Investigations by the Pensions Regulator have dealt immense damage to companies’ reputations in the past. What are its moral hazard powers, and how can organisations mitigate the risk of an intervention?

Anne-Marie Winton, Partner at Arc Pensions Law LLP, examines the role of the Pensions Regulator in imposing joint and several liability on group companies.

Defined benefits (or final salary) pension schemes are often a group’s largest unsecured UK creditor by far, possibly representing hundreds of millions of pounds of contingent liabilities for the group employers who participate in the scheme.

In law, these liabilities sit solely with the companies who have joined the scheme by entering into a formal deed of adherence or participation with the scheme’s trustees. Usual privity of contract rules apply. However, it is possible for the Pensions Regulator (“TPR”) to shatter privity and impose joint and several liability on other group companies – anywhere, worldwide. Examples of countries where TPR has sought to use its UK powers include Bermuda, Canada, and Russia, as well as the UK of course. The source of these wide-ranging powers, known as “moral hazard” or “anti-avoidance” powers is the Pensions Act 2004. Potential targets are those group companies who are “connected and/or associated” with an employer in the scheme (broadly those who can exercise one-third or more voting control). Directors and shareholders can also be at risk of being ordered to pay money into the scheme, without any allegations of fault or bad faith being needed.

Many household names have been the subject of (often, adverse) Government and press attention in relation to their underfunded defined benefits schemes, almost inevitably combined with some form of investigation or intervention by TPR having taken place or about to take place. TPR has itself faced extremely public criticism for, in effect, failing to intervene early and forcefully enough to stop weak and failing businesses from collapsing before they have taken steps to support their pensions liabilities. This led it to launch a 3 year plan in 2018 with the aim of taking a clearer, quicker and tougher approach to driving up standards in the pensions sector. In particular, TPR’s Chairman said that we could expect to see a more vocal Regulator, intervening quickly and decisively through use of its moral hazard powers.

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