Malcolm Weir of the Pension Protection Fund explains the lifeboat’s priorities when assessing a corporate restructuring that involves changes to pension promises.
In these extreme circumstances it is currently possible to separate a pension scheme from the sponsoring employer if this would avoid the company becoming insolvent.
The statutory mechanism for this is called a regulated apportionment arrangement and requires approval from the Pensions Regulator and the Pension Protection Fund, which will only agree to a deal (or, in the case of the PPF, not object to a deal) if strict criteria are met.
We have seen a number of attempts at financial restructuring, essentially to avoid an expensive pension commitment, fail the 12-month insolvency test
RAAs have attracted increased scrutiny of late with Tata Steel, Hoover and Halcrow making headline news. However, these types of arrangements are actually still rare; in fact these were the only RAAs completed since December 2014.
Nor are these deals agreed to lightly. If the inevitable insolvency of the employer within the next 12 months cannot be demonstrated, for example, neither the regulator nor the PPF will engage in an RAA discussion. We have seen a number of attempts at financial restructuring, essentially to avoid an expensive pension commitment, fail this test.
Of course, it is rarely the case that a business’s difficulties are solely due to its pension commitments. If we consent to a restructuring, we need to be convinced that steps are being taken to address the weaknesses in the business and implement the changes that are necessary to ensure that it has a fair chance of success.
Assessing the alternatives
Assuming that the insolvency test is met, the PPF also assesses whether the proposal offers a significantly better return than would have otherwise been achieved through the insolvency, and that the pension scheme would not have been better off if the regulator had instead used its moral hazard powers and issued a contribution notice or financial support direction. Full guidance on the PPF’s approach to RAAs and restructuring can be found on our website.
Increased use of RAAs is ‘inevitable’, experts say
The Pensions Regulator agreed a regulated apportionment arrangement with Hoover in May this year, as experts say the number of RAAs, as well as the amount of due diligence involved, is likely to increase.
Companies can consider alternative restructuring procedures to an RAA. For some organisations, a company voluntary arrangement may be seen as the best course of action. These arrangements are certainly less expensive to implement, but the employer will suffer an insolvency event, which is avoided through an RAA.
The principles outlined above will apply whatever procedure is chosen, and the regulator and the PPF work in close co-operation on all cases to ensure they are robustly adhered to.
Ultimately, our focus is on protecting the 11m members of DB schemes and minimising the levy burden on employers. Accordingly, the PPF will become involved in restructurings where there is an opportunity to reduce the call on its resources, always provided that a real solution is presented rather than postponing a problem to a later date with the risk of a more significant claim in the future.
Malcolm Weir is director of restructuring and insolvency at the Pension Protection Fund
