Defined contribution trustees must respond quickly when scheme sponsors go into administration, particularly in scenarios where financial distress has delayed payment of contributions into the safe haven of a scheme.
A luxury yacht builder has been accused of failing to put pension contributions from its workforce into the scheme for three months, despite taking deductions from workers’ salaries.
Fairline Boats, based in Northamptonshire, went into administration yesterday, bringing the future security of members' contributions into question.
The boat builder was acquired by private equity company Wessex Bristol in September and made 185 temporary redundancies last month, before going into administration on December 2 under restructuring firm FRP Advisory.
There have been instances in the past of financial directors regarding the pension creditor as a soft target
David Griffiths, Squire Patton Boggs
Mike Orpin, regional officer for Unite, said the union had just found out that the company had not been paying members’ pension contributions even though they have been deducted from workers’ wages.
“Questions certainly need to be asked as to why the current legislation can allow an employer to act in such a draconian way and treat its workforce in such a diabolical manner,” he said.
“This is devastating news for the workforce and their families in the run-up to Christmas. We will be talking to the administrator this afternoon to see if a buyer can be found and jobs saved."
Fairline Boats declined to comment.
Material payment failures
Under UK legislation, trustees can be fined for failing to report “material payment failures” by sponsors and must closely monitor incoming contributions to identify late payments.
Under the Pensions Regulator’s code of practice on reporting late payment of contributions to occupational pension schemes, trustees should ensure they are aware of overdue contribution payments and assess whether they are the result of a one-off event or administrative error.
A material payment failure is defined as that which is “likely to be of material significance to the regulator in the exercise of its functions”.
David Griffiths, partner at law firm Squire Patton Boggs, said if the late payment is the result of an isolated event or administrative error, it is feasible for trustees and the company to conclude there is no requirement to notify the regulator.
However, where companies have missed a series of payments and show no sign of “gripping the issue”, trustees must report late payments to the regulator.
“There have been instances in the past of [financial directors] regarding the pension creditor as a soft target,” he said.
If the sponsor becomes insolvent
“If there is a distress situation then [the company] might take the decision to make sure they pay the suppliers that they need and delay payments to the pension scheme because they [are regarded] as a source of less pressure,” Griffiths said.
Any length of time during which the monies are sitting in the company bank accounts means that the individual is running the risk of a company’s insolvency
David Griffiths, SPB
He added pension contributions that have been deducted from employees but have not yet made it into the "safe haven" of the scheme remain vulnerable under insolvency rules of priority.
“Any length of time during which the monies are sitting in the company bank accounts means that the individual is running the risk of a company’s insolvency.”
Marcus Fink, partner at law firm Ashurst, said if contributions have not been paid into the scheme trustees must lodge a claim against the outstanding contributions as a preferential debt.
In a contract-based arrangement this duty usually falls on the scheme administrator.
“There will be no automatic return of those contributions to members, they will be swept up in the administration process,” Fink said. “Unfortunately it’s all down to creditor priority order.”
Members must wait for the overall outcome of the administration process, he said. Once monies have been redistributed, contributions can then be paid by the trustee or provider.
When scheme sponsors become insolvent, pension pots under contract with a provider can be frozen and transferred to the member’s new employer.
But in trust-based arrangements, trustees may have to wind up the scheme and transfer it across to an insured provider.
Fink added: “Effectively the scheme has come to the end of its practical life – to secure past contributions and take contributions for future service and invest those, there is a bit more of a process.”
