Pensions insight: week ended 1 April 2022

tPR round-up: use of powers

Anti-avoidance: Gateley advises PAN Trustees in relation to Pensions Regulator’s decision to issue contribution notice to employer’s former parent company

The Pensions Regulator has published a regulatory intervention report in relation to a £2m contribution notice (CN) issued to an overseas German mining equipment business, Scharf AG, in relation to the 600-member pension scheme operated by Scharf’s former UK subsidiary, the Dosco Group (Dosco). Also secured was a £130,000 settlement with Dosco’s former Chief Executive who had received a personal benefit of €250,000 under a consultancy agreement entered into as part of the offending transaction.

This was also the first time that the Determinations Panel has awarded additional sums for lost investment returns: the CN was made up of a principal sum of £1.4m with an additional £670,000 for lost investment returns and interest up to a maximum of £2.3m.

The action was taken following concerns raised with the Regulator by Gateley on behalf of the Scheme’s independent trustee, PAN Trustees, and by members of the scheme and their local MP. Gateley were appointed by PAN to investigate the actions of Scharf and Dosco management in the lead up to Dosco’s insolvency in 2014.

The case concerned a management buyout of Dosco for €2 million in May 2013.  A shell acquisition vehicle, Dosco Mining Limited, was incorporated for the purpose by Dosco’s management team. The €2 million purchase price comprised €1.5 million in upfront consideration and a €500,000 interest-bearing loan from Scharf to be paid over five years. This amounted to considerably more than the upfront consideration offered by the only other interested bidder.

The day after the sale concluded, Scharf paid Mr Cain €250,000 under the consultancy agreement. Mr Cain retained his position as chief executive following the purchase and took a 60% shareholding in Dosco Mining.

Dosco Mining was a shell company with no assets and the purchase price was “extracted” by way of loans from the scheme employers to Dosco Mining. These loans were subject to onerous terms, with one stipulating that the loans would be written off in the event of the insolvency of either party. The withdrawal of Scharf’s support for Dosco was also key: the fluctuating nature of Dosco’s business was such that its cashflows fluctuated significantly and it was heavily reliant upon the parental support provided by Scharf, including guarantees for its banking facilities. This support was lost on the buyout.

Despite Scharf having previously applied to TPR for clearance in 2010 when it acquired Dosco, it did not make an application in relation to the management buyout, offered no mitigation, and also failed to notify or consult the trustees until the day after the transaction had completed. Mr Cain had received legal advice that the management buyout would be likely to have a materially detrimental impact on the scheme, and that mitigation should be considered. The trustees pursued this in subsequent discussions, but the promised mitigation was never forthcoming.

Only eight months after the management buyout completed, the scheme employers went into administration, triggering a PPF assessment period. In December 2015, the trustee secured a buy-in for the scheme with reduced benefits, meaning the scheme members would not receive the full amounts they expected.

Gateley and PAN provided support to the Regulator throughout its investigation and the Determination Panel hearing.

Norton Motorcycles – former owner receives suspended prison sentence for fraud

Following on from our August 2021 report, Mr Stuart Garner, former owner of Norton Motorcycles, has received an eight month prison sentence, suspended for two years, for investing nearly 100% of the assets of three DC schemes in preference shares of his motorcycle company. Mr Garner was the sole trustee of all three schemes. The investment breached the employer-related investment statutory provisions, under which it is a criminal offence to invest more than 5% of the current market value of scheme resources in employer-related investments.

The schemes had a £10m shortfall – in June 2020, after finding Mr Garner personally liable for breaches of trust, the Pensions Ombudsman directed Mr Garner to repay this amount together with interest and distress and inconvenience payments to the 31 complainant members. However, Mr Garner has entered bankruptcy without making any repayment and the Ombudsman is looking into the impact of this on scheme recovery.

