Kodak’s filing for bankruptcy has left the UK scheme critically underfunded. Pippa Stephens looks at ways to minimise the risk of an overseas guarantor
Check financial strength of employer more than once a year.
Watch out for subordinate guarantees.
Assess employer covenant for legal enforceability and protocol in the event of insolvency.
Look at the performance of similar companies in the marketplace.
The fragile state of Kodak’s UK pension scheme should serve as a warning for schemes to increase the frequency of employer covenants.
Eastman Kodak’s recent bankruptcy filing in the US has left its UK subsidiary in a precarious state, having agreed to guarantee payments to the UK pension plan in 2007.
Anne-Marie Winton, partner at Nabarro, said the case served as a “wake-up call” for UK schemes.
Schemes with overseas parents run the risk of being neglected by their employer. Regular covenant reviews help schemes assess and manage the risk of their guarantor going insolvent.
“Overseas parents are sometimes quite disjointed and not hugely well informed about their UK pension benefits,” Winton said.
Schemes are also advised to check the financial health of their employer more than once a year and compare it with the performance of similar companies in the marketplace.
How Kodak’s problems developed
Eastman Kodak’s pension schemes outside the US, including those in the UK, had a collective shortfall of $1bn (£633bn) out of a total liability of $3.6bn at the end of 2010.
There’s always the belief of ‘we’re too big to fail’. Lehman probably thought that, Nortel probably thought that too
The accounts note Eastman Kodak gave guarantees to trustees of its UK pension scheme that all promised payments would be made until 2024, or until the scheme was fully funded.
But Kodak UK may never get the money back it has loaned to its US parent, which means it could be less able to make future payments into the UK scheme.
A spokesperson from the Pensions Regulator said it was aware Eastman Kodak had filed for Chapter 11 bankruptcy and confirmed it was in contact with the UK pension fund trustees.
Kodak’s UK scheme manager did not wish to comment for this article.
Wake-up call for UK schemes
Winton warned UK schemes with overseas parent companies to take notice of the problems experienced by the Kodak subsidiary.
Monitoring the guarantor shouldn't be a one-off check
She said there may be reluctance on the side of the parent company to support the UK scheme, if information required by UK trustees is not of the same standard as trustees in the company’s jurisdiction.
“There’s always the belief of ‘we’re too big to fail’,” she said. “Lehman probably thought that, Nortel probably thought that.”
She advised trustees and scheme managers to keep a “watchful eye” on the strength of any supplier of contingent assets, either an overseas guarantor or one who is not an employer in the pension scheme.
Schemes are also called on to check the guarantor every trustee meeting – or monthly if possible – and promote information sharing should there be a significant development.
“It shouldn't be something that is a one-off check,” Winton stressed.
Should the parent company offering a guarantee not be willing to disclose its financial strength, trustees could offer a confidentiality agreement.
If the company is still unwilling, trustees should call the regulator in to order the guarantor to provide information.
Compare competitor performance
Simon Kew, covenant expert at Jackal Advisory, said schemes should look at the performance of similar companies in the marketplace.
Kodak should have looked at Polaroid’s insolvency in 2008 and assessed the financial strength of the company accordingly
Kodak should have looked at Polaroid’s insolvency in 2008, for example, and assessed the financial strength of the company accordingly.
He added that if trustees were getting a guarantee from a parent, it was vital to understand how easy it would be to make a claim, given the contingency and the position in the event of an insolvency. This would often be based on a hypothetical situation.
An accountancy review should be carried out by a covenant review adviser to check the value of the guarantee, especially where the scheme will be prioritised should all the cash be swept up in an insolvency.
The covenant should be assessed at least annually, Kew said. Trustees should look out for subordinated guarantees, which would leave schemes with nothing.
Guarantees should be assessed in terms whether they are legally enforceable and, if so, the likelihood of getting the money.
