30 July 2020
- Regulator powers under scrutiny in Bernard Matthews pre-pack
- MPs to examine pension scams
- Corporate Insolvency and Governance Act – PPF creditor rights extended to other entities
- Tackling the growing small DC pot problem
- FCA responds to its examination of intergenerational differences
- FCA launches enhanced register
- Summer holidays
The well-known poultry producer Bernard Matthews went into administration in 2016 with the DB pension scheme going into the PPF along with its reported £75m deficit.
The circumstances of the insolvency generated controversy, an intervention by the House of Commons’ Work and Pensions select committee and investigations by the Pensions Regulator and the PPF.
The Regulator has now published a Section 89 regulatory intervention report which summarises its investigation and explains why it did not use its anti-avoidance powers.
There is more detail in the report but, in brief, what happened was that in 2013 a controlling interest in the parent company of the struggling Bernard Matthews Limited (BML) was obtained by Rutland, a private equity firm, as part of a mechanism through which a substantial proportion of BML’s secured debt with a bank was refinanced.
Rutland lent £25m to BML at a (non-cash) interest rate of 20% pa (apparently the going rate for high risk private equity ventures then). The pension scheme trustees had to agree to their existing charge ranking below Rutland’s debt on insolvency. They agreed because BML would highly likely have been insolvent without the Rutland cash and the trustees’ charge was anyway subordinate to the bank whose debt Rutland was partially replacing.
Further finance of £10m was arranged by Rutland in 2015 but by then it was apparent that the hoped-for turnaround was not happening and Rutland sought buyers. One of the prospective buyers, Boparan Private Office, offered to buy the shares of BML, thus taking on all its liabilities, including the pension ones. This would have been enough to pay the bank, with its first charge, but would have resulted in Rutland writing off the majority of its initial investment and forgoing all of its interest owed. Rutland rejected this but ultimately agreed a deal with Boparan involving a pre-pack administration which meant that Rutland realised a £13.9m profit on its investment while the pension scheme received nothing and was consigned to PPF assessment.
The Regulator’s investigation focussed on whether it could issue a Contribution Notice under the Pensions Act 2004. To do so it would have to conclude that the parties’ actions caused “material detriment” to the pension scheme and that it was reasonable to issue a Notice. The investigation focussed on the key events over the period of Rutland’s involvement and involved issuing several statutory notices and reviewing thousands of documents.
The Regulator found that the material detriment test was not met for the first two events (the initial investment and the 2015 financing). Interestingly, the Regulator is silent on whether or not it is of the view that that the test was met for the rejection of the first Boparan offer and the subsequent pre-pack.
The Regulator concluded that “there are no reasonable grounds to use our Contribution Notice power in this case. Our view is that Rutland’s profit was a legitimate consequence of the terms of its high-risk investment in BML which had been negotiated and agreed on an arm’s length commercial basis with the board of BML and the scheme’s trustees”.
The Regulator is taking the view that it would not be reasonable for them to issue a Contribution Notice where all Rutland had done was to prefer its own interests over those of the pension scheme. This might be a perfectly respectable view, but not one that we expect will be universally shared.
It is interesting to speculate whether there would have been a different outcome had the Regulator’s arsenal included the new powers and criminal sanctions in the Pension Schemes Bill. A cursory look at the two new Contribution Notice grounds suggests that these would not have been applicable in these circumstances.
However, what does catch the eye is that acts or omissions causing material detriment have the potential to link to the new criminal offence of “conduct risking accrued benefits” – with its jail terms of up to seven years – once this has become law. Would the 2013 rescue have gone ahead if the parties were looking over their shoulder at potential jail time if things went wrong? This is a worrying thought; the stronger Regulator powers that will be with us shortly may have damaging unintended consequences for company rescues at a time many are expecting increased company failures in the wake of Covid-19.
The Work and Pensions Committee has launched its first major pensions inquiry following last year’s General Election and under its new chair Stephen Timms MP. In what is intended to be a three-part inquiry the MPs will first look at pension scams which are known to have grown significantly in recent years, unintentionally assisted by the introduction of the pension freedoms at the tail end of the Coalition Government.
A number of questions are posed for consideration, designed to get a handle on the prevalence and nature of scams, how effective the regulatory bodies are in tackling this menace and interestingly, whether HMRC’s position on seeking unauthorised payment charges in respect of scam victims is correct. Consultation closes on 9 September.
After examining pension scams the MPs intend to move on to looking at issues surrounding accessing pension savings and saving for later life, with a call for evidence likely in 2021.
