Chris Edwards-Earl
As the pensions industry is aware – due to constant updates, webinars and, even in some cases, direct intervention – the Pension Schemes Act 2021 widened the circumstances in which The Pensions Regulator (TPR) can use its moral hazard powers (principally contribution notices (CNs) and financial support directions) and granted TPR stronger powers to investigate and sanction wrongdoing.
The potency of the new powers and the high-level guidance released to the market led to uncertainty over how TPR would wield these new powers. TPR has always preferred to guide by example, however, and over time we are likely to see case reports published by TPR providing insight into what the new era will look like. Details of two recent cases have been made public by TPR, each from spring of this year, which are worth profiling.
SMT Scharf AG
SMT Scharf AG (Scharf), a German parent company to UK subsidiary Dosco, sold Dosco to a management buyout company in 2013. The management buyout company, Dosco Mining Ltd, had no reasonable prospect of being able to support the business. Dosco Mining Ltd then collapsed eight months after the sale and the scheme entered an assessment period for potential Pension Protection Fund entry.
TPR argued that Scharf neglected the scheme when selling it to a shell company without the finances required to support the scheme. Additionally, the chief executive (CEO) of Dosco likely acted on a financial incentive offered for selling the business. TPR argued that this demonstrated a clear disregard for the scheme and its members.
The regulator issued a £2m CN against Scharf and negotiated a £130,000 settlement with its CEO so as to provide more resources for the underfunded pension scheme. Interestingly, this was the first time the determinations panel awarded additional sums for lost investment returns and interest.
Meghraj Financial Services
Meghraj Financial Services Limited (MFSL) was sponsoring employer of a UK pension scheme, Meghraj Group Pension Scheme. MFSL was the sole legal owner of Meghraj Properties Limited (MPL), which owned shares in a joint venture company in India (Indian JV). MFSL entered liquidation in 2014, when the scheme's debt was estimated at £5.85m.
In 2014, sale proceeds from an Indian JV were paid directly into a nominee company, Paramount Properties Limited (PPL). This deviated from the previous course of business, whereby MPL received the monies and paid most of it to MFSL. However, an agreement was made in 2012 outlining that the Indian JV sale proceeds would go to PPL and that MFSL had no entitlement to the proceeds. TPR argued that this effectively deprived MFSL of the sale proceeds and put them out of reach of the pension scheme. It therefore met the "material detriment" test under TPR's moral hazard powers.
The panel determined that the 2012 agreement should not be regarded legally-binding, and a CN was issued for over £3m (the sale proceeds from the Indian JV paid into PPL).
Key takeaways
The way in which TPR wrote about these cases and highlighted elements of them may prove useful for practitioners operating under the new regime. For example, TPR emphasised that Scharf did not apply to it for clearance for the sale and only told the trustee about it afterwards - both issues which TPR has emphasised as being important under the new regime, particularly the latter.
"Communication" with trustees and TPR, as well as "mitigation" of impact on schemes, are the two watchwords for avoiding CNs.
Both recent cases also evidence TPR's willingness to protect UK pension schemes regardless of their size. Although these are not high-profile prosecutions or penalties, these cases do suggest that TPR is becoming more confident to pursue smaller matters. It will therefore be important for schemes of all sizes to take note of TPR's new powers and implement effective internal governance to avoid the scrutiny and sanctions of TPR. The regulator has had a history of getting bogged down in large-scale cases, prone to 'scorched earth' litigation - targeting smaller schemes where behaviour has been inappropriate, securing a settlement and moving on, could be the new approach.
These cases also exemplify TPR's growing willingness to move against corporate groups with overseas interests. The fact that TPR pursued a German company and an Indian JV shows how foreign protagonists are not an obstacle for TPR (consider also the Silentnight case). This trend seems likely to continue.
Chris Edwards-Earl is pensions senior associate at Stephenson Harwood
