The situation is all too familiar for many pension scheme trustees and employers:
- a funding deficit which continues to grow;
- an employer which is becoming increasingly less able to support the scheme; and
- disagreements between the trustees and employer over the level of deficit repair contributions (DRCs) which are affordable.
On 2 June 2017 the Pensions Regulator (TPR) issued its report on the way in which these problems have been resolved for the Hoover (1987) Pension Scheme.
The scheme had been struggling for some time with the trustees and employer unable to reach agreement on the scheme’s March 2013 actuarial valuation. In particular, the parties could not agree on the level of DRCs which the employer could afford.
Clean up attempt no. 1
The employer approached the Regulator in 2015 to propose a regulated apportionment arrangement (RAA). An RAA enables an employer to stop participating in a defined benefit scheme and for the debt that would then otherwise be due from it to be apportioned to another company, provided that certain conditions are met. Hoover’s RAA proposal was rejected on the basis that the necessary statutory conditions for an RAA were not met; in particular, it was not felt that the employer’s insolvency was inevitable within one year.
The parties continued to explore ways of restructuring the employer’s business and its liability to the scheme but were still unable to reach agreement.
The Regulator intervenes
At this point (almost two years after the valuation should have been completed) the Regulator decided to intervene by exercising a power which it has held since April 2005 but has never previously used.
Section 71 of the Pensions Act 2004 enables the Regulator to direct an appropriately skilled person to produce a report on any matter which is relevant to the Regulator when exercising its functions.
In this case the Regulator instructed an expert to review the employer’s financial position and report on the level of DRCs which were affordable. The report concluded that the employer’s position had weakened and that there were no adequate DRCs which were affordable without parent company support. The parent company was under no legal obligation to provide this support and duly refused to do so.
Clean up attempt no. 2
Hoover’s business continued to decline to the point where insolvency was becoming inevitable. A second RAA was proposed in early 2017 and, after considering all the relevant factors, the Regulator concluded that an RAA was “an appropriate and reasonable course of action” which would lead to “a better outcome for the scheme than would otherwise have resulted from an uncontrolled insolvency.”
What does this tell us?
The Regulator states that RAAs remain extremely uncommon and will only be approved if all the necessary tests are satisfied and it is reasonable in the circumstances. However, what we do learn from the Hoover case is that the Regulator may be willing to intervene to force trustees and employers to consider the issues in a way that it has not previously done.
Once the dust has settled on Hoover, it will be interesting to see whether the Regulator’s experience of exercising this power will lead to a more pro-active approach when it is faced with trustee/employer deadlock in other situations in the future.
This blog post was written by Stephen Maynard. For further information, please contact:
Stephen Maynard, associate, Pensions
T: 0161 836 7792