Return of the zombies: Can trustees ‘game’ PPF?

Zombie pension schemes – those where employer affordability is so stretched that the plan has little chance of ever returning to full funding – are nothing new in the UK. A landmark 2015 paper by the Pensions Institute found that 1,000 schemes were stressed as a result of weak sponsors, and might be sleepwalking into greater losses for the PPF.

With 83 per cent of Fitch’s sector outlooks now set to negative, and emerging evidence that poorly funded schemes are faring worse in comparison with their peers, the problem could become worse as June 30 approaches, when the Pensions Regulator’s emergency three-month concession to permit deficit contribution holidays ends (unless trustees have reliable covenant information to extend).

According to Hymans Robertson, 14 per cent of schemes have either received, or are expecting to receive, a contribution deferral request as a result of the Covid-19 emergency.

The situation presents a moral and legal conundrum for trustees – permitting zombie sponsors to limp on as funding levels worsen allows more members to age their way to better levels of PPF protection, satisfying their fiduciary duties to members. But doing so also risks regulatory action from the regulator, which itself cannot wind up schemes unless in members’ best interests.

In 2009, the High Court found that trustees of the Ilford Pension Scheme were not permitted to “select against” the PPF by buying annuities for certain members before entering the lifeboat, but experts have warned that this case is highly specific.

‘Gaming’ the PPF creates a funding strain on levy payers and undermines the lifeboat, and a TPR spokesperson stated: “Trustees should not take into account the existence of the PPF and the potential of it providing member benefits in their decision-making.”

The spokesperson pointed to its guidance on how trustees can navigate the current crisis, and added: “Currently, some schemes will find it challenging to manage the impacts of the current crisis. Trustees with concerns over sponsor insolvency need to consider the outcome for the scheme should the sponsoring employer go insolvent, and put in place an action plan.”

The PPF says it is not currently aware of any specific cases gaming the system. However, a spokesperson pointed out: “We continue to work with TPR, which has legislative powers to protect us from situations such as this, to ensure trustees follow the appropriate regulations and guidance. 

“In restructuring situations where the PPF is involved, we will always seek to ensure that the impact of PPF drift is eliminated or minimised depending on the specific case facts to protect our levy payers.”

Trustee-led insolvency difficult to countenance

Despite these strong words, experts have said that the reality of the situation is more nuanced.

Mike Smedley, partner at Isio, has seen “the regulator look very closely at PPF drift in individual schemes, so we know it’s alive to these concerns”.

“But the fact that it very rarely forces wind-up suggests that it supports the approaches taken by trustees in these difficult situations,” he said.

Bob Scott, partner at LCP, agreed: “I would not put it as bluntly as the former chief financial officer of Carillion was alleged to have done – saying that paying pension contributions was a ‘waste of money’ – but, if the PPF deficit is large, then members’ interests will be best served by the sponsor limping on and the scheme continuing as an ongoing scheme.”

Stephen Scholefield, partner at Pinsent Masons, said the situation is rarely black and white, with trustee decisions to suspend employer contributions usually aimed at nursing the sponsor back to health. 

He said: “Stopping PPF drift may require the scheme to be wound up, triggering the s75 debt and leading to the insolvency of the employer and all that goes with that in terms of job losses, etc. Trustees should tread carefully before reaching the conclusion that it is the right thing to do.”

Is TPR triage the answer?

Experts have therefore suggested that an update to the current framework may be necessary, if more zombie employers emerge.

Clive Pugh, partner at Burges Salmon, said that with “no available power to take action in the best interests of members, the employer and the PPF... the principles governing compromises for schemes would benefit greatly from a major update with new flexibilities”.

According to Arc Pensions Law partner Anne-Marie Winton, the regulator needs a triage system: “I suspect they already have it in enforcement of moral hazard cases. It is not going to be possible to investigate every deferral of DB contribution and, quite frankly, some of them they may never know about, because nowhere does it say ‘you have to tell the regulator’.”

She says that trustees would do well to heed pensions minister Guy Opperman’s written answer on April 27, when he said: “With the existing flexibilities and easements, there is no reason why a pension scheme should push an otherwise viable employer into insolvency.”

PPF avoiding knee-jerk reactions

All eyes have been on the PPF’s resilience to the probable financial shock delivered by the Covid-19 pandemic and ensuing lockdown, and the subsequent impact on companies.

Analysis by LCP at the end of April suggested that a “perfect storm” of lower funding levels and heightened insolvency risk means that while the PPF is not under threat, individual companies’ risk-based levies could triple in some cases.

Meanwhile, the PPF itself could postpone its 2030 self-sufficiency goal if necessary, but is avoiding “any kind of knee-jerk reaction”.

Indeed, the PPF levy of £620m for 2020-21 is not a dramatic rise.

The lifeboat stated on its website: “In calculating the levy invoices, we’ll be using information that was largely collected before the economic impact of Covid-19 became significant. As in previous years, the most levy we’ll ask any individual scheme to pay is 0.5 per cent of its liabilities.”