The Pensions Regulator issues a £2 million contribution notice

The Pensions Regulator (TPR) has issued a contribution notice (CN) for more than £2 million against a former overseas parent company and has reached a settlement with the ex-chief executive for £130,000.

Background

This case involved the defined benefit pension scheme, Dosco Overseas Engineering Limited (1973) Pension & Assurance Scheme (the Scheme).

The Scheme’s two employers (the Scheme Employers) were part of a group of companies (the Dosco Group) owned by German parent company SMT Scharf AG (Scharf). Scharf itself acquired the Dosco Group in 2010 and at that time, all parties agreed that the transaction could affect the Scheme Employers’ ability to support the Scheme. Scharf and named directors, including the Dosco Group’s chief executive Martin Cain (Mr Cain), therefore made clearance applications to TPR.

Scharf provided mitigation and supported the Scheme Employers throughout 2011. However, by 2012, senior management at the German parent company had become concerned about its continued ownership of the Dosco Group and commissioned its supervisory board to produce a report covering, amongst other things, risks presented by the Scheme.

Sale of the Dosco Group

The Scheme had assets of around £50m, and with a relatively significant deficit of almost £40m, it presented some risk to Scharf. At a meeting to discuss the supervisory board’s report, Mr Cain concluded that one of the Scheme Employers, Hollybank Engineering, had no future and Scharf were aware that if the company were to close, a costly statutory debt would be triggered under section 75 of the Pensions Act 1995 (section 75 debt).

The risks were sufficient for Scharf’s supervisory board to recommend that the Dosco Group be sold, which Scharf resolved to do. However Scharf decided to postpone Hollybank Engineering’s closure to avoid the section 75 debt, which deprived the Scheme of valuable funds before the sale.

In preparation for the sale, Scharf and Mr Cain took a number of steps, including:

1. Removing financial support from the Dosco Group.
2. Entering into a consultancy agreement under which Mr Cain was incentivised to procure a quick sale by the promise of a share of any sale proceeds, subject to a minimum payment of €250,000, provided the Dosco Group was sold in 2013.

After two external buyers dropped out of sale negotiations Mr Cain, encouraged by Scharf, pursued a management buyout (MBO) instead and, in May 2013, the Dosco Group was sold to for €2m to a shell acquisition company established solely for the purposes of the MBO.

Mr Cain received legal advice that mitigation should be considered because the MBO would likely have a materially detrimental impact on the Scheme. Unlike in 2010 where similar considerations arose, no clearance application was made, no mitigation was offered and the trustees of the Scheme were not consulted until after the MBO had completed.

Insolvency event

Most of the purchase price, €1.5m, came from loans by the Scheme Employers to the shell company which were subject to onerous terms, including one which meant that the shell company had no obligation to repay the loans if any of the three companies became insolvent, which is exactly what happened.

In the absence of adequate parent company support, the Dosco Group companies went into administration just eight months after the MBO completed. The insolvency event triggered a PPF assessment period and whilst Scheme benefits were ultimately secured via a buy-out in December 2015, they were secured on a reduced basis meaning members would not receive their benefits in full.

Action by TPR

TPR issued a warning notice against Scharf in March 2019 based on its ’complete disregard for the interests of the scheme by the inappropriate disposal of Dosco Group to a shell acquisition vehicle, with no investment or realistic prospect of future financial support’. Mr Cain, having been paid the €250,000 he was promised under the consultancy agreement, was also subject to a warning notice for his personal gain from the MBO.

TPR and Mr Cain reached a settlement for £130,000 in December 2020. No such settlement was agreed with Scharf, who requested an oral hearing of the Determinations Panel to decide its fate, and then failed to send a representative to attend that hearing when it was convened in March 2021.

TPR ultimately issued a CN against Scharf for over £2.08m, comprising around £1.4m for the funds extracted from the Scheme Employers and around £670,000 for investment losses and interest. Interest will continue to accrue at a daily rate of more than £100, subject to a maximum overall total sum of just over £2.3m, until the CN is satisfied.

What does it mean?

TPR says that this case demonstrates that it will take action in respect of schemes of all sizes, including smaller schemes as was the case here, and that having an overseas target will not be an obstacle to that action.

However the ultimate benefit to the Scheme remains to be seen. TPR’s regulatory intervention report does not confirm whether Scharf has actually paid the sums set out in the CN, or if it has even indicated that it will. It is probably safe to say that Scharf was not happy with the Determinations Panel’s decision given that its initial reaction was to refer the decision to the Upper Tribunal. Scharf later withdrew the reference, however if payment is not forthcoming, TPR could face some challenges enforcing the CN (or any subsequent regulatory action) against Scharf in Germany.

Perhaps the most interesting point in this case is the award of an additional sum to reflect lost investment returns and interest. This is the first case in which TPR has made such an award, which reflects the time-value of money destined for a scheme whilst it was in hands of the CN target, and could be viewed as evidence of TPR taking a more robust approach to protecting schemes and the PPF.

A tougher approach from TPR is of course to be expected following the strengthening of its powers under the Pension Schemes Act 2021. The events in this case took place long before those changes came into force on 1 October last year, however TPR’s decision makes it clear that it is willing to take action against both companies and individuals. If Scharf’s sale of the Dosco Group were to take place under the same circumstances today, TPR would have the option to pursue both regulatory and criminal proceedings against Scharf, its officers, Mr Cain and any number of other people involved in the MBO. This could result not only in a CN, but in a significant fine and up to seven years in prison for those individuals as well.