Pensions Bulletin 2021/25

Our viewpoint

Weakened direct covenant prompts Regulator to consider issuing Financial Support Direction

The Pensions Regulator’s latest regulatory intervention report sets out how it worked with a DB scheme’s trustees and corporate sponsor in order to reach a settlement that addressed the Regulator’s concerns of a weakening in direct employer support over recent years.

The report explains, in the case of the Sanofi Pension Scheme, that a number of mergers and acquisitions, which required several restructures within the existing group companies and businesses, had led to multiple changes to the statutory employers supporting the scheme, some significant intra-company dividends being paid, and the introduction of a significant degree of reliance by the remaining statutory employers on inter-company balances.  This caused the Regulator to become worried that there was little direct corporate support, ie from the ‘statutory employers’, to back the recovery plan.

Financial support from the wider group had been in place for some while and it did increase following initial engagement, but due to its informality and limited extent the Regulator felt the need to open an investigation in August 2019 to explore whether it should seek a Financial Support Direction against a number of targets across the corporate group.  It concluded that it had a strong case for so doing and notified the targets of its intention to issue a Warning Notice.

Negotiations then ensued leading to a settlement which included the following:

  • A new guarantee from the French parent company in relation to the deficit repair contributions and additional protection of up to £730m in the event of insolvency for roughly 20 years (by which time the scheme should be fully funded on a buy-out basis)
  • A legally binding agreement which means that any dividends paid to the wider group are matched by payments into the scheme for the same amount
  • An upfront payment into the scheme of £37m


The weakening of direct support in the context of a profitable wider corporate entity increased the risk that the latter would be required to provide formal support through the mechanism of a Financial Support Direction – but only if the Regulator took the point.  Although the FSD has not had to be activated, the settlement agreed upon could well have followed any such Direction.

So, a good result for scheme members who now have firmer corporate backing to the pension promise.

Much of the regulatory activity occurred over the same period within which the Regulator was framing its new moral hazard powers, to be activated this October.  Despite threatening the use of a pre-Pension Schemes Act 2021 power, it seems that this was done by reference to a situation that in future could attract a Contribution Notice.  As such, this case could be a harbinger of a tougher Regulator to come.

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Britvic – Court of Appeal decides on a different interpretation of the pension increase rule

The Court of Appeal, in a ruling handed down on 10 June 2021, has sided with the employer’s reading of the pension increase rule of a DB pension scheme, thus overturning a more restrictive interpretation set out by the High Court last year (see Pensions Bulletin 2020/06).

The Britvic Pension Plan’s pension increase rule references “the percentage increase in the retail prices index” subject to either a 5% or 2.5% cap depending on the pensionable service in question but goes on to say in brackets “or any other rate decided by the Principal Employer”.

The issue was what this last phrase meant.  Did it allow the principal employer to substitute a rate that is higher or lower than would otherwise apply, or only a higher rate?  If it allowed for the former, that would enable the employer to move the scheme to CPI-linked pension increases.

At the High Court it was found that the intention behind the rule was to implement the then RPI-linked provisions of section 51(3) of the Pensions Act 1995 (limited price indexation), whilst giving the employer the discretion to award a higher rate of increase.

By contrast, the Court of Appeal, after taking a tour of some past case law regarding interpretation of legal documents, which included the Barnardo’s pension case decided at the Supreme Court (see Pensions Bulletin 2018/46), concluded that it was not possible to limit the interpretation of the phrase above to ‘any higher rate’.

There had not been a clear mistake on the face of the Rule, the wording used was unambiguous and the process of ‘corrective construction’ adopted by the High Court, is normally only adopted where there is an obvious mistake on the face of the document.  Therefore, “on a proper application of the principles expressed in the recent Supreme Court authorities, the objective meaning of the language [used in the pension increase rule] is what it actually says”.


Once again, it is the precise wording of the trust deed that determines whether or not it is possible to move away from RPI-linked pension increases.  In this case, subject to any appeal, it seems that the employer can now require the scheme to operate the pension increase rule as if a CPI switch had been made.

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Royal Assent for the Finance Bill

This year’s Finance Bill received Royal Assent on 10 June, implementing a number of the measures announced in the Budget (see Pensions Bulletin 2021/09).  The now Finance Act 2021 (see also the accompanying explanatory notes) includes the following topics that impact or potentially impact pensions:

  • Freezing the Lifetime Allowance at its 2020/21 level of £1,073,100 until 6 April 2026, at which time, unless specific action is taken otherwise the Allowance will again attract annual CPI increases
  • Maintaining until 5 April 2026 the Income Tax Personal Allowance and Higher Rate Threshold at the levels they increased to on 6 April 2021: £12,570 and £50,270 respectively
  • Increasing the rate of Corporation Tax to 25% on profits over £250,000 from 1 April 2023 (with a tapered increase for companies with profits between £50,000 and £250,000)
  • Introducing the “super deduction” from Corporation Tax, allowing businesses to claim tax relief of up to 130% on investment spending over the next two years (ie before the rate increase above comes into effect)

The Act also modifies the pensions tax provisions in the Finance Act 2004 to enable collective money purchase schemes, legislated for by the Pension Schemes Act 2021, to operate as UK-registered pension schemes.


A five-year freeze on an already much reduced Lifetime Allowance (remember the £1.8m level the allowance was at ten years ago?) will inevitably draw more and more into having to face unexpected tax bills on their retirement savings when they come to access them.  Although it is a nice problem to have, how to manage it is not straightforward.

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This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.