Is regulation needed to avoid pre-pack abuse?

In a written response to a parliamentary question, Kelly Tolhurst, a minister in the Department for Business, Energy and Industrial Strategy, confirmed the government “is currently evaluating whether legislative measures are necessary to regulate pre-pack sales to a connected person”, and that is “aware of concerns" about their transparency.

The statement, published earlier in the week, suggests the government is worried about instances where an insolvent company’s assets are sold to a buyer connected with the old company, such as directors, then passing responsibility for its defined benefit pension liabilities to the PPF.

I think it is generally well known that using a pre-pack to dump a pension scheme would normally fall squarely within TPR’s moral hazard powers

Faith Dickson, Sackers

In her response, the MP explained that pre-pack administration – the sale of all or part of the business, arranged prior to the company entering formal insolvency and realised on or immediately after the appointment of the administrator – is “a valuable business rescue tool”.

She added that while the government does not fundamentally take issue with pre-packs, where there are concerns, these are being referred to the Pensions Regulator for investigation.

Ms Tolhurst continued: “Pre-pack sales help to avoid a deterioration of the value of the company’s business between the appointment of the administrator and sale, meaning there is more money available for creditors, including the pension scheme. 

“In most cases where pre-packs are used, the only alternative would be the collapse of the business and the loss of all employees’ jobs.”

Previous collapses drew scrutiny

When a scheme is funded below PPF levels, the position of scheme members is protected through legislation and passes to the lifeboat fund, but many members will not receive their full benefits.

Last year, the Johnston Press group went into administration, its business and assets were sold under a pre-pack arrangement to a company owned by the group’s bondholders, JPI Media Group.

While TPR found no evidence that the insolvency of Johnston Press was avoidable and had no reason to use its anti-avoidance powers, chair of the Work and Pensions Select Committee Frank Field criticised the watchdog’s decision to drop the probe.

The PPF has issued guidance explaining its role and how it expects professionals to engage, stating that restructuring proposals must satisfy seven principles.

But concerns remain that some pre-packaged administrations could be used by companies to pass off pension liabilities to the PPF.

Onus on regulator to act

According to Faith Dickson, partner at Sackers, pre-packs can be abused, but “the moral hazard legislation is already there” to protect schemes in these circumstances.  

Ms Dickson said: “My experience is practitioners do normally involve the PPF when a pre-pack looks likely, and I’m also aware of pre-packs between connected parties where action has been taken to ensure the business carries on the pension scheme after the sale.  

“I think it is generally well known that using a pre-pack to dump a pension scheme would normally fall squarely within TPR’s moral hazard powers.”

Dan Mindel, managing director at Lincoln Pensions, added: “It is probably right that no further legislation is required with respect to pre-packs and the impact on DB pension schemes.

“However, there is real potential for better outcomes for schemes with distressed sponsors. First, through the implementation of the proposals set out in the UK corporate insolvency framework consultation, which are designed to give companies more scope to design rescue plans to avoid insolvency.

“Second, by also ensuring that there are no inconsistencies or conflicts between current insolvency legislation and the protections for scheme members set out under pensions law.”