Can trustees, in the event of a wind-up, favour one class of members over another if there is an excess?

But the story runs much deeper than a mere buyout win for L&G. It shines a light on the impact of existing legislation on scheme members when an employer becomes insolvent, what goes on during a Pension Protection Fund (PPF) assessment period and how, despite all the best intentions, pensions legislation can result in innocent members losing out on substantial amounts of retirement benefits.

The story of T&N is a fascinating one in itself. Based in Rochdale (pictured), Manchester, T&N was the world’s first and largest asbestos firm. Starting in the 1870s, staff wove the asbestos fibres bought in Africa and Canada into a heat-resistant cloth that was used to insulate pipes around the globe.

It was only in the 1920s that asbestos’s harmful effects became known, with T&N employee Nellie Kershaw becoming the first victim of what would come to be known as asbestosis. In the 1950s, exposure to asbestos was linked to cancer deaths for the first time and what followed was 50 years of damning press articles on T&N and other firms’ use of the substance.

Compensation claims paid out by T&N in the 1980s resulted in the company sitting on the brink of collapse, but the firm was bought by US car parts manufacturer Federal Mogul in 1998. Operations continued until 2001 when Federal Mogul filed for chapter 11 in the US. It then became apparent the UK scheme had acquired a large black hole, partly due to the scheme deciding – as many companies did – to take a lengthy pensions holiday in the 1990s.

In 2004 it was hoped that Federal Mogul’s major bondholder Carl Icahn would provide a boost to keep the scheme afloat; initially he offered a one-off payment of $130m (£67m at the time), which would have shored up 15% of the deficit. However, the trustees believed the liquidation of T&N’s assets would produce somewhere between £100m and £250m, leading the trustees to reject Icahn’s offer.

Icahn later offered £14m a year for three years, plus a contribution that would cover the minimum funding requirement thereafter, but before the trustees could return a response Federal Mogul withdrew the offer, citing the UK pension bill as changing matters.

Then in 2005 Kroll, the administrator for the insolvent company, announced a new deal in which the pension fund would receive a payout of £250m, covering more than a quarter of the £900m deficit. The scheme entered the PPF assessment period in 2006, and so began a five-year actuarial battle to determine whether the scheme would enter the PPF.

Many have asked why it took so long for the PPF to determine the scheme was solvent. PW knows from conversations with L&G that negotiations for a scheme buyout began in 2009; so could the process have been resolved sooner?

The biggest problem was the sheer size of the scheme. David Heslop, chief operating officer for the PPF, denies anyone had dragged their heels, adding that trying to collate the data of more than 30,000 members was incredibly difficult. “We’ve always known the solvency would be reasonably close to 100% and it was discovered that it was just over 100%,” he says.

At the time of entry, the T&N scheme had an annual expenditure of around £69m and assets in the region of £1bn, with an additional £375m being provided by Federal Mogul to help plug the deficit and pay off asbestos compensation claims. The annual expenditure is now believed to be £76m and, with L&G winning the bulk annuity contract in October 2011, the members’ benefits were at last secured – albeit at capped PPF compensation levels.

However, for 33 of the 30,000 members, this PPF compensation cap saw as much as 70% of their original pension payments removed. One member, Grenville Hampshire, has spoken at great length about the punitive legislation and his campaign to get the compensation cap removed if a scheme exits the PPF assessment period.

“The real issue is that by moving out of the PPF that rather pernicious piece of legislation continues to penalise these people,” he says. “There’s no possible argument for saying those 33 people should continue to be capped now that we’ve come out of the PPF.

“I’m not criticising the PPF or the independent trustee, they’re just applying the law. There’s no question that the 2004 act was a very good piece of legislation, it’s just that a very small number of us have had our pensions destroyed and we can’t see what the benefit of doing that is.”

T&N isn’t the only scheme where the legislation has resulted in members losing much of their pension – any scheme that has exited the PPF is subject to the same contribution cap. This includes Heath Lambert, Ilford and Uniq, among others.

Paul Hughes, ex-finance director of Heath Lambert, made contact with members of the T&N scheme after his pension was cut from £70,000 a year to £17,500. “Now all my pension is in the PPF paying other people’s pensions,” he says.

Hampshire makes it clear he has no wish to interfere with the benefits of the other members but that he and his 32 colleagues feel disproportionately disadvantaged. “All we’d ask is if there is a surplus [after the PPF level of benefits has been provided] that it be used to fix that problem.”

Can trustees, in the event of a wind-up, favour one class of members over another if there is an excess above the PPF 100% level? Unfortunately section 73 from the Pensions Act 1995 prevents this from occurring.

A spokesman for the T&N trustee says: “The law sets out how the trustee must apply the scheme’s assets and is clear that we must use any money in excess of that required to secure PPF benefits for the benefit of all members. There is the prospect of a small one-off uplift to all members’ annual pensions in due course – but we cannot use this additional money to favour one group of members over another.”

In essence there are only enough assets to meet a fraction of the remaining scheme benefits. Even if there was a surplus of sorts (ie there is an amount left over after securing 100% of PPF benefits), the trustee would be unable to pay it only to those worst affected by the compensation cap. This is because section 73(3)(b) states: “Where the amounts of the [remaining scheme liabilities] cannot be satisfied in full, those amounts must be satisfied in the same proportions.”

Pensions minister Steve Webb has also drawn a line under the situation. In a letter between himself and an MP representing the 33 affected members, Webb says that after reviewing all the arguments and taking their plight into account he is unable to assist their cause.

One section of the letter dealt with Hampshire and his colleagues being forced into early retirement. Webb says he accepted the members felt as though they had no choice but to take early retirement, although: “I have to bear in mind the position of other people who did not take early retirement before April 2005… and the position of members who have taken or will take early retirement after April 2005. Improving the position of one of these groups... would be unfair”.

Webb “reluctantly” states he could not find a way forward for the 33 members, since “it would be unfair to increase payments to early retirees in schemes that had transferred to the PPF without finding a mechanism to give corresponding increases to deferred and active members of the same age, and those in schemes that wound up outside of PPF or the Financial Assistance Scheme”.

He concludes: “I realise this decision will be a disappointment... and indeed am disappointed to be in this position.”

The only other route would be for a change in the law to change the priorities order so that if the scheme comes out of the PPF everyone gets their pension at the 90% level at retirement age; but this seems unlikely as most schemes exiting the PPF will still not be fully funded in the original sense, meaning there won’t necessarily be enough assets to fund 90% for everybody. Whatever the outcome, for the vast majority of members the bulk annuity deal is a good one as at least some of their pension has been safeguarded – which looked unlikely at best back in 2001.