The Pensions Regulator has agreed a regulated apportionment arrangement with Hoover, as experts say the number of RAAs, as well as the amount of due diligence involved, is likely to increase.
RAAs allow a company to offload its pension fund in order to avoid insolvency, but strict requirements have to be met. The mechanism is therefore seldom used, and so far the Pensions Regulator says it has approved RAAs in relation to 27 schemes.
By the time you get to 12 months you’re crisis managing, whereas if you have a bit longer then you can explore more options
Faith Dickson, Sackers
The Hoover (1987) Pension Scheme, which has 7,782 members, had a buyout deficit of about £500m and a Pension Protection Fund deficit of approximately £300m in March 2016.
Skilled person's report
For the first time, the regulator used its 'skilled person’s report' power under section 71 of the Pensions Act 2004.
The skilled person was appointed to report on the level of deficit reduction contributions the employer could afford to pay into the scheme, allowing the regulator to determine whether a viable funding solution could be found.
The report showed that the scheme could not be properly funded without help from Candy Group, but Candy Group declined to provide further support.
Moreover, it was forecast that the scheme’s employer would become insolvent within 12 months — one of the main conditions a company has to meet for an RAA to occur.
Formal approval of the RAA was issued on May 30 2017, and HPS is expected to transfer into the PPF. As part of the deal, the scheme will receive £60m from Hoover and ordinary shares representing a 33 per cent stake in Hoover.
“We are very disappointed that despite a long period of hard work and discussion, the parties have been unable to agree a viable long-term funding solution for the scheme,” said a spokesperson for the trustees.
“With regret, the trustees have decided to support these proposals as they provide a significantly better outcome for the pension scheme than it would have received through the normal insolvency process,” the spokesperson added.
A new approach
Faith Dickson, partner at law firm Sackers, said that the Hoover RAA “looks like a sensible, pragmatic deal from the regulator, the PPF and the company’s perspective”.
The regulator has shown that it has found “very clear evidence about the inability of the company to fund the scheme going forward”, she said.
“It’s clear to me that the regulator is increasingly looking... to document that the employer just cannot realistically continue to run a business, including the pension scheme with its current liabilities,” she explained.
“I think it’s almost inevitable we will see more [RAAs],” Dickson added. She said that it is sensible to recognise that some businesses can carry on trading and succeed if the pension liability is either removed entirely or reduced.
The Work and Pensions Committee has previously recommended relaxing the requirement for insolvency to be inevitable within 12 months for an RAA to be approved.
Similarly, Dickson noted that the requirement for the employer to be likely to be insolvent within 12 months is too short a period of time.
“By the time you get to 12 months you’re crisis managing, whereas if you have a bit longer then you can explore more options,” she explained, suggesting that increasing the time period to two years could be worthwhile.
RAAs on the rise?
Richard Farr, managing director at covenant advisory Lincoln Pensions, also noted that “the proof of insolvency is quite demanding” when it comes to agreeing to an RAA.
The use of a skilled person's report is a “very interesting development”, said Farr. He explained that “in the past, they’ve generally relied upon the trustee advisers or their own team to make a view on things”.
Given high profile pension scandals such as BHS, “it’s clear now… there are more concerns about due diligence”, he said.
The RAA method “is rarely used, but it should be used more”, said Farr, adding that “people are in denial about pensions”. It is “inevitable” that there will be many more RAAs in the next few years, he said.
A spokesperson for the regulator said: “Since the RAA process was introduced nine years ago, we have approved less than 30, which shows this is not a commonly used mechanism for pension restructuring”.
The spokesperson added: “It is not possible to speculate on how many RAA applications we will see in the future. We are very clear on the criteria that must be met for an RAA to be approved, and companies considering an RAA should be aware of that.”
