Regulators rule

With new powers covering anti-avoidance issues, the pension regulator is someone businesses should be taking a lot more seriously. By Peter Murphy and Ian Cormican

Until recently, advisers involved in M&A work or in corporate finance, paid little more than a passing regard to pensions issues when determining how a transaction should or could be structured. If they were considered at all, it was often as an afterthought, and they rarely had a significant impact. For better or worse (and for most employers for poorer rather than for richer), times have now changed with the introduction of the ‘anti-avoidance’ provisions of the Pensions Act 2004.

Anti-avoidance provisions

Anti-avoidance provisions, sometimes referred to as ‘moral hazard’, give the Pensions Regulator the power to issue two types of documents: contribution notices and financial support directions. The former are often described as ‘event-driven’, as they can only apply on the happening of an event, while the latter are ‘circumstance-driven’, as they may occur at any time but depend on the circumstances of the pension scheme and the employer.

Both documents impose financial burdens on the recipient in order to give greater security to pension entitlements. The underlying premise is that a defined benefit pension scheme should now be treated as a significant unsecured creditor of the employer.

So why might this interest anyone other than a pensions lawyer? Most significantly, the anti-avoidance provisions allow the regulator to impose the full financial liability for a defined benefit pension scheme upon an employer’s related companies and, sometimes, individuals who would otherwise have no liability whatsoever. And, as regards contribution notices, the event need have nothing at all to do with the pension scheme.

Fairly routine corporate actions could be scrutinised by the regulator and lead to the imposition of a contribution notice, which could mean the granting of fixed or floating charges, capital reductions through dividend payments and demergers as well as corporate restructuring.

These events do not even need to involve an employer of the pension scheme, but may simply involve a company that could be the recipient of a financial support direction – that is, any company that is connected with, or is an associate of, the employer.

The regulator may become aware of these corporate activities through a number of means, but primarily through the trustees of the pension scheme raising their concerns with the regulator, or through the compulsory notification procedure that applies to certain events.

Once aware, the regulator will look at the funding position of the pension scheme and the strength of the employer’s covenant. If the regulator believes that, as a result of the action, the pension scheme’s position as a creditor has been materially weakened, it will expect the trustees to have been informed and consulted on the proposed corporate activity and to see money going towards the pension scheme’s liabilities. Otherwise, it may choose to issue a contribution notice, requiring the recipient to pay an amount, up to the full buyout deficit, into the pension scheme.

A financial support direction may be issued at any time when the employer of a pension scheme is a service company or where its ‘resources’ (yet to be defined) are less than 50 per cent of the estimated pension deficit calculated on the most onerous ‘buyout’ basis. Although the requirements of a financial support direction may vary, they will probably require one or more companies within the employer’s group to be jointly and severally liable for the pension deficit. This liability may be imposed indefinitely.

Clearance applications

A source of comfort for any person concerned about the potential impact of a contribution notice or financial support direction is the opportunity to obtain a clearance statement from the regulator. This involves an application being made to obtain a binding decision from the regulator that either the applicant will not be caught by the anti-avoidance provisions, or that it will not be reasonable to impose liability on the applicant in any event.

Although clearance statements provide the obvious benefit of certainty, it is also important to bear in mind some potential difficulties:


The regulator is required to determine a clearance application “as soon as reasonably practicable”. So far, it claims never to have been the cause of any failure to meet a commercial deadline. But it continues to stress that it will not feel compelled to determine an application in a short period of time when the proposed event has been known for much longer.

In any event, time will also need to be factored in for advisers and applicants to put together the information required by the regulator. This can be extensive and may need to include an independent accountant’s report to assess the strength of the employer’s covenant.

In addition, the regulator will expect the pension scheme trustees to have been consulted about the proposed event and for their views to be taken into account. This will not usually be a quick process, particularly at the moment, when most people are still finding their feet. Trustees and employers will each require independent legal and financial advice during this process.


Not surprisingly, many companies may be concerned about providing confidential information to trustees during the consultation process. Although there is no perfect solution to this concern, given the regulator’s approach to the involvement of the trustees, companies may wish to have robust confidentiality agreements in place with the trustees.


There is also the power for regulations to authorise the regulator to charge fees to meet the costs it incurs in connection with clearance applications. Although no details of these potential fees have yet been released, there is no reason to believe that they will be nominal, flat-rate application fees. If the regulator does call upon external professional assistance, it could pass on these significant costs to the applicant.


In these times of difficulty for defined benefit pension schemes, companies act at their own peril if they continue to operate without serious consideration of the potential impact of pensions issues. In most cases, workable solutions can be achieved. But appropriate time and effort must be allocated if the wrath of the regulator is to be avoided.

Peter Murphy is an assciate & Ian Cormican is a solicitor, both in the clearance team at Sacker & Partners. Sacker won the Niche Firm of the Tear Award at this year’s Lawyer Awards