Regulations come into force for extending information and reporting deadlines for scheme pays

The Registered Pension Schemes (Miscellaneous Amendments) Regulations 2022 were laid before Parliament on 29 March 2022 and will come into force on 6 April 2022. These regulations extend certain information and reporting deadlines in relation to Scheme Pays and the annual allowance tax charge where new information is received about a person's pension input amounts. The DWP's consultation on the draft regulations was published on 18 February 2022.

DWP consultation on DC schemes – charge cap, illiquid investment, ERI and consolidation

The DWP has published a combined consultation setting out its response on performance charges and consolidation and its proposals to encourage increased investment diversity in defined contribution pension schemes. The consultation includes:

Charge cap reform:

The response of the government to charge cap reform consultation which looked at removing 'well-designed' performance fees which exceed 'pre-determined performance targets' from the 0.75% charge cap in DC default arrangements.

Detail: There has been a mixed response to the proposal and the Government is going to look at this further to take account of concerns including those concerning potential loss of member protection – it will also consult on principle-based draft guidance in addition to any regulatory consultation; 

SIP & chair's statement changes: A policy consultation on:

• relevant DC schemes (default arrangements of occupational DC schemes) having to disclose and explain their policy on illiquid investment through the statement of investment principles; and
• relevant DC schemes with over £100m in total assets disclosing and explaining their default asset allocation in the annual chair's statement. 

Detail: Whilst recognising that trustees have fiduciary investment duties, the government hopes that the disclose and explain requirements will 'encourage' diversification and lead to 'active reflection' of asset allocation as part of the fiduciary duty to set an investment strategy that 'works optimally for members';

Employer-related investment (ERI) changes:

A consultation on draft ERI regulations which would remove certain ERI restrictions relating to master trust schemes. 

Detail: At present, the same ERI restrictions apply to master trusts and multi-employer schemes. The Government are proposing changing this to eliminate 'disproportionate red tape' which does not reflect the 'lower risk relationship' between the scheme and employers in a master trust arrangement under which employers tend to operate at arm's lengths to the arrangement and have little or no say in investment strategy.

The Government also believes that changing the current ERI requirements will increase the range of potential asset classes which master trusts may invest in including private credit markets. Master trusts would still be subject to limits as regards the scheme funder, scheme strategist and persons associated or connected with these parties; and

Consolidation:

The government's response to a call for evidence on the case for greater DC consolidation. 

Detail: As with the performance fees proposal there has been a mixed response to the call for greater consolidation. Consequently, the government are not going to make any changes on this during 2022 – it will instead monitor the impact that the new value for members' requirements (see our Insights (1) and (2)) will have on consolidation, noting that these may have a greater impact on improving member outcomes than 'targeted consolidation measures'.

The consultation runs until 11 May 2022. For further details see our Insight.

PPF three-year strategic plan confirms PPF levy structure review

The Pension Protection Fund's recently published strategic plan 2022-2025 notes that it will be undertaking a review of the levy structure including:

• reducing the levy as per its previously stated plans provided its funding position remains 'robust' - changes to legislation may be required to achieve the flexibility required to do this; and
• a review of how the levy is calculated to ensure the PPF's approach aligns with its funding strategy and to see where simplifications can be made. 

The 2022-23 business plan has further details on how the PPF will meet its four strategic priorities of meeting new challenges with brilliant service, achieving excellence in asset and liability management, making a difference and transforming how the PPF works.

PASA FAQs on GMP equalisation

The Guaranteed Minimum Pension Equalisation Working Group, which is chaired by the Pensions Administration Standards Association, has published a list of FAQs and responses which trustees and advisers will find helpful when undertaking GMP equalisation exercises on their schemes. The questions will be added to as things progress and 'solutions emerge'. The guidance includes Q&As on:

• "Whether the ‘look-back’ approach in assessing crossover points is appropriate
• PAYE tax considerations on the payment of arrears and interest
• The practicalities of equalising death benefits
• Checking whether underpaid members receiving arrears or increases exceed the LTA
• The impact of GMP Equalisation on commutation."