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TPR powers could create pension "super-creditors"

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  • TPR powers could create pension "super-creditors"

UK - Members of the House of Lords, the UK's upper parliamentary chamber, have warned new anti-avoidance powers given to The Pension Regulator (TPR) could lead to pension funds becoming "super-creditors" and would increase the risks of schemes joining the Pension Protection Fund (PPF).

The amendment to the Pensions Bill 2008 giving TPR additional powers, and announced by the government in April, was  triggered by concerns over new developments in the buyout market where some business models are perceived as reducing the security provided to pension schemes. (See earlier IPE.com article: DWP extends TPR buyout powers)

But in the final stages of the House of Lords debate on the Bill, Baroness Noakes, a peer for the Conservative opposition party, claimed "it is entirely foreseeable that the new rules that have been postulated by the Government will increase the risks—both to members of pension schemes and of compensation becoming payable to the PPF".

She pointed out a possible consequence of the new rules, which include changes to the circumstances in which financial support directions (FSDs) and contribution notices can be awarded, would be an increase in clearance applications to TPR that could impose costs of between £50-100,000 (€63-127,000) on employers. 

As a result, the Baroness argued this would "inevitably lead to a further hardening of view among managements of companies with defined benefit (DB) schemes, which will in turn accelerate the decline in DB schemes".

She said there were also suggestions the increase in costs would make "turnaround situations" in companies - where the firm undergoes significant changes to ensure its survival - more difficult, and would possibly hasten businesses into insolvency, placing further pressure on the PPF.

Baroness Noakes also warned employers with an attached DB scheme will find themselves "unsaleable and unattractive investment targets", which would "inevitably" cause the employer covenant to reduce as firms are unable to find new investment partners.

Lord Oakeshott, a Liberal Democrat peer, admitted he has concerns over the "dangers for British pension funds from what is going on in the buyout industry" and claimed the "zombie funds" where a scheme is moved from an employer to a type of uninsured buyout firm, are "an accident waiting to happen".

He added: "One can foresee many private-equity-backed companies going into receivership over the next year or two with serious consequences for their pension funds. I am totally with the government on what they are trying to achieve. However, there is a right way to go about these things."
 
In contrast, Lord Lucas, a member of the Conservative party, argued the changes to the Bill are "part of a process which is making the pension fund gradually into some sort of super-creditor, giving it rights over and beyond that of an ordinary, unsecured creditor, into a position where it has additional superior rights".

He claimed this action would push companies into receivership, which is "not the best option" for a pension scheme, and instead warned the government it should allow for the commercial relationship between an employer and a pension fund to proceed without the possibility of regulatory "backwash" against what seemed sensible decisions at the time.

Baroness Noakes agreed the Bill is "on the road to creating" a new super-creditor and claimed as the liability of employers to pension schemes is becoming more preferential, "this has not been done via the Companies Act or the Insolvency Acts. It is, in effect, being done by the back door of pensions legislation".

However, the Labour government representative, Lord McKenzie said while the government intends to work closely with interested parties over the summer to deliver more details of the nature and constraints of TPRs powers in the autumn, he maintained the "broad" powers in the amendment are a "proper foundation" to counter the threat to pension provision.

He believes the government should not withdraw the amendment, as "we do not want the message to get out to those who do not want these changes to regulatory power that there is a process by which they can prevent them".

In addition, McKenzie rejected concerns that pension funds would become "super-creditors" under the new powers, and claimed "nothing in the government's proposals would suggest that is the case".

"We do not believe these proposals would increase the priority of pension schemes, which must be treated fairly alongside creditors of equal priority", he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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