The Determinations Panel of the Pensions Regulator rose to the rostrum last week by deciding to issue a financial support direction (FSD) against Sea Containers in respect of the UK pension schemes of its subsidiaries. This is a highly significant event which trustees and their advisers have been hoping for, and companies and equity investors are viewing ruefully. What does this first flexing by the regulator of its moral hazard powers herald?
Over the past two years underfunded pension schemes have been waiting expectantly to see how the regulator might exercise its powers. After last week, schemes and members will be more confident that there will be circumstances when a financially exposed scheme will be protected by the regulator in the face of a significant weakening of the employer covenant. An FSD is an anti-avoidance measure introduced by the Pensions Act 2004 to oblige employers to adequately fund their schemes. Under a defined benefit pension scheme the employer agrees to fund members’ benefits, typically based on a certain proportion of final pensionable pay for each year of pensionable service. Another moral hazard provision is the regulator’s power to issue a contribution notice.
