Bonas case highlights need for covenant reviews

The regulator had originally sought more than £5m from the Belgian sponsors of the Bonas Group Pension Scheme after it fell into the Pension Protection Fund, and lawyers have said sponsor covenants assesments are especially relevant for schemes with overseas owners.

For schemes which are solely reliant on parental support – where the parent has no legal obligation to the scheme – it is feasible that the parent employer may decide to walk away.

In such cases, schemes are advised to seek an independent covenant review to assess the financial strength of the sponsor and its willingness to support the scheme.

Such action would help the scheme management team judge how strong the employer covenant was and determine whether additional action would need to be taken to improve the long-term security of the scheme.

Scheme management teams should also ensure they understand the legal structure of the support to the scheme, the financial support and the position on insolvency so they can go into negotiations with the employer fully prepared.

In April 2010, the determinations panel recommended the regulator should issue a contribution notice in an amount exceeding £5.08m against Michel Van de Wiele NV (VdW), the Belgian parent company of Bonas UK.

The Bonas scheme was effectively dumped into the PPF after it was sold under a pre-pack administration, prompting the regulator to seek a contribution notice from VdW.

Believing the £5.08m sought was too great an amount, VdW applied to the Upper Tribunal – the tax and chancery chamber of the HM Courts and Tribunals Service – and asked for the determination to be struck out.

The strike-out application was unsuccessful, but in giving judgment Justice Warren suggested the amount specified in the proposed contribution notice was excessive, adding the contribution notice should simply compensate the scheme for the detriment suffered, rather than being based the amount on the PPF deficit.

The regulator’s subsequent report said it believed thecomments related solely to the Bonas case and should not be relied on in other cases.

Chief executive Bill Galvin said the settlement was not indicative of any change in the regulator’s approach to “avoidance activity”.

“We will investigate vigorously attempts to avoid pension liabilities and, where appropriate, we will not hesitate to use our powers where we believe there may be an opportunity to improve the outcome,” he said.

“This includes examining closely the circumstances of insolvency events to ensure that outcomes are fair for pension scheme members and the PPF.”

But not everyone has been left feeling as confident. Ken Tymms, corporate pensions manager at Grove Corporate Pensions, said the decision had left him and others confused.

“We are told to be reassured it has been vindicated in doing so in this case and are justified in acting similarly in the future,” he said. “Meanwhile, pensions levy payers have to pick up the £5m cost of making good the deficit on entry to the PPF. I doubt £60,000 will even cover the regulator's costs.

“It would be helpful to the industry if the regulator was to give further explanation about the comments that led to the change in compensation basis. All will want to assess whether this is, in effect, a precedent that will limit the regulator's ability to meet its statutory obligations in future.”

Simon Kew, senior manager at Jackal Advisory, said in the regulator’s defence, it has to ensure bad practice, as in this case where the trustees were not involved, and the parent company walked away from a scheme via a pre-pack, does not gain momentum.

“The regulator calls it 'regulatory erosion' – let one get away with it and the floodgates open. But did it go about it the right way? Probably not – but hindsight is a wonderful thing,” he added.

A report on the Bonas case issued under section 89 of the Pensions Act 2004 can be viewed on the regulator’s website.