The Pensions Regulator (TPR) has reached an agreement with Coats Group plc in relation to two pension schemes sponsored by the group. The agreement secures extra funding for the schemes whilst allowing the employer to lift a restriction on dividends.
Reaching a compromise
As part of the settlement, the employer is committing an upfront cash payment of £255.5 million into the schemes in addition to strengthening the employer covenant through a full guarantee of the schemes’ liabilities.
The deal is significant with the benefits of around 24,000 current and future pensioners being affected.
"This deal culminates a process which has seen the TPR’s regulatory powers used successfully to safeguard member benefits whilst the employer will be free to issue dividends to shareholders."
It serves as a reminder of the statutory powers at the disposal of TPR, particularly in relation to ‘anti-avoidance’. This is seen as an important tool in meeting the TPR’s objective of reducing calls on the Pension Protection Fund (PPF).
To safeguard the benefits of members from being rolled into the PPF, TPR has a number of options that include:
- Contribution notices (CN) – such a notice may be issued to enforce payment of statutory debts by sponsors.
- Restoration orders – where TPR believe a transaction involving a scheme’s assets has been undervalued, they may issue an order to pay the remaining balance.
- Financial support directions (FSD) - where TPR believes the sponsor of an underfunded scheme is insufficiently resourced, they may look to the wider group of companies to support the scheme.
In 2013 and 2014, TPR issued Warning Notices relating to three different schemes sponsored by the group. These set out the case for exercising FSD powers.
Subsequent events at Coats Group plc, including changes to the directorship and an agreement not to distribute the net proceeds from investments to shareholders, preceded the company entering into negotiations with the trustees in early 2016.
More to come?
This deal culminates a process which has seen the TPR’s regulatory powers used successfully to safeguard member benefits whilst the employer will be free to issue dividends to shareholders (note: at the time of writing, a third scheme has yet to reach a deal).
It constitutes a relatively rare use of TPR’s powers. This issue has been much commented upon in recent times with some high profile media coverage. In evidence to parliament in May 2016, TPR observed that it has progressed 16 cases to the stage where a Warning Notice is issued, with an FSD being exercised a total of four times thus far.
Given the outcome, it will be interesting to see if TPR will apply its powers more often or more widely in the future.
This is a matter which appears to be gaining traction amongst legislators – on 21 December 2016, the Work and Pensions Select Committee published a report which included several recommendations to promote anti-avoidance. Ahead of a green paper due in early 2017, the Committee have recommended that the government consult on proposals to beef up tPR’s powers, including:
- Requirements for advance clearance of certain corporate transaction which could have a damaging impact on pension scheme funding, and
- The ability to set punitive fines up to three times the current level, a so-called 'nuclear deterrent'
Whether the government will be keen to augment TPR’s powers and responsibilities in such a fashion remains to be seen but 2017 will offer some fascinating arguments on the regulatory landscape.