On Monday the Pensions Regulator issued two determination notices stating its intention to issue "financial support directions" under the Pensions Act 2004 to Sea Containers Limited ("SCL"), a Bermuda-based holding company, in relation to its two defined benefit schemes in the UK. This is the first use by the Regulator of its much-trumpeted anti-avoidance powers.
A "financial support direction" - effectively a guarantee of up to the buy-out deficit in a scheme - may be imposed on associated or connected companies of any employer in the scheme which is either a "service company" or "insufficiently resourced". An employer will be insufficiently resourced where it has insufficient assets to meet 50% of the estimated buy-out deficit in the scheme and another company in the group is able to meet the difference. It will be a service company if its turnover, as shown in its latest available accounts, "is solely or principally derived from amounts charged for the provision of the services of [its] employees" to other group companies. The Regulator must also consider it reasonable, in all the circumstances of the case, for the financial support direction to be issued.
In the present case, the Regulator has indicated that SCL's UK subsidiary, Sea Containers Services Limited, meets the definition of a "service company". The financial support directions that the Regulator intends to issue will therefore require SCL to put arrangements in place so that it underwrites the liabilities of the service company to the schemes.
What is particularly noteworthy is that the directions will be issued against a parent company based in Bermuda. It had been expected that the Regulator's first use of its powers would be against either a UK or EU entity, given concerns that have been expressed about its ability to enforce its new powers outside those jurisdictions. If SCL fails to put in place the arrangements required, the Regulator would be able to issue a "contribution notice" against it, potentially for up to the full amount of the estimated buy-out deficit in the schemes. The Regulator’s determination notices suggest that this figure is presently over £90m. The reaction of SCL will therefore be a crucial test of the Regulator's powers and credibility.
Interestingly, it appears that a "warning notice" was first provided to SCL as long ago as October 2006 - it had been reported last autumn that the Regulator was looking closely at the Sea Containers schemes. The parties and their advisers have clearly been working on the issues for some time.
The Regulator has insisted that its proposed action is "appropriate and justified", and the trustees of both schemes are said to be fully supportive of the Regulator's intervention. For its part, Sea Containers has issued a press release saying that it is "disappointed" with the issue of the notices but that it will give its full comments, and consider whether or not to appeal, once the Regulator issues its reasoning for its initial announcement next Monday (25 June). In any case, binding financial support directions can only be issued at least 28 days after the determination date (i.e. 16 July).
We will update you as soon as the Regulator issues its reasoning, and keep you in touch with any further developments in relation to what may be a key test of the Regulator’s powers.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 20/06/2007.
