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Pensions Regulator secures extra benefits for members

There has been some scepticism in the press about the Pensions Regulator's ability to protect the benefits of pension scheme members where the parent company is located overseas. Paul Gibbon, customer support manager at the Pensions Regulator, illustrates how the regulator can work with companies based abroad to secure extra benefits for members.

Our powers

The Pensions Regulator has powers to ensure companies do not avoid their pension liabilities, no matter where the business is based.

Under the Pensions Act 2004, we have the power to issue a contribution notice or financial support direction, in circumstances where an employer has deliberately taken action (or failed to act) in order to avoid its pensions liabilities.

A contribution notice can be issued to the employer or associated individuals party to the act, requiring an amount up to the full buy-out debt to be paid into the pension scheme. Where an employer is a service company or insufficiently resourced to support its pension scheme, and is part of a group, we can issue a financial support direction to others within the group to underpin the pension scheme of the weak company.

Where a company wants reassurance that a particular transaction will not fall foul of anti-avoidance legislation, it can apply to us for clearance.

Our primary aim is always to work closely with employers and trustees where there may be a problem or disagreement, to facilitate discussions and ensure a satisfactory outcome is achieved. We will only consider using our powers as the last resort, although we will implement them where necessary.

Although enforcement overseas is on a case-by-case basis, we believe that the majority of companies, including those located abroad, wish to stand behind their pension schemes. Through our clearance process, especially in the area of mergers and acquisitions, we have already successfully worked with several international companies with UK subsidiaries where they have been committed to supporting the pension scheme, and complying with UK legislation.

Case study

Having a clearer understanding of UK pension legislation can prompt an overseas company into taking positive action. In this anonymous case study, we examine how we influenced the South American parent company of a UK subsidiary to honour its pension commitments.

The pension scheme of the UK subsidiary commenced winding up in March 2003, prior to new regulations on scheme wind-ups coming into force. Since June 2003, solvent employers choosing to wind-up their scheme have had to fund the scheme to the full buy-out level, i.e. the cost of buying all members an annuity with an insurance company equal to their accrued benefits. Before June 2003, schemes in wind-up with a solvent employer legally only had to be funded to a 100 per cent of the minimum funding requirement (MFR). In practice, this meant that scheme members still stood to lose a percentage of their benefits, as 100 per cent MFR funding is usually well below the cost of full buy-out.

In this case, the pension scheme was well-funded on an MFR basis when it commenced wind-up. This allowed the trustees to offer members transfer values of more than 160 per cent of the MFR level. However, the members were still going to receive reduced benefits. In November 2003 a member complained to the Pensions Regulator's predecessor Opra about the level of scheme funding. Opra contacted the company by post several times to see if the employer could afford to pay more into the scheme, but no other action was taken.

In 2005, the case was passed over to the new Pensions Regulator. We took a proactive stance by engaging with the company and pension scheme trustees. Through face-to-face discussions we were able to explain our powers and jurisdiction, and highlight the importance of protecting members' benefits.

At our behest, the overseas parent company reviewed the level of funding on wind-up and the reduced payments made to members. They assessed the level of benefits provided to members compared to the previous pension scheme entitlements before the scheme started to wind up.

In October 2005, following the review the company agreed to make an ex gratia payment to members to be used to provide them with additional pension. This additional cash represented more than 50 per cent of the scheme assets and meant that the members would receive benefits broadly equal to their full pension entitlements. The company were conscious of the increasing cost of pension promises and acknowledged that the previous payments did not provide for this. The negotiations with the Pensions Regulator confirmed that they should follow their conscience and fulfil their moral obligation to the scheme members.

Conclusion

Although in this instance the company was not obliged by law to fund the scheme above the 100 per cent MFR level (since the wind-up commenced before June 2003), they complied with the spirit of the new legislation on solvent employer wind-ups. This case study also demonstrates the ability of the Pensions Regulator to influence companies based overseas to honour their pension commitments.

By working with us, the overseas parent company was able to reach an equitable solution with the trustees, which directly benefited the pension scheme members. The company recognised our jurisdiction and interest in this case, and through our active engagement a positive result was achieved.

Ultimately, it makes good business sense for an employer to stand behind its pension scheme and ensure it is properly funded. Such action can help restore employee confidence in pensions, improve staff relations, and enhance the company's reputation as responsible employer.

Published: The Pensions Regulator website, March, 2006