The UK Pensions Regulator has offered some comfort to investors and funds which may have been deterred from investing in UK companies with historic defined benefit liabilities.
It is unusual, as a matter of English law, for the corporate veil to be capable of being pierced – normally the liability incurred by one group company will not, as a matter of course, taint others in its group. Liability for defined benefit pension liabilities is a notable exception – provided certain conditions are met, the Pensions Regulator can look to other group companies or controlling shareholders to provide cash or guarantees to prop up poorly funded schemes with weak corporate sponsors. The existence of such a scheme can sometimes tip the balance against an investment being made. However the Pensions Regulator’s recent report on the Bernard Matthews pension scheme suggests the Pensions Regulator will not automatically seek to target investors in these circumstances.
Rutland Partners made an investment of some £25 million in Bernard Matthews Limited (producer of turkey products) in 2013. At the time, the business was ailing and as the investment was considered to be high risk. Rutland took a controlling interest in the parent company and also took security over group company assets. This put Rutland behind the banks but ahead of the scheme in any insolvency recovery. The trustee of the scheme agreed to the security package, on the basis that reducing the likely recovery of the trustee as a third ranking creditor in a future insolvency, this was a lesser evil than impending insolvency. However, the business continued to struggle and in the space of three years Rutland looked to sell. Rutland rejected various offers for the business which would have resulted in a large part of its investment being wiped out. Ultimately Bernard Matthews was sold by way of a pre-pack insolvency, leaving the scheme to go into the PPF (the UK lifeboat for defined benefit schemes of insolvent employers). Rutland made a profit of £13.9 million on its investment.
The Pensions Regulator investigated the sale. There were no grounds for the Pensions Regulator to consider ordering any party to provide ongoing financial support to the scheme (a financial support direction). However it looked in detail as to whether it should order Rutland to make a cash contribution to the scheme (a contribution notice). The Pensions Regulator considered the 2013 purchase, the period of Rutland’s ownership and the sale in 2016 and concluded that there were no grounds to pursue Rutland as there was no evidence of unreasonable conduct.
Why is this of interest to the market? A quote from the report sums this up quite neatly:
“Rutland’s profit was a legitimate consequence of the terms of its high-risk investment in [Bernard Matthews Limited] which had been negotiated and agreed on an arm’s length commercial basis with the board of BML and the scheme’s trustees. We have no evidence of unreasonable conduct on Rutland’s part at any stage of its association with BML and the scheme or in respect of the sales and insolvency processes.”
Clearly the outcome all investigations would depend on their own facts (and the Pensions Regulator was at pains to stress that it would investigate pre-pack insolvencies thoroughly so this decision is not a get-out-of-jail-free card) and in this case it was found that Rutland did not seek to exercise undue influence or control the sales or pre-pack processes. But it is important to note that Rutland’s decision to put its own profit first and maximise its return on its investment, and not take offers which would have been worse for it but better for the scheme, was a legitimate path for it to take, given the high risk nature of the investment.
Knowing that the Pensions Regulator has signalled that investors should not be penalised for commercial decision-making may encourage investors in UK companies not to avoid groups with a defined benefit scheme in quite the same way in the future.