The Pensions Regulator will not pursue moral hazard proceedings against chemical company Chemtura after the firm agreed a £60 million comprehensive funding package.
Under the agreement, £30 million has already been paid to the Great Lakes UK pension plan, which is sponsored by Chemtura Manufacturing UK (CMUK), a solvent trading UK business.
A further £30 million will be due over the next three years, with group companies, including the overseas parent, entering into security arrangements providing protection to the scheme regarding its further liabilities.
Trustees approached the regulator with concerns about the security of the pension scheme after Chemtura Corporation, CMUK’s US parent, filed for chapter 11 bankruptcy protection in March 2009.
The regulator launched an investigation, and in December 2010 started regulatory action by issuing a ‘warning notice’ against target companies including CMUK and Chemtura Corporation.
The warning notice explained that the regulator’s determinations panel may in due course decide whether it would be reasonable to issue financial support directions (FSDs) against the target companies.
In May 2011, CMUK and Chemtura Corporation reached agreement with the trustees in relation to a funding package for the scheme. The settlement finally agreed meant that a hearing before the regulator’s Determinations Panel scheduled for June 2011 was not necessary.
There were about 1,270 members of the pension scheme.
Stephen Soper, executive director for defined benefit (DB) regulation at the regulator, said: “In my view, as in the 2007 Sea Containers case, this is another example of the use (or potential use) of the FSD power assisting in securing additional financial support for a UK scheme from an overseas parent company. That’s good news for the 1,270 members of this scheme as well as Pension Protection Fund levy payers.
“A negotiated agreement is clearly preferable to having to take enforcement action and we urge sponsoring employers and their parent companies to engage positively with scheme trustees to ensure pension schemes have adequate security.”
Moral hazard is when a solvent company tries to find a way to avoid paying the liabilities that they have.
Financial support directions allow the regulator to go to the connected company of a larger organisation – a sister company, for example – and require them to put in place financial support for a pension scheme.
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