Chris Edwards-Earl: Case is the first to involve an ongoing sponsor and fund in a contribution notice
A judgment came out in August which, whilst it passed under the radar for some, is the first of its kind.
Enforcement action by The Pensions Regulator (TPR) was upheld, and the amount was increased, by the Upper Tribunal (UT) (See: More than £2.5m returned to pension scheme after anti-avoidance action by TPR).
The case involved a contribution notice (CN), or an order to put money into an underfunded pension scheme that has suffered material detriment by the target's actions.
The CN was issued against a director and indirect shareholder of the sponsoring company, DFL. Value had been extracted over time, despite the weak employer covenant and pension scheme deficit.
So far, so unremarkable - how is this case ground-breaking? Because it is the first CN case where the pension fund and sponsoring employer were, and remain, ongoing. When one thinks of the cases TPR has fought pursuing CNs, and financial support directions, they have generally involved collapsed companies, insolvency processes, and claims to recover assets back for the schemes in wind up: Nortel, Bonas, Box Clever, Silentnight, Meghraj etc.
Despite the ongoing profitable trading of the sponsor, the circumstances in this case were compelling enough to issue CNs to individuals to make payments into the scheme, not just relying on stronger recovery plans and prudent valuations.
Why wasn't it good enough for TPR to push for an accelerated recovery plan (like with the MGN scheme)? The UT agreed with TPR that the payments out of the employer's money to its ultimate shareholders had increased the risk that payments to the scheme may not be forthcoming in the future, and this should be regarded as materially reducing the likelihood of pension benefits being received. Therefore, the statutory test was satisfied.
Tom Robinson KC, who acted successfully for TPR, refers to how the case is illustrative of TPR's vigilant approach. "It is clear that TPR may intervene earlier, before insolvency is on the horizon. This includes when the detrimental acts, or omissions, are increasing the risk of pension funds becoming underfunded, rather than having already caused this to happen - yet. With this approach in mind, more circumstances may be opened up for regulatory intervention."
Of course, any payment of a dividend or similar by a sponsor at a time when a scheme is underfunded is, by definition, money which is not then available for reinvestment into the operations of the company and which could have gone to the scheme. Surely, TPR is not of the view that the payment of all dividends whilst schemes are in deficit will justify intervention?
As with most things in life, however, this will come down to a question of degrees. In this case, the extraction of value was by way of what the UT described as a synthetic own share purchase funded by the employer - the employer's bank facility was used to fund a purchase of shares in the employer's parent to the benefit of the target (and other shareholders). The value extracted equated to a third of the net assets of the sponsor, at a time when, whilst the sponsor was solvent, it was not sufficiently healthy to build up that kind of value again for some time.
One could therefore distinguish between this case and cases where, whilst a deficit exists, the sponsor is nevertheless healthy with a strong covenant, predictable cashflow, and where the trustees enjoy security and fulsome information of the company's financial health. One would expect TPR to adopt a different approach in such cases, without issuing CNs, but perhaps focusing on the pace that the deficit is addressed, balanced against the security enjoyed by the trustees, making sure that the trustees are not treated worse than other creditors.
Chris Edwards-Earl is pensions partner at Stephenson Harwood
