PRINT THIS PAGE Further threat to final salary pension schemes in the UK17/04/2008. Source: SJ Berwin. Wyn Derbyshire 
This week, the UK government announced proposals to extend the 'moral hazard' provisions in existing pensions law, and to widen the powers of the Pensions Regulator. The proposals are flawed and will be of concern to all private equity houses doing UK deals, writes Wyn Derbyshire of SJ Berwin. The draft legislation, expected to be published next week, will be the subject of a short consultation process - only eight weeks is being allowed for comment. But the changes could be dramatic. They will include enhanced powers for the Regulator to issue notices requiring those who are party to an act which is materially detrimental to a scheme's ability to pay members' benefits to make financial contributions to the scheme. It would seem that the present requirement that, before such a "contribution notice" (CN) can be issued, the Regulator must be of the opinion that the main purpose (or one of the main purposes) of the act is to prevent the recovery of a debt which is or might become due under section 75 of Pensions Act 1995 (or otherwise, other than in good faith, to prevent it becoming due), would no longer be a necessary pre-requisite to the issuing of a CN. Moreover, the DWP have commented that the Regulation "would no longer need to prove intent on the part of a party to avoid funding the scheme, but rather that the effect of an act or course of conduct posed a materially detrimental risk to member benefits."
The Government also plans to give the Regulator power to require an employer (or an associated party) to make additional contributions where a "bulk transfer" (that is, a transfer of members, assets and liabilities to another pension scheme) has been carried out and was deemed to be "detrimental to the interests of the members". Creation of such a power could have implications for those employers who, for reasons of financial and administrative efficiency, seek to merge several pension schemes into one.
The changes will also clarify that a CN can be triggered by a series of acts rather than a single act aimed at avoiding a debt to a pension scheme, and the Government says they will ensure that the resources of the whole group of companies may be taken into account when considering whether to issue a "Financial Support Direction" when there is an under-resourced employer (as is the case at present).
The changes are to be introduced retrospectively with effect from 14 April 2008 (save for the "series of acts" amendment which is to be backdated to 27 April 2004 - the date under the Pension Act 2004 after which acts (or failures to act) could potentially become the subject of CNs).
Much will of course depend on the actual details contained in the proposed legislation. However, the proposals as described in this week's press release raise significant concerns for all those engaged in UK buyouts (and indeed, the wider world of commercial M&A and corporate restructurings). Given that (by and large), it has generally been accepted that the changes introduced under the moral hazard provisions (and the Regulator's subsequent interpretation of his role having regard to those provisions) have been effective at promoting pension scheme security without unduly restricting normal commercial activities, it is difficult to see any legitimate reason why the Government has chosen this time to make such major amendments. The DWP for its part has indicated that it is seeking to achieve fairness between scheme beneficiaries and others who may seek a return from scheme assets and that enhancing the Regulator's powers is necessary in order to retain the current system of occupational pension provision. Whether this is in fact the case is debateable, and many will fear that the proposals are yet another step in the long and painful demise of defined benefit pension provision in the UK's private sector.
It is anticipated that many aspects of the proposed changes will be challenged vigorously during the forthcoming consultation exercise, not least by the UK private equity industry.
Warning! This bulletin is not intended to offer professional advice and you should not act upon the matters referred to within it without taking specific advice.
For further information on the Government's proposals please contact Wyn Derbyshire (wyn.derbyshire@sjberwin.com).
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit the website at www.sjberwin.com.
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