Vol 7 (2010) - Issue 4

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The Questionable Reach of the UK Pensions Regulator

Background: the UK Pensions Regulator and the Pension Protection Fund
The Pensions Act 2004 heralded a significant step in the UK’s regulatory regime governing defined benefit pension plans. Amongst making numerous changes to an already hefty body of legislation, the Act created two new public bodies:

– the Pension Protection Fund (or 'PPF'): a vehicle akin to the US’s Pension Benefit Guarantee Corporation, empowered to assume responsibility for the defined benefit plans of insolvent sponsoring employers, and with the ability to guarantee defined benefit pension promises up to certain threshold monetary values; and

– the Pension Regulator (or 'TPR'): invested with significant powers enabling it to pierce the corporate veil and pursue certain entities associated or connected in some way with the failed sponsoring employer (including, but by no means limited to, the failed sponsor’s parent company) for deficits within defined benefit plans, with the twin aims of ensuring that corporate groups 'stood behind' the pension promises given to UK employees, and that pension liability would not be 'dumped' on the PPF (and, as a result, UK tax-payers generally).

From its inception, TPR took a bullish approach to its powers and, in particular, its ability to enforce them against overseas parent companies of UK subsidiaries. Its approach was lent significant support (or seemingly so at the time) by the decision of the US Bankruptcy Court in Sea Containers which approved a settlement reached amongst the creditors which was highly favourable to the UK pension trustees, substantially upon the basis of steps which TPR had taken to pursue the parent company for the pension debt of the UK subsidiary.
However, recent decisions of the US and Canadian courts in the aftermath of the Nortel insolvency appear to be taking a tougher stance with TPR. Specifically, the decisions suggest that TPR will not be able to advance its position (nor the position of the UK pension plan members or, for that matter, the PPF) by exercising or threatening to exercise its Pensions Act 2004 powers in the UK when a stay against legal proceedings by creditors is in place (a significant point of divergence from the Sea Containers decision). In international insolvencies, TPR is – at best – but one of many unsecured creditors and has no legal entitlement to preferential treatment of its claims.

It is understood that TPR is appealing both the US and Canadian decisions on the basis that its formalised threat to invoke its UK statutory powers (in the form of a 'Warning Notice') has been 'misinterpreted' as a judicial process which creates a new claim, yet it is hard to consider TPR’s statutory powers as anything other than quasi-judicial processes which are capable of generating direct claims against overseas parent companies.