Regulatory and Litigation Advisory
As the Pensions Regulator becomes more active in exercising its powers and seeks to engage more extensively with trustees, we are increasingly helping trustees and sponsors understand and respond to regulatory intervention, including providing expert witness advice.
The Pensions Regulator (TPR) continues to increase its active role in UK defined benefit pension schemes, in line with its objective to be “clearer, quicker and tougher”.
TPR has a number of tools which it can use. Its Contribution Notice (“CN”) and Financial Support Direction (“FSD”) powers give it a far-reaching ability to pierce the corporate veil and require financial support from third parties (both individuals and corporates). These are known as TPR’s ‘moral hazard’ powers.
TPR also has certain funding powers, including the power to set contributions and technical provisions in certain circumstances. Its investigations into the appropriateness of using its funding powers will often commence through either proactive or reactive engagement in the context of a scheme specific funding valuation.
In order to use these powers, TPR must be satisfied that a number of statutory tests are met and/or that the imposition of its powers is reasonable.
TPR has generally used its moral hazard powers in respect of relatively poorly funded schemes that have also been subject to corporate events (such as a restructuring, or material levels of dividends) or an insolvency event. However, the next funding code could see TPR broadening its reach with a renewed focus on stakeholder equitability and funding plans lacking sufficient ambition.
TPR is likely to commence a regulatory investigation into using its funding powers in situations where it does not believe a valuation agreement is appropriate in the circumstances of the scheme and/or the sponsor.
The most likely outcome of a regulatory investigation is a negotiated settlement between the parties. However, if TPR’s moral hazard powers are ultimately used, a CN will require a direct contribution to the scheme while an FSD will require a more general ‘financial support’ arrangement to be put in place for the scheme.