Articles

A recent determination notice issued by the Pensions Regulator (“the Regulator”) has highlighted the role of the Regulator in relation to corporate activity and pension schemes. This determination notice contained an order that an independent trustee company be appointed with immediate effect as trustee of a pension scheme (“the Scheme”) in exclusion of all the other trustees of the Scheme.

A determination notice allows the Regulator to exercise its powers in relation to a scheme in various circumstances, which include where a problem arises within a scheme or there has been a breach in relation to a scheme.

Under its standard procedures, a warning notice is issued, setting out the powers the Regulator is considering using and which gives the affected parties 14 days to comment. However, the Regulator can use a special procedure to make a determination without issuing a warning notice where it feels that immediate action is needed to protect members’ interests and to avoid giving advance notice to parties that may be considering an inappropriate action.

The Regulator had received information (presumably provided by a whistleblower) that the principal employer of the Scheme was intending to strip out assets of the employer and then buy back the employer’s remaining assets in a pre-pack arrangement but excluding the pension liability (a pre-pack arrangement is one under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an Administrator, and the Administrator effects the sale immediately on, or shortly after, his appointment).

The Regulator acted swiftly and under its special procedures on the basis that it felt actions by the principal employer to trigger the pre-pack were thought to be imminent.

This is a warning, not only to employers seeking to avoid a pensions liability that the Regulator will be on the watch for such actions, but also a warning for trustees and advisers to be alert to such attempts to avoid pensions liabilities. Trustees who become aware of such a potential situation are under a duty to notify the Regulator as soon as reasonably practicable after they become aware of the situation.

The notice appointing an independent trustee provides an example of the use of a power recently given to the Regulator by the Pensions Act 2008 to appoint trustees where it is reasonable to do so to protect the interests of the scheme members generally (previously the power was only exercisable where ‘necessary’). It also reflects the recommendation made by the Regulator last October for the greater use of independent trustees as chairs of trustee boards, not only to manage conflicts of interests between the sponsoring employer and its pension scheme trustees but also for the improved management of schemes generally. Clearly in this case there was a conflict of interest between the employer and the trustees (as two of the principal employer’s directors were also trustees).

Consideration of the appointment of independent trustees may be particularly important in the current economic climate where balancing the duties to scheme members and to shareholders of the companies that employ the directors is increasingly difficult for trustees who are also involved in the company.

A situation where a director is also a trustee of the company’s pension scheme is a particularly good example of the type of potential conflict of interest that has been addressed in the Companies Act 2006 (“the Act”). Directors are under a new duty to avoid a situation where their interests may conflict with the interests of the company.

The Act allows directors to authorise conflicts and potential conflicts in advance to avoid a director being in breach of duty - there are certain procedural requirements which must be satisfied and these differ for public companies and private companies. For example, the articles of a public company must contain a specific provision enabling the directors to authorise conflicts and potential conflicts and an existing private company must first pass a shareholder resolution allowing the directors to authorise conflicts and potential conflicts.

The consequences of a breach of this duty can include a director being required to pay damages or compensation where the company has suffered a loss or a requirement for a director to account for profits made or received by the director.

The Act also allows articles of association to contain other provisions for dealing with conflicts of interest -- see Memorandum and Articles of Association and the Companies Act 2006 article by Tom Farrington (see http://www.rollits.com/news.php?number=798&type=EDIT).

The new duty to avoid conflicts of interests is discussed in more detail in an article on our web-site (see www.rollits.com/news.php?number=736&type=EDIT).

Craig Engleman