This report outlines how The Pensions Regulator (TPR) worked with Keytec (GB) Limited, its parent company Turbon AG, and the pension scheme trustees to reach a settlement that achieved the best possible outcome for members without the need for us to use our anti-avoidance powers.
Published: 28 July 2021
Case summary
The German parent company of a UK-based distribution company has agreed to provide essential financial support for its pension scheme after we issued a Warning Notice proposing to use our anti-avoidance Financial Support Direction (FSD) power.
The parent company has paid a one-off lump sum of £636,000 into the scheme as well as underwriting the employer’s ongoing funding obligations. This includes providing an improved guarantee and agreeing to a funding framework for future valuations, ultimately leading to greater security for savers.
Background
Keytec (GB) Limited is the statutory employer of a small hybrid arrangement (135 defined benefit (DB) members and 27 partial DB members) with its parent company, Turbon AG, based in Germany. When the scheme submitted its 2016 actuarial valuation we considered it was being treated unfairly as a creditor of Keytec in comparison with the company’s shareholders. The trustee and employer had agreed a two-year contribution holiday for the scheme after the 2013 valuation, with just £30,000 paid in the year ending 5 April 2016 and a further contribution holiday agreed during the 2016 valuation. Even when the employer paid out a £876,000 dividend in 2015 (after the parent company decided to wind up the employer’s manufacturing business and convert it into a distribution company for products manufactured in Europe), the scheme received nothing further.
The employer had become a service company and we were concerned that it would not be able to support the scheme without help from Turbon, which had told the trustees that it preferred to prioritise general company cash needs over payments to the pension scheme. Turbon had provided two guarantees to the scheme, but these did not provide sufficient financial support as they were limited in value and one was also time-limited.
Regulatory action
The negotiations
In order to reach a positive conclusion for the scheme members we supported negotiations for a funding package between the trustee and Turbon, while remaining prepared to refer the matter to the Determinations Panel if our expectations were not met.
Throughout these negotiations we engaged extensively with both Turbon and the trustee to ensure they could meet Keytec’s funding obligations, insisting that Turbon needed to promptly pay an upfront lump sum contribution to the scheme to make a significant reduction to the deficit.
We indicated that we would consider closing our regulatory action seeking an FSD if Turbon could agree with the trustee to provide proper long-term, ongoing financial support for the scheme.
In response, they proposed a funding package that would see Keytec pay £89,000 per year over 20 years (with Turbon guaranteeing those contributions) and the existing guarantees fall away. However, we did not consider that this was adequate support for the scheme.
After further discussions between ourselves, Turbon, and the trustees, the proposal developed into a provisional funding agreement which included:
- an agreed basis for the valuation as at 5 April 2019, targeting self-sufficiency and resulting in a deficit figure of £1.8m
- a prompt lump sum cash payment of £636,000
- deficit repair contributions of £106,000 per year until 31 December 2030 (as well as £50,000 per year for expenses)
- a guarantee by Turbon covering Keytec’s ongoing funding obligations and any section 75 debt capped at £4million, replacing the two existing guarantees. This was based on a £4.2m deficit on a buy-out basis as at 5 April 2019, before the lump sum was paid
- a funding framework reflecting an agreement to carry out future valuations of technical provisions on a self-sufficiency basis, as set by the scheme actuary to reflect a low risk funding strategy. This included deficit repair contributions continuing at the same level if the deficit reduces and increasing if the deficit increased, maintaining the recovery plan end date of 31 December 2030 (subject to affordability).
We requested financial information from both the trustees and the targets to verify that the proposed terms reflected both the maximum affordable support by the employer group and meaningful long-term financial support for the scheme. As part of this we received details of proposals to transfer new group operations to Keytec to generate future revenue.
We concluded that the proposed funding package between Turbon and the trustee would provide meaningful financial support for the scheme and addressed our concerns in full, so we were satisfied it was no longer appropriate to use our powers.
Outcome
Following our intervention and consultation with the parties, the targets and the trustee have entered into a funding agreement in line with the above proposal which provides meaningful long-term financial support for the scheme.
As a result of the funding agreement, the savers have increased prospects of receiving their full benefits and the risk that the scheme will need to call on the Pension Protection Fund (PPF) has reduced. The cash lump sum has improved the funding position and the guarantee from Turbon of Keytec’s ongoing funding obligations as well as the section 75 debt provides increased long-term security for the scheme. It also places members and the PPF in a much better position in the event of scheme wind up or an insolvency of Keytec.
Turbon has accepted financial responsibility for the scheme in view of the erosion of Keytec’s covenant and the significant deficit. While Turbon had made legitimate business decisions in respect of Keytec’s business, the funding needs of the scheme had been under-prioritised. As a result of our intervention, the scheme will now be receiving meaningful financial support.
Our approach
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 also 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.
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 PPF.
Timeline of events
| 11 April 2017 | 2016 valuation submitted to TPR |
|---|---|
| 11 May 2018 | Keytec and Turbon notified of TPR investigation |
| 29 October 2019 | Turbon confirms Keytec no longer has an operational role in the Group |
| 13 December 2019 | Trustee proposal to Turbon regarding 2019 valuation |
| 23 March 2020 | TPR issues Warning Notice |
| 15 April 2020 | Extension to representations deadline agreed |
| 31 August 2020 | Representations received |
| 10 September 2020 | Discussion with Turbon about the level of financial support being offered |
| 05 February 2021 | Signed agreements for funding arrangements received |
| 12 March 2021 | TPR confirms end of regulatory action |