Contribution notice issued against former parent company

An overseas former parent company has been made liable to pay a contribution to a UK pension scheme, including a sum for lost investment returns and interest.

Summary

A regulatory report reveals that the Pensions Regulator has successfully used its anti-avoidance powers to issue a contribution notice to SMT Scharf AG (Scharf), a German mining equipment manufacturer, in relation to a failed management buyout of its UK-based Dosco Group.

The transaction meant that the employers of the Dosco Group’s DB pension scheme became unable to support it. The employers went into administration only eight months later and the scheme went into a Pension Protection Fund (PPF) assessment period.

The Regulator issued a contribution notice against Scharf for just over £2m and also reached a settlement with a key individual to pay £130,000 to the scheme.

Background

Dosco Overseas Engineering Limited (Dosco) and Hollybank Engineering Co Limited (Hollybank) are the employers of the Dosco Overseas Engineering Limited (1973) Pension & Assurance Scheme (the Scheme).

In 2010 Scharf had acquired the Dosco Group (comprising Dosco Holdings Limited and its subsidiaries, Dosco and Hollybank) from Billington Holdings Plc (Billington). Acknowledging that the employers were historically heavily reliant on formal support provided by the parent, Billington, the parties to the transaction sought clearance from the Regulator. Amongst other things, this included a warranty that all transactions affecting the Dosco Group would be at arm’s length.

The supervisory board of Scharf concluded in 2012 that Scharf’s continued ownership of the Dosco Group would not generate any value for Scharf. It decided to sell the Dosco Group and end Scharf’s connection to the pension scheme.

The sale

In April 2013 Scharf decided to sell the Dosco Group by way of a management buy-out.

Dosco Holdings was sold for €2m to a shell acquisition vehicle which was owned by Dosco’s management team and had no assets or investors. The purchase price was extracted through loans from the scheme employers to the acquisition vehicle on onerous terms, including that the loans would be written off in the event of the insolvency of either party.

This time Scharf did not make a clearance application in relation to the sale, offered no mitigation for the removal of parent company support (including £1m in guarantees) and also failed to notify or consult the trustees until the day after the transaction had completed. At this time the Scheme’s deficit was approximately £38.8m on the buy-out basis.

Martin Cain, the chief executive of the Dosco Group, had received legal advice that the management buy-out would be likely to have a materially detrimental impact on the scheme and that mitigation should be considered, but he failed to pursue this. He received €250,000 from Scharf under a consultancy agreement for his part in the transaction.

Eight months after the transaction the employers went into administration. The trustee secured a buy-in for the scheme with reduced benefits, meaning the scheme members would not receive the full amounts they expected.

Regulatory action

The Regulator noted the following reasons for its decision to pursue a contribution notice against both Scharf and Mr Cain:

• Scharf’s “complete disregard for the interests of the scheme by the inappropriate disposal of Dosco Group to a shell acquisition vehicle, with no investment or realistic prospect of future financial support.”
• The removal of parental support “on which the employers historically relied”.
• The extraction of about £1.4m from the employers (through loans) to fund the acquisition.
• Mr Cain had personally benefitted from the transaction under the consultancy agreement.

The Regulator successfully negotiated a settlement with Mr Cain in December 2020, to the value of around £130,000 to reflect the benefit he received under the consulting agreement. Consequently the Regulator withdrew his case from the Determinations Panel.

In August 2021 the Determinations Panel issued a contribution notice against Scharf for about £2m, comprising a principal sum of £1,412,113.77 (the sum extracted from the employers) and an additional sum of £670,269.09 for lost investment returns and interest.

Comment

This case is notable for being the first time the Determinations Panel has awarded an additional sum for lost investment returns and interest. It seems likely that the Panel will take the same approach in future contribution notice cases.

The Dosco case also shows the Regulator’s willingness to pursue overseas targets and individuals.

As this case pre-dates the Regulator’s ability to pursue criminal sanctions, the Regulator does not comment on whether those new powers would have been engaged had the events in question taken place after October 1, 2021.