‘Compromise’ deals designed to secure benefits above lifeboat levels could increase over the next couple of years, as deficit reduction pressures continue to squeeze schemes and their sponsors’ balance sheets.
A compromise deal is an arrangement where a scheme is bought out for less than the face value of assets, but provides higher benefit than if members had entered the Pension Protection Fund, which caps members’ benefits.
It can also include cases where the scheme enters the PPF, and gives the lifeboat fund an equity stake in the scheme assets, and the employer provides an additional level of benefit.
If it were easy for companies and pension schemes to compromise this benefit then that would be [a] very real concern to the regulator and PPF
Darren Redmayne, Lincoln Pensions
Such deals are pursued where employers are unlikely to be able to meet their covenant obligations but want to prevent members receiving PPF-level benefits.
“We may see more compromises in the next two to three years than we have seen,” said Darren Redmayne, managing director at corporate adviser Lincoln Pensions.
“Pension schemes and companies have really exhausted [their options] over the past couple of years… They’ve tried seeing if they can invest their way to full funding.”
Redmayne cited lengthening recovery plans, the Pensions Regulator’s sustainable growth objective and a more benign economic environment as factors that have prevented company collapses and therefore compromise deals up to now.
But he added: “There comes a point where all the levers that can be pulled have been pulled. They tend to be entered into as very much a last resort.”
A recent deal between vehicle engineering company Mira and insurer Pension Insurance Corporation allowed the company to secure a £70m buyout to provide its members with above-PPF levels of benefit following its sale to automotive test system company Horiba.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said while it is unlikely such deals would become prevalent, they could grow.
He said: "If people looked at it more there would probably be more of them."
However, Nolan added: "The people with the most to gain [from compromise deals] are those who have the least to spend speculatively," and pointed to the need for the industry to find new ways to make schemes aware of their options.
Unavoidable insolvency
Ian Cormican, partner at law firm Sackers, said compromise deals were typically only considered “where the sponsor is inevitably going to become insolvent”.
“Rather than compromise their full scheme benefit, you’re looking at what they’d get in the PPF,” he said. “They have to be fairly certain that the only alternative is that the sponsor will become insolvent.”
Cormican said that while the number of such deals is low at present, they tend to receive a lot of publicity when they happen.
“The regulator tends to publish this approach on these transactions, so they usually do come into the public domain.”
The Pensions Regulator's 'clearance guidance' says compromises have a detrimental effect on members' benefits and the regulator would expect relevant parties to gain clearance for proposed compromises.
A spokesperson for the Pensions Regulator said: “If a compromise proposal is put forward, we expect trustees to critically analyse it; they should carefully consider whether the proposed compromise is appropriate in the circumstances, whether it represents the best possible outcome for the scheme and whether any other stakeholder is being treated more favourably."
Redmayne said compromise deals would pose a "very real concern to the regulator and PPF" if it became too easy to compromise the member benefits, as it would increase the "moral hazard" of not providing a strong enough incentive to be certain schemes were doing everything in their power to avoid necessitating a compromise.