The first part of this inquiry is very much in the public interest and will be an early test of the effectiveness of the Committee under its new management. It is almost certainly going to find that there have been delays and missed opportunities to bear down on the scammers.
Regulations securing creditor rights for the Pension Protection Fund in relation to the newly introduced moratoriums and restructuring plans have been extended, to cover co-operative societies and community benefit societies, less than a month after they were originally made (see Pensions Bulletin 2020/28).
The Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) (Amendment) Regulations 2020 (SI 2020/783) simply extend the entities referenced in the original regulations in order to cover these societies. They in turn are a follow-on from another set of regulations recently introduced under the Corporate Insolvency and Governance Act in order to extend the scope of the moratorium and restructuring plan measures to these societies.
All entirely logical but an illustration of the catch-up necessary when an Act is rushed through Parliament as has been the case with the Corporate Insolvency and Governance Act.
The PPI finds that the number of deferred pension pots in master trusts is likely to rise from 8 million now to around 27 million in 15 years’ time, as a result of automatic enrolment. These small pots could easily be forgotten, and in any case are too small to contribute to retirement income in any meaningful way. Management charges could either erode away these pots; alternatively, providers’ expenses in managing these pots are not covered through charges and as a result there is an increase in cross-subsidy from members with larger pots.
The PPI suggests that “financial instability in master trust schemes, arising from too many small pots, could, in extreme circumstances result in trustees triggering an event to wind up the scheme”. It also points out that policies aimed at consolidating pots are likely to provide a better long-term solution than tackling charging structures.
The PPI draws together views from the industry and considers six policy options in detail: dashboards could facilitate more consolidation; same provider consolidation would allow returning members to re-enrol to their deferred pot; pot follows member would result in otherwise deferred pots moving to the individual’s new employer’s scheme; member exchange would result in the reassignment off all existing pots into the current active scheme; a lifetime provider would enable members to remain throughout their working life with the same provider; and deferred pots could automatically transfer to a default consolidator provider after one year. The PPI recognises that each option has its own limitations and a combination of policies may be necessary to maximise benefits while minimising potential drawbacks.
A much-quoted snippet says that a typical person will have had 11 jobs by the time they retire. With each employer having to automatically enrol employees to a pension scheme, workers will have many pots to keep track of. The PPI’s research highlights this growing problem both for savers and providers. However, much of the suggestions need support of policymakers as well as the pensions industry to come together, and with so many issues on the Government’s and Regulators’ agendas, will this be forgotten until it becomes a crisis?
The Financial Conduct Authority has published a feedback paper to its May 2019 discussion document (see Pensions Bulletin 2019/18) in which it is setting out some conclusions about the different financial services needs of the three generations known as “Baby Boomers”, “Generation X” and “Millennials”.
The FCA finds that:
- Consumers need better support to manage increased responsibility and additional exposure to risk – pointing in particular to changes in the pension and retirement income sector. In response, the FCA has adopted business priorities to enable effective consumer investment decisions and ensure that financial products and services across retail sectors offer consumers fair value in the digital age
- Consumers need more hybrid and flexible products to meet their evolving needs – referencing the Pension Sidecar developed by NEST for Generation X, and the need for more innovation in the decumulation space to assist Baby Boomers. The FCA recognises that it is for industry to develop innovative products, but the FCA can support these innovations as part of its statutory objective to promote competition in the interests of consumers
- Certain consumer segments cannot access lending products needed for their financial goals. The FCA’s current business priorities already seek to ensure consumers can find the products that meet their needs and that affordable credit is available
The FCA also mentions two further areas primarily relating to social policy issues which go beyond its remit. These are that consumers need access to better products to fund long-term care, and consumers may not have sufficient savings levels to meet future financial needs.
The FCA intends to focus its attention on the first set of conclusions in carrying out its remit and use these findings as success measures of its business plan. However, no rule changes or other bespoke remedies are expected in response to these findings.
As promised (see Pensions Bulletin 2020/29) the Financial Conduct Authority has launched its enhanced register whose purpose is to make it more easy for individuals to check whether firms and individuals are authorised to conduct regulated activities.
At this stage the enhanced register is a redesign of the previous register to improve user experience. The information it contains doesn’t seem to be specific enough to enable a user to check whether an adviser has permission to give “appropriate independent advice” in relation to DB transfers. We understand that this facility will appear later this year.
As we move into August the Pensions Bulletin is taking a break for a few weeks. We hope that you all are staying well and will be able to “get away” too – even if it is only by switching off your work computer.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.