PPF’s role in company restructuring and insolvency events

The PPF was set up to protect millions of people who belong to final salary pension schemes in the UK. If their employers fail, and their pension schemes cannot afford to pay what they were promised, the PPF will compensate scheme members for their lost pensions. 

For a CVA proposal to be successful, at least 75 per cent of creditors must vote in support of it

In insolvency and company restructuring cases, we assume creditor rights for the troubled DB pension scheme, and our in-house team works closely with the Pensions Regulator to negotiate the best outcome for scheme members and the PPF. 

While our objectives are broadly similar, the PPF and the regulator have different roles when negotiating these cases. Below are some examples.

CVA use on the rise

Usually, the scheme is one of many unsecured creditors and has no special advantages throughout these negotiations. Restructuring proposals must satisfy all of our seven published principles, which essentially require that employer insolvency is inevitable and that it provides a significantly better return for the pension scheme than it would receive through the normal insolvency process.

This is to improve the funding position of the scheme and reduce its risk on the PPF. 

Lately, we’ve seen a rising trend in company voluntary arrangements, which allow companies with significant financial difficulties to reach an agreement to compromise, pay its creditors over a period of time, or perhaps both. We evaluate and scrutinise these methods of restructuring and ensure they are not being used to abandon pension responsibilities. A CVA does not require formal TPR clearance, and therefore our tough stance in these negotiations is crucial.

For a CVA proposal to be successful, at least 75 per cent of creditors must vote in support of it. In most cases, because of the size of the deficit of the pension scheme, the PPF will have a large enough vote to prevent a CVA from passing if it is not in the best interests of the scheme, our levy payers and our members. To decide if the proposal will secure our support, we will work closely with the regulator and the scheme trustees.

RAAs see TPR take leading role

Regulated apportionment arrangements are rare. Neither we nor the regulator enter into them lightly. They allow a company to free itself from its financial obligations in relation to its pension scheme to avoid insolvency.

We will only back a proposal if it provides a significantly better return for the pension scheme than it would receive through the normal insolvency process. 

The PPF and TPR both have statutory functions as part of the process. When an RAA is proposed, a draft clearance application should be submitted to, and considered by, TPR before the PPF engages in the discussions. Throughout these discussions we will support TPR, which takes a leading role in negotiations, and we will be required to show our support for the deal by issuing a ‘non-object’ letter.

Early engagement on pre-packs helps avoid moral hazard

A pre-pack administration is where the sale of a business and assets is negotiated before the appointment of administrators and completes either immediately upon, or shortly following their appointment.

In most cases, a pre-pack administration will see a company bought out of administration without the responsibility of the pension scheme, as was the case with Johnston Press and House of Fraser. In these cases, if there are insufficient assets for the scheme to buy out benefits with an insurer at above PPF levels, the plan will transfer into the PPF.

The PPF expects to be engaged with the company as early as possible during pre-pack negotiations. We have clear pre-pack guidance published on our website, which sets out exactly what we expect from insolvency practitioners and aims to reduce the risk of pensions dumping.

If we have any concerns, the case will be drawn to the attention of TPR, which will then consider whether to use its moral hazard powers against those involved. 

In all arrangements, the PPF’s guidance is designed to assist employers, trustees and their advisers in formulating proposals and managing expectations of possible outcomes. We consider each case on its own facts; however, we will always be focused on maximising the return in respect of the creditor rights we hold.

Malcolm Weir is director of restructuring and insolvency at the Pension Protection Fund.