The pensions White Paper and insolvency

09 August 2018

In March of this year, the Department for Work and Pensions published a White Paper, ‘Protecting Defined Benefit Pension Schemes’. Many of the proposed pensions reforms outlined in the White Paper will have an impact on the insolvency and restructuring profession, which plays a key role in resolving the future of a financially distressed or insolvent company’s pension scheme. R3 has written to pensions minister Guy Opperman MP in light of the White Paper to explain the profession’s role, and to set out the reforms we would like to see, to improve outcomes for all parties, from current and former employees to the Government itself.

In the White Paper, the Government sets out proposals to give the Pensions Regulator (TPR) extra powers to fine directors who put pension schemes at risk, while there will be a new criminal offence for those guilty of reckless behaviour in relation to a pension scheme, and the Insolvency Service will also be updating the disqualification regime. The paper does, however, back away from creating compulsory regulatory clearance for certain business transactions; businesses will have to flag more events to the regulator instead. TPR already has extensive powers to take action on transactions which have been detrimental to a pension scheme, and R3 believes the proposals would potentially have been unfair to other unsecured creditors, such as HMRC or suppliers, who do not have their own clearance mechanism. The Paper also makes a number of proposals aimed at making it easier to consolidate schemes.

R3 had two main concerns with the White Paper: the lack of firm action on making Regulated Apportionment Arrangements (RAAs) easier to use, and the lack of extra support for trustees to accompany their new, extra responsibilities.

RAAs: Regulated Apportionment Arrangements (RAAs) allow a scheme sponsor in financial distress to detach itself from its defined benefit pension scheme liabilities; the scheme is then likely to end up with the Pension Protection Fund (PPF). An RAA can only be used if insolvency is ‘inevitable’ in the next 12 months, and this tight requirement means they are little used: only 28 RAAs have been agreed since they were introduced in 2009 – just over three per year.

The insolvency and restructuring profession understands and respects the need for the PPF to be protected, and an RAA will only be suggested as an option of last resort when advising on the financial affairs of a struggling scheme sponsor. However, we believe that the current rules serve to undermine payments to the PPF and do not effectively ‘protect’ the fund. R3 has long argued there should be more flexibility in the use of RAAs, and that the ’12 month’ rule mentioned above should be modified. In the profession’s experience, the sooner a company restructures, the greater the chance that it will be able to fulfil its financial obligations. Failure to take action early often leads to financial positions deteriorating, destroying value for creditors – including a company’s pension scheme.

Unfortunately, the White Paper makes no firm promises about revisiting how RAAs work. Instead, the Government merely commits to “working closely” with stakeholders to improve matters

R3 has recommended that the criteria for an RAA be altered so that one can be agreed when there is “a real prospect of insolvency in the foreseeable future”. . Following the publication of the White Paper, we will be engaging with the Department for Work and Pensions in order to ascertain exactly what its stakeholder work will entail, and will make sure that the profession’s views are taken into account.

Trustee governance: The White Paper introduces more responsibilities for trustees, but not much in the way of additional support beyond the positive work the Regulator already carries out; as it is, many trustees struggle to understand their existing obligations, let alone any extra ones. Information provided to trustees can be limited and trustees may struggle to have a clear picture of the viability of a scheme’s rescue plan. The Government should also consider ways to increase the number of trustees who are independent from the sponsor of the scheme for which they are responsible, particularly smaller companies’ schemes. Trustee boards could include a paid ‘independent trustee’ who can provide full time advice, although this would be an additional cost to the scheme sponsor.

Additionally, R3 has previously pointed out that the provision of information to trustees can be limited to the statutory triennial review of a scheme’s valuation and rescue plan – but a lot can happen to a company in three years. To ensure trustees have a clear picture of the viability of a scheme’s rescue plan, regular monitoring of the covenant, funding and investment risks being faced by the scheme by both the trustees and the sponsor should be encouraged and facilitated. In particular, in between triennial reviews of schemes’ valuations and rescue plans, trustees would be much better equipped if they were provided with information about the sponsor’s ability to fund a scheme’s recovery plan.

R3 will continue to put forward to Government our members’ views on the changes the profession would like to see, which we believe will help to strengthen the insolvency and restructuring framework while also providing more peace of mind and better prospects of rescue to scheme sponsors, trustees and beneficiaries.