A private equity group, and three individuals who worked for it, face a multi-million pound claim against them by the Pensions Regulator (TPR), after a court dismissed their attempt to bring judicial review proceedings against TPR.


Background

In its recent judgment in the case of Grace Bay II Holdings v The Pensions Regulator, the court dismissed a legal challenge to the Regulator's use of its "moral hazard" powers. The judgment itself is concerned with the correct legal procedure for challenging TPR, but the background shows TPR's willingness to use its powers to make multi-million pound claims against the parties involved in a corporate deal if it considers that the deal terms disadvantaged a pension scheme.

The deal which gave rise to the current case was the 2011 sale of the Silentnight business to a US private equity group for £19.2M under a "pre-pack" deal. The private equity group did not take the pension scheme, which was left with a deficit and no solvent employer. Subject to the outcome of TPR's claim, the scheme will fall into the Pension Protection Fund, leaving many of its members with much lower benefits than they were expecting.

Following an investigation, in 2014 TPR issued a notice against the private equity group and three individuals who worked for it, warning that it intended to use its moral hazard powers to require them to pay £17.16M into the scheme. It alleged the scheme had lost out by that amount due to the business being sold at an undervalue. In 2016, after receiving representations from interested parties, including the scheme trustees, TPR served a second warning notice. This time it sought payment of a higher sum, the value of the scheme's total deficit at the relevant time, arguing that the employer company could have remained solvent through re-financing so the pre-pack was unnecessary.

Comment

The final outcome of this case is not yet known. TPR's Determinations Panel (which operates separately from its case workers) will need to decide whether to make an order on the basis sought in either of the warning notices, and its decision could then be challenged in the courts through a different procedure to the judicial review sought in this case. But whatever the final outcome, over five years on from the original pre-pack, those involved face the prospect of being made liable for multi-million pound pension liabilities, having already spent £7M in dealings with TPR to date, and with further costs of dealing with the second warning notice, which they estimate at £2M-£4M.

The pensions aspects of the Silentnight deal attracted a lot of media attention. Since then, we have seen the collapse of BHS, with TPR coming in for considerable criticism for failing to take action more quickly to protect the BHS pension scheme. Just before Christmas, a parliamentary select committee called for greater TPR powers, and a requirement to seek TPR clearance for some deals. (A Government Green Paper on pensions is due this quarter.) Thus the current direction of travel seems clear: an increased appetite on the part of TPR to take regulatory action where it sees a pension scheme as having been disadvantaged by a corporate deal, and potentially greater power to do so.

What is the key message for those involved in corporate deals? Ensure that pension deficit issues are addressed in a way that will withstand TPR scrutiny!

Key contacts

Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

View profile
Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

View profile
Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

View profile
Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

View profile