The Pensions Act 2004 (2004 Act) introduced provisions to empower the Regulator to issue:

(For background, see News brief “Moral hazard provisions: pensions reforms draw closer”, www.practicallaw.com/7-103-2445.)

The CN was issued to the Belgian company Michel Van De Wiele N.V. (VDW). VDW had transferred the business and assets (but not the pension scheme liabilities) of its UK subsidiary Bonas UK Limited to a new company under a pre-pack administration.

Following the administrator’s appointment, the scheme entered assessment for the Pension Protection Fund (PPF) and formally transferred into the PPF in November 2008. (The PPF is a statutory fund, established by the 2004 Act, which pays compensation at a prescribed level to members of defined benefit schemes that are eligible for entry.)

The Regulator’s determination panel (the panel) said that the two key triggers for its decision to issue the CN were the fact that VDW had retained the business while avoiding the pension liability, and that it had then walked away without engaging openly with the trustees or the Regulator. The CN was for £5 million, the amount required to bring the Bonas scheme back to solvency on the PPF basis.

The panel decided that it was not appropriate to issue a CN against Bonas’s managing director, who was also chairman of VDW, mainly because he was acting as a director of VDW rather than in a personal capacity.

However, this may not be the end of the story, as VDW is appealing the determination to the Upper Tribunal.

The FSD was issued against 25 companies in the Nortel group in Canada, the US, Europe and Africa because the employer of the Nortel Networks UK Pension Plan was found to be insufficiently resourced. The FSD requires the companies to provide financial support of up to £2.1 billion for the scheme, representing the shortfall on the buyout basis under section 75 of the 2004 Act (that is, the cost of securing all benefits under the scheme with annuities).

However, the Regulator may face an uphill battle enforcing the FSD, as the panel’s decision conflicts with recent Canadian and US rulings that an FSD will breach the moratorium in place under insolvency proceedings in these jurisdictions.

"The overseas issue in both Bonas and Nortel must be a worry for the Regulator," says Dickson. "Lots of companies operating in the UK are ultimately owned overseas, and if overseas parents come to the conclusion that the Regulator cannot enforce its powers in their jurisdiction, that will clip the Regulator’s powers significantly."

However, it is interesting that the Regulator comments that the Nortel FSD "enables the scheme to have a voice in the insolvency proceedings", and that "it is not an attempt to enforce outside of the Canadian or US insolvency processes".

"Perhaps this is an indication that the Regulator sees a bigger role for itself in getting pension schemes to the negotiating table, than in imposing its decisions to the letter on a world-wide basis," says Dickson. "And perhaps this will work, so long as companies would rather negotiate than litigate."

The Regulator claims that the mere existence of its moral hazard powers since 2005 has meant that employers have continued paying into pension schemes. It says that, by a process of engaging with trustees and pension scheme sponsors, it is able to secure funding for schemes, and that it is able to reach agreement in most cases without formal enforcement action being required.

Dickson agrees that the Regulator has had a degree of success simply due to its moral hazard powers. "But it is starting to look as though this was more true in good times before the recession, than it is now," she says. "And if the Regulator's powers are used only very infrequently, employers can reach the conclusion that the risks are more theoretical than real.

"As the Regulator determined that there was a 'powerful link between the pension obligation and entry into administration of Bonas', it may therefore see this as a good example to try and stem the tide of companies believing (wrongly) that they can do easy deals with the PPF to leave a pension scheme behind and carry on the business."