As Covid-19 continues to wreak its devastation on the corporate landscape, dozens of pension schemes could fall into the Pension Protection Fund. However, a no-deal Brexit could scupper that option for up to one-fifth of distressed employers with an EU connection.
This issue affects UK-based, cross-border schemes where a sponsoring employer of the arrangement is EU-based and where that company does not have an ‘establishment’ in the UK.
Currently, the pensions lifeboat protection is in place for members of eligible UK defined benefit schemes when their sponsoring employer becomes insolvent. To be eligible, a pension scheme has to have its main place of administration in the UK, which will remain unchanged with Brexit.
However, the mechanism for triggering a PPF assessment period where schemes have EU-based employers could be altered from January 2021 when the transition period ends, warned Clive Pugh, partner at Burges Salmon, who raised this issue in a blog.
From my own experience, I would estimate around 20 per cent of schemes have an overseas employer or connection. This is a major issue impacting a large number of scheme members
Clive Pugh, Burges Salmon
He said: “This will affect a significant number of schemes. From my own experience, I would estimate around 20 per cent of schemes have an overseas employer or connection. This is a major issue impacting a large number of scheme members.”
A PPF spokesperson explained that a no-deal Brexit will have no impact on the level of protection it provides to eligible UK DB pension schemes that have a sponsoring employer registered in the EU.
However, “while the eligibility position is unchanged, the mechanism for triggering a PPF assessment period following an EU employer’s insolvency could be affected”.
“PPF assessment will be achievable, but EU employers will need to take appropriate steps to register their insolvency in the UK like all non-EU overseas employers do,” the spokesperson added.
Insolvency process can take months
Nevertheless, Mr Pugh warned that “ensuring PPF eligibility can’t be flicked on and off like a light switch”, as the process can take months.
He noted that the risk regarding overseas employers has been seen on numerous occasions, such as the Olympic Airlines case.
Despite paying the PPF levy, the scheme was ultimately unable to place the airline employer into a UK insolvency process.
This was due to the fact that the company had ceased to have an establishment in the UK before the winding-up petition was presented by the trustees to the English court. The case ended up in the Supreme Court in 2015, which confirmed the initial decision, denying lifeboat protection to the scheme members.
Mr Pugh explained that the question of sufficient presence in the UK is “a complex legal one, including the need for a review as to whether the presence by the employer is sufficiently established in the UK to be situated here for UK insolvency purposes”.
“This includes the location of staff, the nature of their physical presence and the nature of their outward-facing activity,” he added.
Trustees advised to stay alert
A more recent case of a scheme that was not entitled to compensation from the PPF is Flybe, which collapsed into administration in March due to the impact of the coronavirus on flight bookings, after struggling for months to balance its books.
As the pension scheme was registered in the Isle of Man, its members were not entitled to protection from the pensions lifeboat.
Jeremy Harris, partner and pensions lawyer at Fieldfisher, suggested that in some cases trustees of a UK DB pension scheme “can protect themselves by starting their insolvency proceedings in the UK as soon as possible, before an EU entity closes down its establishment in the UK”.
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Defined benefit trustees linked to struggling employers face tough decisions about whether to tip their sponsors into insolvency or increase their burden on the Pension Protection Fund amid the onset of a global recession, in what experts have called a regulatory grey area.
For Jane Kola, partner at Arc Pensions Law, the best solution for these schemes “is to have a UK resident sponsor, even if it is a shell company with covenant supplied by overseas companies through intra-company support”.
Simon Borhan, managing associate at Linklaters, advised trustees and employers to “keep this area under close review and ensure that they have a contingency plan in place”, as further guidance is expected from the Pensions Regulator, alongside an update to the one already in place.
“Similarly, it is expected that regulators in the various EU member states will issue their own guidance to employers of UK-based pension schemes,” he said.
