Member Article

In this October edition of Pensions Bulletin we consider a recent Government paper on surplus payments and highlight that schemes must take action if they wish to preserve a power to pay surplus to a sponsoring employer in the future. We also comment on the impact of the latest developments in the Sea Containers case on the use of the Regulator's power to issue Financial Support Directions.

Surplus - DWP options paper & action required to preserve power to pay

Whilst surplus may not be uppermost in most schemes' consideration at the moment, payment of surplus to employers from defined benefit schemes is an issue that has recently been considered by the Department of Work and Pensions (DWP) amidst apparent concern in the industry over the existing rules. At the beginning of October, the DWP completed an informal process whereby they issued a discussion paper to "selected key stakeholders" seeking views on options for amending the legislation governing surplus. The DWP stressed in their correspondence, however, that the process being undertaken (which was a follow up to an earlier consultation) was not a formal public consultation.
Since 6 April 2006, payment of surplus to an employer is prohibited unless the scheme is funded to a full buy-out level and the trustees are satisfied that a payment is in the interests of the scheme's members. It is also a requirement that the scheme rules must allow payments to be made to the employer from the scheme’s funds. Options set out in the DWP discussion paper that are of particular interest include whether it would be helpful to clarify the members' interest requirement, whether consideration should be given to lowering the full buy-out threshold (and taking this point further, whether the threshold should only be lowered in schemes which are open to new members as an incentive to employers to keep their schemes open). The discussion paper concluded with a general invitation welcoming any other suggestions that those being consulted may wish to make.

We shall keep you updated if there are any further developments in this area. In the meantime, however, trustees and sponsoring employers should be aware of the impact of particular provisions of the Pensions Act 2004, which have implications for payment of surplus to sponsoring employers. These provisions mean that it will only be permissible for a payment of surplus within an occupational pension scheme to be made to a sponsoring employer (even if the power already exists in the scheme rules) where the trustees have made a resolution effectively re-activating the power.

Crucially, this is not something that schemes can ignore until such time as they may wish to use the power, as any resolution must be made before 6 April 2011. If the trustees of a scheme do not resolve to reactivate by 6 April 2011, a discretion under the rules to make payments of surplus to the employer will be lost. Trustees and sponsoring employers should consider this issue now and, having taken advice, decide whether to resolve to "re-activate" any such power under their scheme rules.

We will be happy to provide more detailed tailored advice on this issue and to draw up any necessary amending documentation if required.

Regulator's powers – Sea Containers

As you may recall from our Pensions Bulletin in February 2008, the Regulator issued two Financial Support Directions (FSDs) against Sea Containers Limited (SCL) in February 2008. This was the first example of the use of the Regulator's anti-avoidance powers in terms of the Pensions Act 2004. SCL was the Bermudan parent company of a global network of subsidiary companies. One of the subsidiaries (Sea Containers Services Limited) was the principal employer of two UK defined benefit pension schemes. The SCL group had filed for Chapter 11 bankruptcy protection in the USA in 2006.

The trustees of the two schemes were involved in ongoing negotiations with SCL and eventually reached a settlement agreement with the SCL group providing that the trustees would receive a sum representing the full section 75 buy-out costs of the schemes' liabilities. Trustees of one of the schemes had, however, previously raised concerns with the Regulator regarding the group's ability to support the scheme and the Regulator eventually issued the FSDs against SCL. Other creditors of the company, however, raised an action in the US Bankruptcy Court for the District of Delaware seeking to overturn the agreement objecting to the validity of the FSDs in Chapter 11 proceedings. The Court rejected the creditors' objections, upheld the trustees' unsecured claims on a buy-out basis and concluded that it was reasonable to calculate the Schemes' claims as though the FSDs were valid. The Court held that the FSDs did not amount to an attempt to collect a debt or assert a claim against the debtors, but that the FSDs did provide guidance as to the needs of the Schemes and therefore the pertinent considerations in valuing the Schemes' claims. In a further boost for the Regulator, the Court acknowledged that the FSDs reflected that the Regulator was fulfilling its statutory objective of ensuring that pension schemes are properly funded and maintained. It remains to be seen whether a US bankruptcy court would reach a similar decision were the parent company to be a US incorporated company, rather than a Bermudan company.

 

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