On 31 March 2022, the Pensions Regulator (TPR) published a section 89 report on its regulatory intervention in relation to the Dosco Overseas Engineering Limited (1973) Pension & Assurance Scheme (the Scheme).
The report came a year after TPR issued a contribution notice (a CN) for up to £2.3m against SMT Scharf AG (Scharf), a German company, for its role in a transaction which resulted in the insolvency of the Scheme’s statutory employers and, ultimately, in reduced benefits for members. The quantum of the CN suggests that CNs are compensatory rather than punitive, and will not necessarily extend to the full amount of the buy-out deficit if that exceeds the loss caused.
In 2010, Scharf acquired the Dosco group of companies (the Dosco Group), which included the statutory employers of the Scheme. Scharf was aware of the Scheme’s significant defined benefit liabilities at the time. Nonetheless, two years after the acquisition, Scharf’s concerns about these liabilities grew and it began plans to dispose of the Dosco Group.
Two potential buyers appeared, but both pulled out due to the DB liabilities. As a result, Scharf planned a management buy-out for €2m, using a shell company as the acquisition vehicle. The acquisition was financed by £1.4m’s worth of loans from the Scheme’s statutory employers, whose terms stipulated that they would be written off in the event of either party’s insolvency.
Scharf made no application to TPR for clearance, offered no mitigation and failed to notify or consult with the trustees of the Scheme in time. Eight months later, the statutory employers went into administration. This triggered a Pension Protection Fund (PPF) assessment period and forced trustees to secure a buy-in with reduced, PPF-level benefits.
In March 2019, TPR issued a warning notice against Scharf. TPR’s case was based on Scharf’s “complete disregard for the interests of the scheme by the inappropriate disposal of Dosco Group”. However, despite TPR’s fierce criticism of Scharf’s conduct, the quantum of the CN was compensatory only. The CN was for £2.1-2.3m, of which £1.4m was the principal sum (corresponding to the value of the loans from the statutory employers) and the remainder was for lost investment returns to the Scheme and interest. (It was the first time TPR included lost investment returns in a CN.)
This decision on quantum provides clarity on how TPR might approach CNs in the future, after two previous CNs that were difficult to reconcile. The first of these was the Bonas case, in which the Upper Tribunal held that, generally, the amount of a CN should be restricted to the detriment suffered by the scheme and should not be penal. TPR responded to the judgment by rejecting the Upper Tribunal’s analysis and stating that it would not be changing its approach to CNs as a result. However, when issuing CNs in relation to the BHS pension schemes seven years later, TPR calculated quantum by reference to the amount of the loans and dividends paid by the scheme’s sponsors .
The Dosco decision suggests that TPR will apply the principles from the Upper Tribunal’s decision in Bonas which compensates schemes for the detriment they suffer (including consequential losses such as lost investment returns) from the actions that the CN relates to.