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The Pensions Act 2004 gives the new Pensions Regulator wide-ranging powers to encourage companies to pay more money into their final salary pension schemes where they are in deficit. It should enable the regulator to keep pension schemes under close scrutiny and to become involved at an earlier stage when companies are at risk of insolvency events than previously. However, the new powers may lack clarity and blur the lines between its role and that once held by insolvency practitioners.
The new powers will allow the regulator access to more detailed information on pensions schemes. It may be that the regulator will freeze 'at-risk' schemes pending investigation, or even disqualify trustees judged unfit to carry out their duties. Moreover, the regulator may issue improvement and third-party notices and it can impose substantial fines when these are not complied with.
The Heath Lambert case last year revealed the extent to which the regulator can become involved in negotiations to avoid the Pension Protection Fund (PPF) taking on liability from an occupational pension scheme without receiving any contribution from the sponsoring employer.
In Heath Lambert, the regulator allowed the insurance broker's three underfunded final salary pensions schemes, with a deficit of around £200m, to enter an assessment period with a view to going to the PPF in return for it taking a 10 per cent stake in the new sponsoring phoenix employer. The business of Heath Lambert would be transferred to the new company, which could then rise out of the ashes free from the burden of funding the pensions scheme deficit. The phoenix company could continue to trade without the burden of a huge deficit hanging over it, while pension beneficiaries have their benefits guaranteed at PPF levels. More recently, it has been reported that the PPF may take a 30 per cent stake in a new entity set up to receive the business of Sheffield Forgemasters Engineering, which had a deficit of up to £180m.
The deals, which have the backing of the Government, signal a more commercial approach by the Pensions Regulator. There is no point in forcing employers into liquidation when deals can be struck. This will save jobs, with pension scheme beneficiaries receiving more from the PPF than they would be likely to get if the struggling employer continued.
Heath Lambert had more than 2,000 employees, while at Sheffield Forgemasters Engineering, up to 600 jobs were saved. The deals could also be of great benefit for businesses. It is also difficult for employers to borrow money to turn the business around when any profit will be absorbed into the pension scheme. Meanwhile, the shares in the new phoenix company can become valuable, with the company freed from debt. Therefore, the PPF and other shareholders stand a chance of making a recovery.
Gary Cullen is head of pensions law at Maclay Murray & Spens