Sections

Parent group contract reveals anti-avoidance - TPR

UK - A US-based transportation company is being hit with the UK's first financial support direction (FSD) because it has an agreement in place to support its UK subsidiary's pension, The Pensions Regulator has revealed.

Details of a ‘reasons' notice issued this morning by TPR's determinations panel said Sea Containers Limited (SCL) had a written agreement in place for many years to service the financial needs of its Sea Containers Service Limited UK-based subsidiary when needed, including its employee benefit and pension liabilities.

As a result, the parent company is responsible for ensuring the "parlous" pensions liabilities of the 1983 and 1990 defined benefit pension schemes are covered, determined the panel, and will be ordered next month to rectify the two funds' £132.6m (€135m) pensions deficit because its recent actions are seen as attempting to avoid their responsibilities.

According to "facts" presented by the TPR panel, Sea Containers Ltd - the US parent group which owns UK rail company GNER - signed a "services agreement" in 1989 to provide Sea Containers Services Limited - the UK operation - with "all management administration, financial, accounting and other services".

More importantly, the parent firm had an agreement stating "it had always been the intention of SCL to stand behind the obligations of SCSL" according to the panel, so should the UK operation be unable to meet its liabilities, SCL would pay "that proportion of the amount which should have been paid to the defaulting company".

One of the key details to the arrangement between the two firms is SCL maintained an inter-company balance sheet for tax purposes. This meant SCSL had no firm assets of its own but was itself financed through a quarterly "costs plus" 10% arrangement - meaning the UK firm would bill its parent and associated subsidiaries for "services" to the operation and SCL would then present SCL with the money it needed to meet its bills as they became due.

However, SCL terminated the agreement to support its liabilities to SCSL in a letter to 1983 trustees on June 8 2006 - a move seen as anti-avoidance according to TPR because it had sufficient assets at that time to meet its liabilities.

In October 2006, SCL then filed for Chapter 11 bankruptcy in the US and the firm's legal team is therefore arguing there are insufficient funds to cover its liabilities.

Following a request from the 1983 and 1990 schemes trustees and the panel's conclusion, TPR is now expected to issue the FSD on July 18 2007 requiring SCL act immediately to rectify the pension funds' financial positions.

Arguments presented by lawyers for SCL to the determination panel at a June 12 meeting suggest TPR has "acted with inappropriate haste" and is wrong to issue an FSD because they have not been given sufficient time to consider how it will meet its liabilities.

However, the panel disagrees and has announced its intention to issue an FSD because there has been correspondence since June 2006 between the necessary parties to try and rectify the funding situation.

TPR has now amended the exact figure of the funds' deficit as having reached £132.6m, rather than the £91m published earlier this month, as the 1983 scheme had a deficit of £105.4m to June 8 2006 on a buyout basis while the 1990 scheme is underfunded by £27.2m to June 27 2007.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2474

    Asset class: All/Large Cap Equities.
    Asset region: Global Developed Markets.
    Size: $150m.
    Closing date: 2018-09-25.

Begin Your Search Here