Stronger support package agreed for scheme following Regulator’s warning notice

The Pensions Regulator (TPR) has issued a regulatory intervention report detailing the stronger support package that it negotiated for the Northern Foods Pension Scheme after issuing a warning notice regarding possible exercise of its “moral hazard” powers.

Background

The principal employer entered into several significant business sales without the scheme receiving any of the proceeds from the sales.  The principal employer’s parent company had issued more than £600 million of bonds to finance its acquisition of the principal employer and the principal employer’s existing debt.  These were refinanced through subsequent bond issues with a substantial value.  To provide mitigation for the principal employer’s shrinking direct covenant, its parent company had agreed to put in place a partial guarantee for the scheme’s section 75 deficit (ie the shortfall in the scheme’s assets relative to the cost of securing all benefits by means of annuities).  The guaranteed amount increased with each business sale in proportion to the size of the business sold.

In 2020 the group began investigating options for redeeming the bonds due for repayment in 2021.  It entered into a substantial business sale.  The scheme received 30% of the net disposal proceeds and there was an increase in the amount covered by the parent company guarantee, but the majority of the sale proceeds were used in a refinancing, alongside funds raised from the issue of £475 million in new bonds.

TPR’s actions and the outcome

TPR opened a case to consider potential use of its “moral hazard” powers because it had become increasingly concerned about the reduction in strength of the scheme’s direct employer covenant.  Whilst some mitigation had been put in place, in the form of a partial parent company guarantee for the scheme’s section 75 deficit, TPR considered this inadequate on the grounds that it represented a less robust covenant for the scheme than direct recourse to a financially strong employer.  In particular, TPR was concerned that the reducing scale in the principal employer’s activities meant that it would be unable to support the scheme on its own.  TPR issued a warning notice both to the principal employer’s parent company and to other related companies.

Following the issue of the warning notice, the relevant parties agreed a package of measures with TPR, including: a different company in the group assuming the role of employer in relation to the scheme; substantially higher future contributions than would have been paid under the scheme’s previous schedule of contributions; an extension of the parent company guarantee to cover all ongoing liabilities including the full amount of the scheme’s section 75 debt; agreement that all of the parent company’s subsidiaries (including any acquired in future) would also provide guarantees for the scheme’s section 75 debt; and an agreement regarding the percentage of sale proceeds to be received by the scheme in the event of certain business sales in the future.

Our thoughts

This case is particularly noteworthy because it involved intervention by TPR in relation to a scheme where some level of mitigation had already been agreed in relation to the impact of corporate activity on the scheme.  Most previous reported interventions by TPR have involved situations where there has been no attempt by the parties to agree mitigation for the pension scheme.  This report signals that even where the parties have agreed a meaningful level of mitigation for the scheme in relation to corporate activity, TPR is still prepared to use its moral hazard powers if it considers the mitigation to be inadequate.  TPR’s report does not go into detail regarding the discussions which TPR had with the parent company.  It may be that the parent company saw the use of sale proceeds to refinance bonds rather than make additional pension contributions as an important means to maintaining the employer covenant.  If so, it would appear that TPR had little sympathy for such an argument.