Was TPR's settlement for the Carrington Wire pension scheme evidence of its limited powers against overseas firms? Natasha Browne investigates
Last month the Pensions Regulator (TPR) agreed an £8.5m settlement with two Russian steel firms over the Carrington Wire pension scheme. Even though a third target is being pursued for recoveries too, the watchdog is clear it will not claw back enough to keep the scheme out of the Pension Protection Fund (PPF).
The case has been ongoing for four years. The Yorkshire-based firm began to wind down its business in 2009, when it was owned by Severstal. The pension liabilities were guaranteed by Severstal's parent company. Less than a year later the steel giant sold Carrington to a shell company.
The sale terminated the Russian firm's pension guarantee when the scheme had a deficit of around £20m. Neither TPR nor the scheme's independent trustee firm –Pan Trustees – had been told about the sale. This prevented them from making sure the new sponsor had the resources to support the scheme.
The trustee firm failed in its attempt to get Severstal to voluntarily contribute to the pension after Carrington was sold. This forced Pan Trustees to push TPR to exercise its moral hazard powers. In November 2012 the watchdog issued the former sponsor with a warning notice that signalled its intention to hit multiple targets with contribution notices.
The matter was passed to the regulator's determinations panel and a hearing had been scheduled for mid-January. On the eve of the hearing, however, TPR accepted the offer of £8.5m from PAO Severstal and OAO Severstal-Metiz.
PP understands the funds were paid in very quickly after the agreement was reached. However, the amount recovered was less than a third of the sum required to plug the scheme's £27m deficit at May 2014.
Interestingly, a contribution notice can be issued against a company or an individual. The section 89 report detailing the facts of the case may confirm which TPR is pursuing. Linklaters partner Mark Blyth observes: "An individual would have to have millions of pounds of assets to be able to satisfy a contribution notice."
A poor deal
Questions linger over why the watchdog was unable to get a better deal for members, or indeed, the PPF. However, lawyers say it may be because of the difficulty of dealing with overseas businesses.
Norton Rose Fulbright partner Lesley Browning (pictured) says: "What is quite striking is that there were three potential targets for the use of the regulator's powers. And it's only two of them – the overseas Russian companies – who've proffered the settlement. I'm not sure how culpable TPR saw each of the entities as being or whether they were looking at joint and several liability for the full amount, in which case why didn't they push for the full amount?
"I think it's quite difficult because there are probably some question marks over how easy it would be to enforce a direction from TPR to overseas companies, particularly companies that are not in the EU.
Browning says the regulator will have weighed up the pros and cons of settling. "Maybe it decided to accept the settlement offered on the basis that at least it gives certainty now, rather than incurring more costs getting to the stage of issuing a direction and then having to leave the trustees to enforce that against two Russian companies."
Charles Russell Speechlys head of pensions Penny Cogher echoes this sentiment. She says: "There is the interesting question of whether TPR exercised its powers proportionately in this case, but it is harder to comment on this without knowing more of the detail.
"For example, what level of professional fees did TPR incur and are they proportionate to the sum recovered? Should any sum recovered be regarded as a victory given that actually getting a contribution notice issued (contribution notices have only been issued in respect of two cases since TPR opened its office in 2004) and then enforced in Russia is still all rather novel and so unattractive in legal terms? This is legal code for potentially very costly with an uncertain legal outcome.
"We don't know how much more was needed to keep the scheme out of the PPF, but how realistic was a more substantial settlement? Any payment helps to resource the PPF and so reduces the risk-based levy other DB schemes pay. And let's face it, it's not uncommon to find that the pension arrangements of some of the UK's older industries have entered the PPF."
A pragmatic decision
Blyth says it was a shame the case was not heard because it would have been the first to deal with a contribution notice under the widened jurisdiction on material detriment. "There's a lot of uncertainty as to what the scope of material detriment means. I don't know whether that uncertainty also played into the settlement –that's guesswork," he says.
But he adds: "What this does show is that the regulator will rightly be pragmatic about what can be recovered. The regulator needs to look at what it will recover based on the merits and also the difficulty of recovery, be that available assets and the location and jurisdiction that the target is in."
Pan Trustees, which has been the sole independent trustee of the scheme since October 2010, said it was "disappointed" that the recovered sum would not be enough to keep the scheme out of the PPF. Charles Russell Speechlys' Cogher can sympathise.
She says: "They are entitled to think they've come off badly given the sheer size and importance of PAO Severstal, one of the world's leading steel and steel-related mining companies, with numerous glittering awards to its name, and OAO Severstal-Metiz, the flagship of the Russian metalware industry, in Russia and globally."
Cogher notes that the Russian firms have experienced growth since Carrington Wire went into insolvency. She adds: "Perversely, it is perhaps this growth and greater global position that has led both companies to the negotiating table – they both have a considerable reputation to lose.
"It may even have been this, rather than a fear of TPR's teeth – its ability to enforce its moral hazard powers – which they and their advisers may not have been that convinced about, which resulted in the settlement payment. We just don't quite know but certainly there has been a game of poker, rather than Russian roulette, going on."
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