Hot on the heels of reports of the Pensions Regulator’s first issue of a contribution notice, the Regulator’s Determinations Panel (the ‘Panel’) has today published its reasons for supporting the Regulator’s issue of financial support directions against a wide range of companies in relation to the Nortel Networks Pension Plan. This is only the second time that the Regulator has determined to issue a financial support direction; the previous occasion concerned Sea Containers in 2007.
We report on the Panel's findings below, based on the facts and the reasons as set out in the published decision.
Companies involved
Many corporate entities were the targets of the process before the Panel. They fell into three main groups:
- the two Canadian parent companies which ultimately controlled the group (the ‘Canadian parents’);
- two American companies (the ‘USA entities’); and
- a much larger group of (mainly) European companies (the ‘EMEA entities’).
This third group did not include Nortel Networks UK Limited (‘NNUK’), the scheme’s principal employer.
Notably, none of the targets participated in the Panel process.
The scheme
The scheme is a defined benefit occupational pension scheme. NNUK had inherited the scheme from STC plc, a major UK telecommunications company; in 1987, the group had owned 27.1% of STC and, in 1991, increased its holding to 100%.
From 1989 to 2002, all the scheme’s participating employers – NNUK included – enjoyed a contributions holiday. At the end of this, the scheme had an ongoing deficit of £177m (with the value of the contributions holiday to the various employers being estimated at £300m). It was also estimated that the scheme would have been £500m better funded had it not been for the contributions holiday.
The events that then ensued were of company contributions (determined by the Canadian parents) being at levels which were dramatically lower than those stated by the scheme actuary as necessary to restore the scheme’s ongoing funding position and no commitment to a regular schedule of contributions.
By the April 2005 valuation, the ongoing deficit had risen to £356m. At this time the trustees did manage to secure a funding agreement with NNUK (sanctioned by the Canadian parents) of £150m by April 2008. After that, one of the Canadian parents guaranteed contributions up to 2012 based on an assessment of the deficit and guaranteed NNUK’s statutory buy-out debt up to US $150m. Even these figures, however, still fell well below the actuary’s assessment of what was required and, in the Regulator’s view, the guarantees were ‘not close to sufficient to meet the section 75 debt’.
On 13 January 2009, the size of the fund was £1.4bn, but with a deficit of some £2.1bn on a buy-out basis. The following day, NNUK went into administration with an estimated likely distribution to its unsecured creditors (including the scheme) of around 15%.
Financial support directions – essential criteria to be met
In order to issue a financial support direction (or ‘FSD’) against a target company, several statutory criteria needed to be met. These related to the nature of the scheme, the relationship of the target to the employer concerned and the employer needing to have been ‘insufficiently resourced’; the Panel found these conditions to have been met.
Reasonableness - general
The Panel also had to be satisfied however that the issue of an FSD would in all the circumstances be ‘reasonable’.
Although the legislation sets out a list of matters to which the Panel must have regard if relevant, the list is not exhaustive in determining the issue of reasonableness in any particular set of circumstances.
The Panel considered that the various companies in the group had operated as a single global entity for the overall good of the group – rather than for the specific good of each individual company. This in itself did not determine the question of whether it was reasonable to issue an FSD, but it was relevant to some of the specific reasonableness factors referred to below.
Reasonableness – the two Canadian parent companies
The Panel considered that, between them, the two Canadian parents had been in the driving seat throughout: all major strategic decisions were taken by them, including financial budgetary controls, cash flow management and so on.
More particularly, decisions about contributions to pension arrangements by other companies in the group were decided by the Canadian parents; closely related to this was the Panel’s finding that the Canadian parents had had effective control over NNUK’s financial position. It was found to have been the Canadian parents who had been behind the contributions holiday (and who had ultimately benefited from it) and the subsequent inadequate contribution levels after the holiday had ended.
Reasonableness – the two American companies
The two USA entities were found to have benefited from these arrangements too.
One of them, for example, was found by the Panel to have made an interest-bearing loan to one of the Canadian parents, part of which had been paid back to it in cash. It was also found that the same Canadian parent had not repaid any part of a (non-interest-bearing) debt owed by it to NNUK, so the Panel concluded that the USA entity concerned had benefited indirectly from that.
The USA entities were also found to have benefited from work carried out at a loss by NNUK for one of the group’s major US customers and other work done by NNUK for the US group. The Panel decided that this latter work gave the USA entities a considerable competitive advantage in the US market, and that the USA entities also relied extensively on NNUK for valuable sales and marketing assistance for which NNUK were not (or not adequately) paid.
The USA entities had no direct connection or involvement with the pension scheme, but the Panel considered that they benefited indirectly from the Canadian parents’ failure adequately to repair the scheme’s deficit after 2002.
Reasonableness – the EMEA entities
This was the largest group of companies. Since around 2003, these had mostly (but not all) been subsidiaries of NNUK. They were all, however, found to have been under the effective control of the two Canadian parents.
The Panel found clear evidence that benefits had flowed from NNUK to the group as a whole (and therefore to the EMEA entities) in respect of its research and development activities, and that NNUK had not been adequately rewarded. The Panel formed the view that there was other evidence too of benefits flowing from NNUK to the EMEA entities in the form of services for which NNUK was inadequately compensated.
Like the USA entities, the EMEA entities had no direct connection or involvement with the pension scheme. However, they (along with the USA and other group companies) were found to have benefited from the financial easement to the group arising from the Canadian parents’ failure to repair the deficit after 2002.
Panel’s conclusions and consequences
The Panel’s conclusion therefore was that it was reasonable to impose the requirements of the FSDs sought by the Pensions Regulator on the Canadian parents and on the USA and EMEA entities.
The Regulator’s determination to issue FSDs was made on 25 June 2010, with each of the targets having 28 days in which to decide whether to refer the mater to the Upper Tribunal (Tax and Chancery) (formerly called the Pensions Regulator Tribunal); the FSDs will not be issued if a reference is made until final disposal of it and any appeal from the Tribunal’s decision. (A reference is effectively a complete re-hearing of the matters before Panel.)
The Panel decided that the FSD to be issued should require the financial support to be put in place within the six months following that.
The Canadian parents and USA entities, however, have obtained orders in their respective jurisdictions to the effect that any FSD will be void there. These orders are a consequence of the insolvency proceedings taking place in those jurisdictions.
The Pensions Regulator's press release on this development (with a link to the Panel's published determination) can be found here.
