Trustee briefing

July/August 2010

Regulator issues first Contribution Notice

The Pensions Regulator issued its first Contribution Notice at the end of June, demanding £5m be paid into the pension scheme of textile machinery business Bonas Group – which transferred into the Pension Protection Fund in November 2008 – by its parent company Michel Van De Wiele (VDW).

The Regulator’s Determinations Panel found VDW had avoided its pension liabilities by placing Bonas into a pre-pack insolvency, which is a deal put in place before a company enters a formal insolvency process. The Regulator said that VDW had “not engaged openly with pension trustees or the Regulator”, although VDW has appealed the decision.

Gary Tansley, a consultant at Hamish Wilson, said VDW was “seemingly, fully aware” that its actions in transferring the pension scheme to the PPF contravened the anti-avoidance provisions of the Pensions Act 2004, necessitating the Contribution Notice, which requires a specified amount of money to be paid into a pension scheme by an individual or a company.

Robin Simmons, a partner at the pensions law firm Sacker & Partners, said the Contribution Notice should serve as “a warning shot” to other companies looking at pre-pack administrations, although the legal and regulatory “hurdles to be jumped” before a Contribution Notice could be issued meant their use was likely to remain rare.

“The key is that there must be an act (or failure to act), the main purpose of which is to prevent the recovery of a statutory debt (under section 75 of the Pensions Act 1995) that might become due to the pension scheme. In addition, it must be ‘reasonable’ to impose the liability,” he said.

In the Bonas case, Simmons said the Regulator’s Determinations Panel had found VDW had concealed the fact that it wanted to put Bonas into administration from the pension scheme trustees and the Regulator, with the goal of avoiding incurring a liability in relation to Bonas’ pension scheme.

“This may all be the beginnings of the Regulator baring more of its regulatory teeth. And employers would be foolish to ignore the messages that this determination sounds out,” Simmons added.

The Regulator has warned companies that despite its preference for working with employers and trustees to reach equitable solutions, it would not shy away from using its moral hazard powers and issue further Contribution Notices in future. It added using its moral hazard powers in the past had led to “hundreds of millions of pounds” being paid to pension schemes.

BA trustees agree recovery plan

Trustees of British Airways’ (BA) two pension schemes – the open New Airways Pension Scheme (NAPS) and the closed Airways Pension Scheme (APS) – have agreed a recovery plan with the company that will enable NAPS to remain open to existing members.

The deal will see BA pay a total of £330m a year into the schemes, rising with inflation, until 2023 for APS and 2026 for NAPS to address a combined deficit of £3.7bn. This maintains BA’s annual contributions at their current level, although if the airline’s year-end cash balances exceed £1.8bn, it will make additional payments.

The schemes will also be provided with £250m of additional security over BA’s assets which would become payable should the airline fold.

British Airways chief financial officer Keith Williams said: “The trustees understand that the airline is unable to increase its contributions in the current financial climate but we have agreed a recovery plan that avoids closing the pension schemes, gives NAPS members choice over their future pension accruals, and increases the prudence of the assumptions employed in managing the scheme.”

The recovery plan still needs to be submitted to the Pensions Regulator for approval, but Williams said the watchdog’s initial response to the plans had been “positive”.

BA’s proposed merger with Spanish airline Iberia had been under threat earlier this year because of the deficit – and Iberia also has yet to give its seal of approval to the recovery plan.

Separately, trustees of the scheme signed a £1.3bn buy-in deal with Goldman Sachs subsidiary Rothesay Life. The buy-in covers approximately 20% of the liabilities of the APS, which will see Rothesay Life insuring the scheme’s benefits, although the assets are retained by the fund.

Section 75 judgement brings clarity

The verdict of the long-running Pilots National Pension Fund (PNPF) Trust Company Ltd v Geoff Taylor and Others has clarified a number of issues around responsibility for deficits and section 75 payments in multi-employer schemes.

The first of these applies to ‘triggers’ for a section 75 debt payment. Section 75 relates to multi-employer schemes and in particular the circumstances in which an employer exits a multi-employer scheme. On exit, an employer must make a one-off payment to the scheme to exit its obligations under the 2004 Pensions Act.

While it is the duty of trustees to recover such payment, the point at which the one-off debt is triggered has been unclear. Different cases have identified it as the point at which a scheme no longer has any active members, or the far wider definition of the point at which there were no more active, deferred, pensioner members or anyone ‘eligible for the scheme’.

“The judge in the PNPF case took a middle ground,” said Matthew Bullen, senior associate at law firm Hogan Lovells, who represented the corporate trustee of the PNPF. “It was defined here as the employer ceasing to employ anyone who is eligible for the scheme. But it is very difficult for trustees to know that. They will have to look carefully at their schemes and will need to write to employers within a multi-employer scheme to find out.”

Although section 75 regulations were revised in April 2008, with ‘trigger points’ defined as an employer having no more active members, Bullard said “it would be wrong” to conclude the PNPF case was “just of historical interest”.

The case also brought clarity on whether trustees can ask for funding from a sponsor once a recovery plan is in place, in the event of the employer covenant weakening or investments failing.