We have two main powers which we can use in the circumstances set out below against an employer with a defined benefit scheme and those associated or connected with such an employer.
These are sometimes called our ‘anti-avoidance’ or ‘moral hazard’ powers and comprise contribution notices and financial support directions.
You can ask us to confirm that we won’t use these powers following a corporate transaction or scheme-related event. You should use the clearance procedure.
Our anti-avoidance powers
In summary, the main circumstances in which we have powers to act against an employer (and those associated or connected with an employer) are where:
- one of the main purposes of their actions was to stop the triggering or recovery of all or part of a debt due to the scheme under section 75 of the Pensions Act 1995 (a section 75 debt reflects the amount of extra cash that a scheme would need, on top of its existing assets, to buy annuities to secure members’ benefits in full)
- their actions have caused ‘material detriment’ to the scheme’s ability to provide benefits
- we require support to be put in place for a scheme where the employer doesn’t have enough resources or is a service company
Our powers help us to:
- protect members’ benefits
- reduce the number of claims for compensation to the Pension Protection Fund (PPF)
- reduce the PPF’s exposure if a claim is made
We can issue contribution notices (CNs) and financial support directions (FSDs).
A CN is like issuing a demand to pay a set amount of money to the pension scheme.
An FSD is more flexible and allows the target of the FSD to propose how they will financially support the scheme. For example, the target could become liable for the employer’s liabilities to the scheme or make a lump sum cash payment. If we consider that the proposal is reasonable we will issue a notice approving the arrangements.
These powers can deter avoidance activity. If it looks like we may use these powers this is often enough for the relevant parties to reach a resolution, rather than risk enforcement action.
We can issue CNs to individuals but we can’t generally issue FSDs to individuals.
CNs and FSDs may only be issued after the Determinations Panel has determined that this is reasonable. What is reasonable depends on the circumstances of the case.
Targets of CNs are required to pay cash to a scheme or, in some circumstances, to the PPF.
To issue a CN we must consider that the target was party to an act, or failure to act, that meets one of the following tests:
- ‘main purpose’ test: one of the main purposes of the act or failure was either to:
- prevent the recovery of all or part of a debt due to the scheme under section 75 of the Pensions Act 1995
- prevent such a debt from becoming due, or reduce or compromise that debt
- ‘material detriment’ test: we consider that the act or failure has detrimentally affected in a material way the chance of accrued scheme benefits being received by or in respect of members
We must also consider that it is reasonable for the target to pay the sum stated in the CN. We will consider any relevant issues, which may include:
- how involved the target was in the act or failure
- the relationship the target had with the employer
- the value of benefits which the target receives or is entitled to receive from the employer
We can start the procedure seeking a CN up to six years after an act, or failure, took place.
Financial support directions
An FSD requires the target to put financial support in place for a scheme.
To issue an FSD we must consider that the scheme’s employer was either a service company or ‘insufficiently resourced’ at a time that we choose (known as the ‘relevant time’).
‘Insufficiently resourced’ means that an employer’s resources are valued at less than 50% of its estimated section 75 debt to the scheme at the relevant time. There also needs to be one or more associated or connected entities that have enough value to make up the difference.
We must also consider that it is reasonable to require the target to provide financial support. We consider any relevant issues, which may include similar issues to those we consider for CNs.
We can start the procedure seeking a FSD up to two years after the relevant time.