If an employer becomes insolvent and it has a defined benefit pension scheme in deficit, the Pension Protection Fund (PPF – the statutory body established to compensate members in such circumstances) will act as a creditor on behalf of the scheme to maximise recovery from the employer.
Pension schemes can only enter the PPF if its sponsoring employer suffers an insolvency. However, sometimes an employer that is facing insolvency – and has a scheme in deficit – can strike a deal with the PPF which will see it take on responsibility for the scheme, leaving the employer to continue trading.
The PPF’s role in recent high profile cases has received a lot of scrutiny. The fund has recently published a fact sheet that summarises the conditions that need to be met before it will consider entering into such deals. Broadly, it has advised that the following conditions will need to be met:
- the company’s insolvency must be inevitable – in other words, the PPF will have to take on the pension scheme’s debt regardless
- the pension scheme will need to receive money or assets which are significantly more valuable than it would have received through the otherwise inevitable insolvency
- what is offered to the pension scheme in the restructure or rescue is fair compared to what other creditors (such as banks) and shareholders will receive as part of the deal
- the pension scheme will be given an ‘anti-embarrassment’ equity share in the new company – typically 10% if the future shareholders are not involved and 33% if they are
- the pension scheme would not have been better off by the Pensions Regulator issuing a contribution notice or financial support direction*
- the fees charged by the bank(s) are reasonable where the deal involves refinancing
- the other party pays the legal fees incurred as part of the deal for both the PPF and the pension scheme’s trustees.
Whilst the factsheet seeks to summarise, rather than expand upon, the established position set out in the PPF’s Guidance for Insolvency Practitioners, it nonetheless provides a useful reminder to all employers with defined benefit pension schemes of the hurdles they will have to overcome if they wish to offload their scheme.
In particular, the requirement that the deal is a fair one in the context of what other creditors will expect to receive once the employer is free of its pension liability is, from experience, a key condition that the PPF requires to be met and is one employers should bear in mind when considering the likely cost of negotiating their scheme’s entry. We have seen a number of proposed compromises reach a fairly advanced stage only to be rejected on this ground.
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* Where the employer of a defined benefit pension is insufficiently resourced, the Pensions may require that a lump sum is paid or financial support is put in place by connected or associated parties for the purpose of maintaining the solvency of the scheme.