Lucida PLC

The Art of Anti-Avoidance. Engaged Investor

Oct 01 2008

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Margaret Snowdon of LUCIDA plc asks: Will amendments to the anti-avoidance powers of the Pensions Act 2004 bring the right results?

When it happened, Pensions Corporation’s acquisition of Telent looked like it could change the face of pension deals forever. Ironically it may have done so for the wrong reasons. The Government responded to concerns about the deal and announced its proposal to give the Pensions Regulator increased powers to demand financial support plans or higher contributions from “organisations connected or associated with the employer”, if it judges members’ benefits to be at risk.

The DWP is currently consulting on the proposed amendments. It is targeting non-insured buyout models and rightly so. Protection of member rights is of paramount importance and this security relies on the employer covenant; the employer’s willingness and ability to continue to fund the scheme at the level necessary. It cannot be in the members’ best interests to remove that covenant and replace it with something weaker.

Deals like Telent show that employers want to relieve themselves of the burden of their pension schemes. Employers do not wish to limit or reduce member pensions, which are, after all, deferred pay, but are finding it difficult to tolerate the cost and complexity involved in running a pension scheme in the UK. The current interest in buyout is testament to this.

Most buyouts are backed by UK regulated insurance companies, where the employer’s commitment is replaced by an insurance policy that provides security for members over the long term. Targeting concerns over non-insured solutions reinforces the positive of the more expensive and reliable insured buyout approach.

The many positive aspects of the proposed amendments come with a downside. The Telent deal took the Government by surprise and it has proposed changes to attempt to control abuses arising from deals not yet conceived. This may be a sledgehammer to crack a nut. The fear of penalty could have the effect of hindering corporate deals which would have positive outcomes for employees and pension scheme members.

There are two points which give most concern. The first is going back to 2004 to pick up on earlier transactions which form part of a series of events that ultimately result in lower member security. The second is the removal of the “otherwise than in good faith test”. This means the burden of proof is on the parties to the deal – making an innocent mistake and meaning well will no longer be a defence.

With these two changes, the Regulator could go after any combination of corporate events and judge the outcome with the benefit of 20:20 hindsight. If it does not like what it sees, the employer, or any associated company, could be ordered to pay contributions to boost the fund up to a fully funded level.

Trustees will be encouraged to examine each corporate event with suspicion. They may also be expected to foresee possible consequences of that event, and model against possible future external impacts. Trustees may therefore have to seek legal or other professional advice. This will add considerably to the costs of running the scheme and will be an extra burden for trustees to bear.

The Government’s reaction has created an image of unscrupulous employers and investors whose only desire is to place member benefits at risk for the sake of a quick win. This may be true of a small number of cases, but not for the majority. The proposed regulations are likely to restrict the well-intentioned and may not stop the sharks.

Margaret Snowdon is Operations Director at Lucida.
020 7647 1610
margaret.snowdon@lucidaplc.com