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Avoiding pensions liabilities: Opra issues guidance
by Ian Neale 19/12/2004 Printer-friendly version of this page
Opra Update 10 (17 December 2004) provides guidance for employers and trustees on how Opra is seeking to reduce the risk to scheme members and the Pension Protection Fund (PPF) of pension liabilities being avoided. From 6 April 2005 Opra's successor, The Pensions Regulator (TPR), will have new powers under the Pensions Act 2004 (PA 04) to deal with these funding issues:
- Contribution notices (PA 04 ss. 38 - 42)
These will allow TPR to recover when reasonable an amount up to the full statutory debt from one or more persons who were involved in an act or failure to act after 26 April 2004 which had as one of its main purposes the avoidance of pension liabilities. The amount would be payable to the trustees of a scheme (or to the PPF if it has assumed responsibility for a scheme).
- Financial support directions (PA 04 ss. 43 - 51)
These will require provision of financial support to an underfunded scheme. Financial support directions may be issued where TPR concludes that the sponsoring employer of a scheme is either a service company or is insufficiently resourced. In deciding whether it is reasonable to issue a direction TPR will have to consider a range of relevant factors.
- Restoration orders (PA 04 ss. 52 - 56)
These will require money or property that has been transferred out of the scheme at undervalue in the two years before an insolvency event or application for PPF protection (but after 26 April 2004) to be either returned to the trustees or paid to the PPF as appropriate to restore the scheme to the position it would have been in had the transaction not been entered into.
- Clearance statements (PA 04 ss. 42, 46)
Anyone who considers they may be subject to a contribution notice or financial support direction will be able to seek confirmation from TPR that it will not exercise its powers to issue these. TPR must make a decision in relation to clearance as soon as reasonably practicable but will not be bound by the clearance statement if there is a material change in circumstances or if the circumstances described in the application are inaccurate.
Opra does not have these powers. However, Opra's guidance is relevant: not only because it is still the regulator in the run-up to April 2005, but also because some of TPR's new powers will be retrospective to 27 April 2004. Consequently, the sponsoring employer and other companies involved in any corporate transaction or restructuring are urged to consider
- the possible effect on the ability to fund defined-benefit liabilities in the pension scheme, both for past and future service; and
- whether TPR may, from April 2005, decide to use its new powers to lessen the risk to members' benefits.
Employers can discuss any concerns they have with Opra, although of course Opra cannot give any undertaking that would bind TPR.
Update 10 also covers 'Bradstock'-style compromise agreements. Opra has updated guidance originally set out in Update 7 in May 2004. Where a compromise results in benefits which are below the PPF level, the scheme will only be eligible for PPF protection if the compromise is part of a scheme of arrangement or if the compromise takes place during a PPF assessment period when the PPF's Board is acting as creditor of the employer.
This whole subject of which schemes may be eligible for admission to the PPF, including Government measures to strengthen the gatekeeper's powers, was controversial right up until the day the Pensions Act received Royal Assent (18 November 2004) - and continues to be, as we await regulations. Meanwhile, trustees are warned that it remains the case that any scheme that started to wind up before the introduction of the PPF (ie, in all probability, before 6 April 2005) will be ineligible for PPF compensation. From April 2005 it is intended that compromise agreements will be 'notifiable events'. Employers and trustees will have to notify TPR of their decision to seek such agreements.
Until the handover to TPR on 6 April 2005, which should be largely seamless, Opra is encouraging trustees and their advisers to pass on information especially where both of the following apply:
- the pension scheme is currently underfunded or is likely to become so following the employer action being considered; and
- there is the likelihood of a significant impact on the security of members' benefits because actions have been taken since 27 April 2004 or are being taken or contemplated, that would put at risk the making good of the statutory debt on the employer if the scheme started to wind up.
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