Comment on Pension Regulator's issue of its first FSD

by Dr. Ros Altmann

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Pension scheme members and trustees should be encouraged to hear that the new Pensions Regulator has finally issued its first Financial Support Direction.  Sea Containers – a Bermuda based company - is being asked to support the pension shortfall of its UK group companies.  After warnings that it must not 'walk away' from its pension liabilities without providing proper funding, the Pensions Regulator has now used its powers under the 2004 Pensions Act – which were designed to prevent this from happening.  It has asked Sea Containers to pay over £90m into its two UK pension schemes, which were operated by service companies within the Group.  This will be a very important test case for the new pension protection regime.

For too long, many companies viewed their UK final salary pension liabilities as 'optional' and have not taken their pension promises seriously enough.  In the past, parent companies engineered 'insolvency' events to get rid of pension liabilities if they did not want to meet the full costs of providing the pensions their staff were expecting.   Private equity and venture capital firms did this time and again before the new regime came in.

Effectively reneging on pension promises was legal, but was morally indefensible.  Thousands of people's lives have been shattered by the loss of the pension they were relying on.  Successive independent investigations have laid the blame for the resulting problems at the door of the Government's inadequate framework of 'protections' for members' pensions.  That is why the 2004 Pensions Act was needed.

Now, members should have better protection against such employer behaviour and trustees are backed up by an improved legislative environment. 

However, the new rules have not been tested yet.  It will be interesting to see how much power the Regulator does have, in practice, to enforce these new measures, especially with cases against a foreign company.  Will the Courts be able to impose an order to pay millions of pounds to a UK subsidiary and force the company to pay?  Members need to know that the new Regulator has real teeth, if they are to feel that their pensions are really protected.

This is an historic day for UK pension scheme members and their trustees.  They should all be following the progress of this case closely, to ensure that the right result can be delivered by the new pension regime.

ENDS

Dr. Ros Altmann                                                                                       18th June 2007
07799 404747

Notes for Editors:

  1. Sea Containers has two UK final salary pension schemes – the 1983 and 1990 schemes.  Sea Containers filed for Chapter 11 protection in the US last year and has taken advantage of US rules that allow pensions to be offloaded onto their Pensions Benefit Guaranty Corporation (US equivalent of the PPF).  The Regulator apparently considers that Sea Containers wanted to do the same in the UK, but the new 2004 Pensions Act legislation makes this unacceptable.  It seems that the Company did not really expect the Regulator to issue an FSD against it.  For example, its News Release last October stated the following:

    In light of the deficits relating to the Sea Containers 1983 and 1990 Pension Schemes in the U.K., Sea Containers has sought to ensure that the restructuring takes account of the pension liabilities. The directors of Sea Containers Services Ltd are in discussions with the trustees of the 1983 and 1990 Schemes and the U.K. Pension Regulator about the future of those Schemes. The trustees of the 1983 and 1990 schemes have issued certain demands and notices, pursuant to legal requirements and the pension scheme rules, to Sea Containers Ltd and participating employers including Sea Containers Services Ltd.

  2. In January 2007, the Pensions Regulator issued a warning notice to Sea Containers, demanding that it must support its UK pension schemes.  Again, the company filed a form 8-K which contained the following statement – clearly suggesting that it did not consider the FSD to be reasonable and was hoping to negotiate its way out.

    The United Kingdom government Pensions Regulator (which regulates employment-based pension plans in the UK and aims to protect the benefits of  members of UK pension plans) has issued notices to the Group on October 19, 2006 warning that the Regulator is considering exercising its powers to issue financial support directions ("FSDs") to the Group under relevant UK pensions legislation, in respect of the Sea Containers 1983 Pension Scheme (the "1983 Scheme") and the Sea Containers 1990 Pension Scheme (the "1990 Scheme") (together the "Schemes"). 
    These are multi-employer defined benefit pension plans of Sea Containers Services Ltd., a UK subsidiary of the Group. If FSDs are issued to the Group, it may be liable to make a financial contribution to one or both of the Schemes which may be greater than the sum payable by the Group in respect of pension liabilities under the terms of a support agreement between SCL and Sea Containers Services Ltd. entered into in 1989 under which the UK subsidiary provides administrative services to the Group and other subsidiaries and is indemnified by the Group for the cost of those services. 

    Because the Schemes are multi-employer plans, the liabilities under them are shared among the participating companies. The Company cautions, however, that these estimated costs have not been agreed by the Company and that no FSDs have been issued. The Group is considering its reply to the Regulator's warning notices and does not accept that it is reasonable or appropriate for the Regulator to issue FSDs.

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