Pensions World

Terry Saeedi and Ruth Bamforth, Eversheds, highlight the main regulatory challenges facing overseas employers with UK DB schemes

We live in a world of ever increasing globalisation. Multinational corporate groups are just one example of this. As business continues to operate across multiple jurisdictions, it is increasingly important for overseas employers to understand the implications for themselves and their wider corporate group of any UK defined benefit (DB) pension scheme.

UK DB pension schemes, the majority of which are in deficit, are very highly regulated. UK sponsoring employers often struggle with the regulatory burden of operating such schemes. The difficulties for overseas employers are magnified because they may not fully appreciate the serious implications that having a UK DB scheme within the corporate group may pose.

Correct identification

In general terms, much of the UK DB regulatory regime applies to a scheme’s statutory employers. Employers that are not statutory employers may still have obligations in relation to the scheme, but these will arise as a result of contractual arrangements or as a result of the exercise of the Pensions Regulator’s powers (TPR). It is crucial for an overseas employer to understand whether or not it is a statutory employer or is a scheme employer in the wider sense.

Statutory employers TPR’s July 2011 statement “Identifying your statutory employer” requires trustees to identify employers who are legally responsible for:

• meeting the scheme funding requirements
• paying the employer s75 of the Pensions Act 1995 debt if certain events (broadly, insolvency, cessation events or wind up) happen and
• triggering entry into the Pension Protection Fund (PPF).

Once the statutory employers are identified, the trustees will be required to notify TPR who they are on their scheme return. TPR has confirmed only those employers who are responsible for scheme funding, s75 debts and who can trigger PPF entry are to be notified on the scheme return. There is no requirement to identify employers who do not satisfy all the criteria.

Clearly the correct identification of statutory employers is crucial. If statutory employers are incorrectly identified, there may be regulatory consequences for the scheme; for example, employer covenant assessments may be inaccurate which could in turn affect scheme funding and the scheme may ultimately be ineligible to enter the PPF.

The identification of a statutory employer is not straightforward. This is because pensions legislation does not contain a single definition of “employer” and, indeed, those definitions have changed over time. For schemes open to accrual, the statutory employers will include those employers with active members. For schemes closed to accrual or which have employers who no longer have active members – the so-called “former employers” – the position is much more complicated. This issue is particularly acute in relation to the s75 regime.

This regime has been subject to much amendment over the years. Not only has the definition of “cessation employer” been amended but so too has the criteria by which an employer may be considered a former employer with the result that it is off the s75 hook. The difficulties with the definition of “former employer” was one of the issues considered in PNPF Trust Company Ltd v Taylor.
Whether or not an overseas employer is a statutory employer is a matter of fact to be determined in each case. It may be that the overseas employer is well aware of its status. However, the position may not be so straightforward where there has been a history of employers joining and departing from the scheme.

Scheme employers An overseas employer will not be a statutory employer where it has never had any employees in the scheme, but yet it may still be an employer with obligations towards the scheme (typically where the employer is the principal employer).

Scheme rules place obligations on scheme employers. Examples of these obligations may include funding and contingent assets (other than in accordance with the statutory scheme funding regime) or instances where the employer has been nominated by one or more other scheme employers to take decisions or be consulted on matters on their behalf.

An overseas employer may take on obligations which are outside the scheme’s rules. An example is to provide PPF-compliant contingent assets to reduce the scheme’s PPF levy.

It is key, therefore, that any overseas employer understands whether or not it has any obligations in relation to the scheme and, if it does, the extent of those obligations.

Financial support direction

TPR is concerned to ensure that DB schemes are properly funded and supported. The statutory funding regime requires statutory employers (including relevant overseas employers) to fund the scheme. In addition to the funding regime, TPR’s power to impose financial support directions (FSD) requires the strongest employers in the corporate group to stand behind the obligations of weak scheme employers even where the strong employers have never had employees in the scheme.
TPR may issue an FSD against the employer of the scheme (or an entity connected or associated with the employer) which is either a service company or is insufficiently resourced and where the employer participates in an underfunded DB pension scheme.

An FSD requires the recipient to put in place Regulator-approved financial support for the employer’s obligations. The support must remain in place until the scheme winds up. TPR may only impose an FSD where it considers it reasonable to do so.

The cases where TPR has sought to exercise its FSD powers up to now have been in relation to overseas employers. The first FSD, issued in 2007, related to the Sea Containers schemes. The only other FSD cases to date relate to the insolvency of the Nortel and Lehman groups. Together these cases highlight the issues which can arise in relation to enforcement of an FSD against an overseas employer.

In the Sea Containers case, the UK employer was a service company controlled by a Bermudan parent (SCL). Once the Regulator determined that it was reasonable to issue an FSD, various companies in the Sea Containers group filed for US Chapter 11 bankruptcy. After much litigation and negotiation, a settlement was agreed between SCL and the schemes’ trustees. The US courts and TPR approved this agreement. It is important to note, however, that FSD enforceability was not considered by the US courts.

In the Nortel and Lehman cases, TPR issued FSDs against companies in various jurisdictions including the UK, the US and Canada. The main issue in these cases is whether an FSD is enforceable in and outside the UK where the targets are in insolvency proceedings. In October 2011, the UK Court of Appeal upheld the High Court’s December 2010 decision that TPR can exercise its anti-avoidance powers against a company during insolvency proceedings and that the liability ranks as an expense of the insolvency. Leave to appeal to the Supreme Court has been given.

The question of enforceability in overseas jurisdictions is largely untried. The imposition of an FSD itself does not create an enforceable liability – TPR must determine to impose a contribution notice (CN) for non-compliance with an FSD. The CN is a debt, but it would still be necessary for the trustees to obtain a judgment in the UK courts which would then be enforceable overseas. TPR considers that there would be little difficulty enforcing judgment in the EU, but that other jurisdictions may be more problematic.

In other countries such as the US, where there is no reciprocal treaty enforcing civil judgments, the decision of such courts to recognise the claim is at their discretion.

The problem may be that the trustees would be attempting to enforce a judgment which emanates from the powers of TPR and legislative provisions, ie a statutory debt, rather than a standard civil debt. This issue has not been tested to date – the US and Canadian Nortel cases were not concerned with this point.

Conclusion

Employer obligations in relation to UK DB pension schemes are neither transparent nor static. It is crucial that all employers (including overseas employers) within a corporate group with such a scheme understand their pensions obligations and monitor changes within the group that may expose them to the risk of regulatory intervention.