TPR flexes “moral hazard” powers – smaller fish beware
TPR has recently published details of two instances in 2020 and 2021 where it used its “moral hazard” powers. A key takeaway from TPR’s actions is that it no longer seems to be limiting the use (or threatened use) of its powers to headline cases or household names.
- In the first case, contribution notices (CNs) were issued against two individuals for entering into an agreement in 2012 which had the effect of depriving the sponsoring employer of sale proceeds from group corporate activity.
- In the second case, TPR issued a German parent company with a CN after a 2013 management buyout also resulted in material detriment to the pension scheme.
The determinations illustrate the reach of TPR’s powers in taking enforcement action in relation to schemes of all sizes, against individuals as well as corporates and across geographical regions, and in relation to activity that took place many years prior to the power being exercised. The second case, significantly, was also the first time the Panel has awarded an additional sum for lost investment returns to a scheme and interest for the ‘time-value of money’ in the hands of the target.
CNs against two individual directors
The Panel’s determination in respect of the Meghraj Pension Scheme was made in 2020, further to a warning notice issued in May 2018. The Panel determined that an agreement in 2012 detrimentally affected in a material way the likelihood of accrued scheme benefits being received.
Under that 2012 agreement, sale proceeds from the sale of a final tranche of shares in an Indian JV owned by the sponsoring employer’s subsidiary were paid to a Jersey company that was also a nominee for one of the sponsoring employer’s directors. In October 2014, the sponsoring employer went into liquidation and the underfunded scheme fell into the PPF. Although members lost out to a lesser extent than they would otherwise have done, TPR still took action.
CNs were issued against two individuals for the sum of £3.68m on a joint and several basis. Both were “connected with” the sponsoring employer: Anant Shah was one of its directors, and his nephew Rohin Shah was an “associate” of a director of the employer.
Unusually, the panel’s decision was by majority rather than unanimous. It also may not be the last word on the case because it is under appeal to the Upper Tribunal.
CN against parent company following MBO of subsidiaries
In the second case, the 2013 management buy-out of an engineering business, Dosco Holdings Limited, from its German parent company resulted in the management-owned employers being unable to support the pension scheme. The employers went into administration within 8 months of the MBO and the scheme entered into an assessment period with the PPF. One of TPR’s statutory objectives is to prevent calls on the PPF hence it took action against those it considered responsible for the pension scheme failing.
The Determinations Panel found that the German parent had “paid no regard whatsoever to the Scheme in the course of the [management buyout], instead viewing the Scheme as something to offload … on to a purchaser”. A CN was issued against the former parent company for just over £2m, comprising a principal sum of £1.4m and an additional c£600k for lost investment returns and interest.
Regulatory action to issue a CN on the former chief executive of the engineering group, who had personally benefited from the management buyout, was discontinued after a financial settlement of £130,000 was agreed with him – so although not the recipient of a CN, he also paid the price for involvement in activity which caused material detriment to a defined benefit pension scheme.