TPR threats enough to secure fair treatment for hybrid scheme

The case concerned a small hybrid scheme with 135 defined benefit members and 27 partial DB members; Keytec, its statutory employer; and Turbon AG, its German-based parent company.

The trustee and employer had agreed a two-year contribution holiday in 2013, with just £30,000 then being paid in the year ending April 2016.

They agreed a further contribution holiday following the 2016 valuation. This was despite the fact that the employer paid out an £876,000 dividend in 2015.

The dividend followed a restructuring and repurposing of Keytec, which had ceased to be a manufacturing business and became instead a service company — which move occasioned the dividend. 

TPR became concerned that Keytec would not be able to support the scheme without additional help from Turbon, which had previously told the trustees it preferred to prioritise the cash needs of the business over payments to the pension scheme.

It had provided two guarantees to the scheme, but the regulator noted that these did not provide sufficient financial support. Both were limited in value and one was additionally time-limited.

During TPR’s investigation, the trustee discussed improving the security of the scheme’s guarantees from Keytec and Turbon, but Turbon did not engage.

Consequently, the regulator issued a warning notice threatening the use of its anti-avoidance powers.

Turbon initially proposed a support package that would see Keytec pay £89,000 a year for 20 years, with Turbon acting as guarantor. TPR, however, thought this was insufficient.

Following extensive negotiations, a provisional funding arrangement was concluded that included an agreed basis for the April 2019 valuation, targeting self-sufficiency and resulting in a deficit figure of £1.8m.

Turbon has paid a one-off lump sum of £636,000 to the scheme, while the new arrangement will see deficit repair contributions of £106,000 paid every year for 30 years, plus £50,000 a year for expenses.

Turbon will provide a guarantee, capped at £4m, covering Keytec’s ongoing funding applications and any section 75 debt obligations. 

Resulting from the agreement to target self-sufficiency, the new arrangement will see future valuations of technical provisions carried out on a self-sufficiency basis, as set by the scheme actuary to reflect a low-risk funding strategy. 

Deficit repair contributions will continue at the same level even if the deficit reduces, and will increase if the deficit increases, in order to pursue the recovery plan end date of December 2030.

In a bulletin, LCP said the case shows that TPR was and remains effective even without the new powers afforded it by the Pension Schemes Act 2021.

“This case indicates the willingness of the regulator to intervene, and threaten to use its armoury of powers, even where the scheme is small. That a good solution was reached within a year shows that the existing powers can work well,” the consultancy said.

TPR said the case demonstrates “that we will work with employers, trustees and the employer’s parents or other potential targets of our FSD powers to achieve a strong outcome for savers, regardless of the scheme’s size”. 

“We will not hesitate to exercise our anti-avoidance powers in respect of targets — whether UK or (as in this case) overseas-based — to ensure DB schemes receive sufficient financial support,” it said.

It added that the case illustrates that targets and trustees “can take part in successful negotiations (including in relation to the employer’s funding obligations) in parallel with our regulatory action”. 

“Where targets are willing to engage with us and the trustees to address our collective concerns, we are willing to bring an early end to our regulatory action to save the time, costs and resources of all parties while still achieving a strong outcome for the scheme and its members,” the regulator said.

“We will consider all credible settlement proposals that further our statutory objectives, which include the protection of members’ benefits and the reduction of the risk of calls on the Pension Protection Fund.”