By Clive Pugh, partner in the Pensions practice at independent UK law firm Burges Salmon.

In short, The Pensions Regulator (TPR) in the United Kingdom already has powers similar to Thor and new laws will make it as strong as all of Avengers Assembled.

If you own a business in the UK with a large pensions scheme in deficit, you might be looking to find out what the risks are, what you need to do and if you have any options. On this, it’s important to note that TPR has two new sets of powers on the statute book.

Understanding the regulator’s current and proposed powers are key for (i) any US corporate with UK subsidiaries that have pensions schemes and also (ii) if business owners are thinking of acquiring or disposing of a UK firm.

The good news is that there are options available to you to reduce risk and promote real business opportunities. In this article, we explore some of the key options for US business owners with UK subsidiaries as well as setting out in summary the powers and proposed changes.

Do I have a pensions issue? What should I be looking out for?

If you own or are looking to buy a UK business, checking the pensions position is key. To assess the scale of the issue, key factors to consider include:

• Is it the kind of scheme that can have a deficit (like the US schemes that are eligible for the Pension Benefit Guaranty Corporation (PBGC))? The main question here is whether the scheme is defined benefit (DB), where there is likely to be a substantial deficit. By contrast, in a defined contribution (DC) scheme there are not generally deficits as the pension provided is based on the value of an individual’s pension pot at retirement. The essential difference between DC and DB schemes therefore lies in the allocation of risk, either to the individual saver building a pension pot or to the company obliged to fund a set income in retirement.
• How large is the pensions deficit and how large is it compared to the sponsoring employer’s business turnover and free assets?
• How well is the scheme administered – is the member data accurate? Are there any historic legal issues as to benefits, etc.?
• How is the relationship with the trustees – do the trustees have the experience and time to maintain a strong a positive dialogue with you?

Thor’s Hammer: TPR’s current powers can break through the corporate barrier

The Pensions Regulator is already very strong: two of its key powers can break through barriers just like the mighty hammer Mjolnir. These powers can require companies and individuals that are connected and associated with a sponsor of a UK pensions scheme to make payments to it.

Can these powers apply to companies in the US? On this, the regulator’s clear position is that it is not limited by jurisdiction. Of course enforcement will need to be considered in the relevant US courts. That said, the risk of enforcement in North America must be meaningful with the US group Great Lakes paying £90 million to settle UK regulator proceedings and Nortel settlement being for £1 billion.

For these powers – contribution notices (CN) and financial support directions (FSD) – to be issued, detailed statutory tests must be met. In summary, the underlying principles behind the powers are whether a person has acted to the detriment of the pension scheme or where the scheme employer has limited assets, another group company or person has greater assets and it is reasonable in the circumstances to require payment. A key consideration will be understanding the detail of the statutes and knowing the scope of the powers. By doing so you will be in a much better position to know, assess and mitigate risk.

There are also a number of statutory defences to the regulator’s powers, but essential to these defences is that the necessary steps for the defence available must generally be taken and audited prior to any relevant corporate activity.

The new legislation: not mind-reading powers, but close

The current regulatory regime is essentially remedial, but the new draft legislation introduces punitive fines and prison sentences. For some of the offences, a person will be liable to an unlimited fine and/or seven years’ imprisonment.

New legislation will also add to TPR’s powers to investigate offences. TPR has existing powers to request information or documentation to assist investigations, but will soon have the power to obtain extensive communications data through warrants that are unknown to the subject of the warrant. This will include powers to obtain communications data from UK or overseas internet and cell phone service providers. TPR will thereby be able to access emails, web browsing history and phone records. TPR’s existing powers to inspect premises and seize documents will also be extended to investigation of grounds to make a contribution notice. TPR may not be able to read your mind, but it will be able to read your data.

Any owners and purchasers of UK companies should carefully consider this suite of prosecution and investigation powers. As part of an acquisition process, a purchaser or seller may seek to restructure the target company to make it a more attractive acquisition. Where this restructuring relates to the target’s liability to a DB pension scheme, and in particular where it removes liability or risks pension benefits, there will be a risk of regulatory investigation and prosecution against the company and its key individuals.

What are the options?

There a number of steps that can help mitigate the pensions risks, including:

• a full review and understanding of the pensions obligations;
• an active dialogue with the trustee of the pension scheme;
• discussing with the trustees the mutually beneficial options that can be reached;
• confirming whether, for example, a scheme’s cash demands can be reduced if contingent assets can be provided (generally the more that the liabilities are secured the lower the risk of regulator action);
• confirming if member-related exercises such as exchanges of benefit reduce the liabilities;
• considering discussions with the regulator and promoting a positive dialogue that recognises and takes into account the UK legal system;
• Having a full audit of the necessary business rationale for any step taken. Audits compiled in the right manner and meeting set tests can help provide a permitted statutory defence to some regulatory action.

In short, whilst there is soon to be a surge of power in an already strong regulatory body, there remain options to consider and steps to take that reduce regulatory risk. As is often the case, full dialogue with other parties, a clear audit and an understanding of the detailed regulatory provisions can all go to reduce risk and promote a balanced way forward.