Current legal issues

1
Current legal issues

• Peter Esam
• Philip Stear

2
Current legal issues

• Pensions Act 2004
• 11 June 2003 the story continues
• New commercial considerations for companies
• A new employer-trustee relationship

3
Current legal issues

• Winding up priorities
• Debt on the employer
• Moral hazard
• contribution notices
• financial support directions

4
Current legal issues

• Duty to notify Regulator
• Postscript
• LPI
• TUPE

5
Debt on employer- where are we now?

• Pre 11 June 2003 - MFR basis
• From 11 June 2003 - buy-out basis for solvent
  employer, on wind-up
• From 15 February 2005 - buy-out basis for all
  employers, on wind-up or liquidation

6
New law

• Debt arises
• when wind-up starts
• on insolvency
• notice to or from PPF, employer unlikely to
  continue as going concern
• on voluntary liquidation

7
New law

• Contingent on no scheme rescue
• if triggered by insolvency
• or by going concern notice
• Trustees control over timing restricted
• Potential debt-liability mismatch

8
Multi-employer schemes

• Currently, MFR basis
• PA 2004 - buy-out basis by default
• Implementation date?

9
Multi-employer schemes

• Orphan liabilities
• Transfers
• Financial support

10
Moral hazard

• Supplementary to the statutory debt regime
• Contribution notices anti-avoidance behaviour
• Financial support directions under-resourced
  employers - piercing the corporate veil

11
Contribution notices

• Power of the regulator to demand a contribution
• From an employer or a connected or associated
  person (includes a director who knowingly assists)

12
Contribution notices

• Where the person was party to an act or
  deliberate failure to act...
• occurring after 27 April 2004

13
Contribution notices

• the main purpose or one of its main purposes
  being
• to prevent recovery of section 75 debt
• otherwise than in good faith, to prevent section
  75 debt from arising or reduce its amount

14
Contribution notices

• Reasonable to impose liability

15
Contribution notices

• Emphasis on purpose
• the act or failure to act must be directed at the
  pension liability

16
Contribution notices

• Preventing a debt from arising
• Eg artificial transactional structures to
  prevent employer withdrawal

17
Contribution notices

• otherwise than in good faith
• eg pension scheme mergers arrangements with the
  object of ensuring that pension liabilities are
  paid as they fall due

18
Contribution notices

• Preventing recovery of a debt
• manipulating assets to remove value
• knowing that a statutory debt is likely to arise

19
Contribution notices

• Distributions to shareholders
• Sales of assets
• Note
• insolvency practitioner exemption
• individuals
• private equity funds

20
Financial support directions

• Employer is a service company, or insufficiently
  resourced
• net assets lt of buy-out deficit
• but another associated entity has net assets of
  that amount

21
Financial support directions

• Power to make all group companies responsible
• joint and several liability
• prescribed arrangements
• NB individuals not generally caught
• Private equity funds

22
Moral hazard clearance

• Anti-avoidance contribution notice will not be
  issued
• FSDs - in circumstances stated in the clearance
  application, FSD will not be made

23
Winding up priorities - from 6 April 2005

• 1. Benefits matched by certain annuities
• before 6.4.1997
• 2. PPF protected benefits
• 3. Other AVC benefits
• 4. All other benefits

24
Winding up priorities

• Buy-out basis
• Solvency irrelevant
• Statutory order covers all defined benefits
• May need to adjust benefits during wind-up

25
Winding-up priorities

• Money purchase benefits not covered by statutory
  priorities
• Subject to scheme rules?
• Or regulations may deal with them

26
PPF protected benefits

• 100 uncapped if over NPA or ill-health pension
  in payment
• 90 capped otherwise
• 2.5 LPI increase in payment for post-1997
  accruals
• Future revaluation of accrued pension 5 pa
  compound or RPI if less

27
Compensation cap

• Maximum expected to be 25k pa net of 10
  reduction
• Actuarially reduced if below age 65
• Increased in line with average earnings

28
Notifiable events - trustees

• Action leading to failure to recover debt in full
• Major scheme events
• More than one change of advisers
• Accepting extra liabilities without funding

29
Notifiable events - employers

• Employers and former employers remaining in group
• Action leading to non-payment of debt
• Ceasing business
• Redundancy programme
• Events related to solvency

30
Notifiable events - employers

• Any change of credit rating
• Change of control
• Change of CEO and FD

31
Postscript LPI

• 2.5 for DB
• Nil for DC
• DB do you need a rule change?

32
LPI

• DC benefits in hybrid schemes
• not a money purchase scheme
• and legislation requires benefits attributable
  to pensionable service to be increased

33
LPI

• But intention is to distinguish
• (DB) benefits attributable to pensionable
  service
• (DC) benefits attributable to payments

34
Postscript TUPE

• NOT a removal of the TUPE exemption
• The exemption means that
• on an asset transfer, there is no inherited
  occupational pension liability
• with some exceptions

35
TUPE

• An obligation to provide pension, triggered by
  the transfer
• DB or DC
• reference scheme test
• DB to DB equal value
• 6 matching contributions (basic pay)

36
Overview

• 11 June 2003 the trends
• Schemes pressure on funding towards buy-out?
• Deals pressure on price adjustment towards
  buy-out?
• Deals reluctance to take over DB schemes at all?

37
Overview

• Changing trustee-employer relationship
• New balance of power
• Concern with financial affairs of employer
• and whole group

38
Note

• These slides have been prepared as background
  for an oral presentation. They are not a summary
  of the law. They should not be relied upon in
  any way.
• March 2005