Scharf AG, a German mining equipment business, has received a notice from TPR to contribute just over £2m to the pension scheme of its former subsidiary.
This blog post will be relevant if you are considering corporate transactions and operate a DB pension scheme in the UK. This case shows the importance of taking specialist advice on TPR’s wide powers to protect pension savers.
In 2013, Scharf sold a UK subsidiary business (the Dosco Group, which was a manufacturer and supplier of mining and tunnelling equipment) to a shell acquisition company that was set up by management for an MBO (management buy-out).
Two companies in the Dosco Group were employers in a UK defined benefit occupational pension scheme that had approx. £53m assets and a s75 debt at the time of acquisition of £38.8m. The purchase price was put together with loans from the two employer entities (which TPR states was an extraction of cash) and, per TPR, the transaction deprived the scheme of parental support. It was progressed with “complete disregard for the interests of the scheme” and with “no investment or realistic prospect of future financial support”. A key individual also received a cash payment the day after the transaction completed and TPR argued that he had personally benefitted from the arrangements. A cash settlement for £130,000 was reached with this individual.
TPR’s regulatory intervention report clearly sets out the facts.
TPR says the case shows it will take action for schemes of all sizes, that it will consider action against corporates and individuals, and that a target being based overseas is no obstacle to TPR using its anti-avoidance powers. It is also the first time TPR’s Determination Panel has awarded a sum for lost investment returns to a scheme and for interest for the time-value of money in the hands of a target.
It is interesting that the quantum of the contribution notice (approx. £2m) is similar in value to the detriment caused to the scheme as a result of the transaction itself and is not related to the s75 debt to reflect, as has been argued in other cases, the loss of a chance for full funding. It may that a “loss of chance of full benefits” was not an applicable measure in this case but we believe this is a really important measure in the right case in order to promote contribution notices closer to the buy-out amount to improve outcomes for members.
The facts of the case as reported by TPR appear a fairly clear cut avoidance situation. The Dosco business entered administration just 8 months after the transaction and the key individual had received legal advice that the transaction would be materially detrimental to the scheme but had not acted on it. There had been no clearance application (when this option had been taken on a related transaction just three years earlier) and no advance notification or discussion with the trustees for mitigation. Finally, Scharf did not attend the Determination Panel hearing in February 2021.
Since the facts of this matter the circumstances in which TPR can exercise its anti-avoidance powers have widened and there have been new criminal sanctions introduced in the Pension Schemes Act 2021. Would the facts of this case have merited TPR seeking to exercise its criminal powers had they taken place more recently?
In the months since the new powers came into force, we are seeing employers seeking greater and earlier advice on TPR’s powers and on the impact of corporate activity on their pension schemes. This is a good thing. The criminal sanctions will further deter avoidance behaviour. Our interactive triage tool supports employers and pension trustees with navigating these new powers and we fully support TPR pursuing action against those who seek to avoid their pension liabilities.
In this case we successfully used our anti-avoidance powers in relation to a management buyout in 2013 of an engineering business from its German parent company.