunities to take a tough approach if it presents itself. In light of this regulatory approach, and expected further regulation in the area, directors should have at the forefront of their minds the need to treat pension schemes equitably with other stakeholders when making corporate decisions. Pension considerations will now impact board-level decisions in almost every area of the business.
I expect corporate decisions to be increasingly analysed by the regulator over the next few years. We will be watching closely to see if the recent events with Thomas Cook galvanise the government to produce the much-anticipated legislation introducing the criminal sanctions and increasing the regulator's powers, even if that legislation will be too late to impact Thomas Cook's pension schemes.
Stephen Richards is a pensions partner at Stephenson Harwood
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