UK: Putting You In The Picture: Kodak Offloads UK Pension Scheme

Eastman Kodak (the US parent of Kodak UK) and the Trustees of the UK Kodak Pension Plan ("KPP") have reached a deal which will see the pension scheme take control of certain parts of Eastman Kodak's business. In return, Eastman Kodak will hopefully be able to emerge from Chapter 11 bankruptcy proceedings in the US. The Chairman of the KPP has stated that members will be better off in retirement.

This transaction, together with the Uniq "debt for equity swap" in 2011, demonstrates that both the Pensions Regulator ("TPR") and the Pension Protection Fund ("PPF") are prepared to listen to creative solutions where an employer's future is seriously at risk due to onerous pension obligations.

The deal

Eastman Kodak has been a casualty of the digital age in which we live. The 130 year old company failed to keep pace with the move from film-based to digital photography and did not anticipate the impact of smartphones and the internet. Inevitably, falling sales forced Eastman Kodak into bankruptcy under Chapter 11 in the US in January 2012.

However, after nearly two years of protracted negotiations, on 4 September 2013, the KPP announced that it had completed the acquisition of certain parts of Eastman Kodak's business. The personalised imaging and document imaging businesses have been sold to the KPP and, in return, Eastman Kodak's UK subsidiary company has been discharged from its current and future obligations to the KPP. The trustees' claim against Eastman Kodak stems from a guarantee provided by Eastman Kodak which covers the full buy-out deficit in the KPP. The transaction therefore represents the settlement of approximately £1.8 billion (the current buy-out deficit) of claims by the KPP against Eastman Kodak and certain of its affiliates.

The deal to take control of the imaging businesses involved cash and non-cash consideration of some £420 million. The proceeds will be used to support the emergence of Eastman Kodak from Chapter 11 bankruptcy in the US and to facilitate Kodak's ability to grow and develop other commercial areas of digital imaging.

The KPP which has 15,000 members, including some 8,600 pensioners, will be closed and members offered the chance to join a new scheme which will have lower benefits. However, these benefits will be significantly better for members than if the KPP had gone to the PPF.

The KPP intends to use the cash generated by the businesses to help close the scheme's deficit and should the healthier parts of the business grow in the coming years, KPP could also sell the businesses to fund its obligations toward members.

The role of the Pensions Regulator and the Pension Protection Fund

The deal had to be approved by TPR via the use of a regulated apportionment agreement (RAA) to facilitate the settlement. RAAs were introduced by pensions legislation in 2008 as a means of releasing an employer from its pension obligations. Relatively few have been approved (the most notable being in relation to Aquascutum, Uniq and BMI), and this is not surprising given TPR's guidance which states that RAAs are "extremely uncommon" and the expectation is that they will be used "rarely".

The question being asked by the pensions industry is whether the Kodak deal represents a sea-change in attitude by TPR and the PPF? Will we see an upsurge in similar restructurings and RAAs? There must be dozens of other companies whose futures are being seriously hampered or even threatened by burdensome pension scheme obligations and there is no doubt that light at the end of the tunnel would be welcomed.

Insolvency inevitable?

TPR released a statement about the Kodak transaction on 4 September 2013. It gives very little away other than describing TPR's willingness "to be creative and work collaboratively with pension scheme trustees" and encouraging "trustees and employers to approach us [TPR] at an early stage if they are experiencing financial difficulties..."

The truth is that the criteria that TPR and the PPF use when considering situations remains opaque and it is difficult to predict a response from case to case. Whilst TPR's guidance states that for an RAA to be approved the insolvency of the company must be inevitable, this goes further than legislation requires. TPR will want to see an estimate of the outcome for a scheme and the employer's other creditors on insolvency and if there are any other viable alternatives to the proposed RAA deal or insolvency. TPR will also be keen to see the expected outcomes of each such alternative, including the use of TPR's moral hazard powers (if available).

It therefore comes down to a numbers game which will require employers and trustees to engage the services of a specialist to prepare a solvency report – the outcome of which will influence TPR's decision on any proposed deal.

Wedlake Bell comment

• KPP's ownership of the two businesses will enable it to remain outside the PPF and provide benefits for members above PPF levels. This is also good news for employees generally (who naturally keep their jobs) and the UK economy as a whole.
• The trustees of the KPP are now "going it alone" – there is no further employer covenant and the success of the imaging businesses depends on trustees' management and business acumen skills.
• Each "distressed employer" case will need to be assessed on its own merits and there will no doubt have to be a degree of estimation as to the solvency outcome figures. Approval of an RAA is not a "one size fits all" process as evidenced by the scarcity of such deals being approved. Neither do we believe the outcome simply has to be 'better' than insolvency. Both TPR and the PPF need to be convinced that any deal provides 'demonstrably' better value than any of the alternatives. TPR and the PPF will be determined not to create a precedent whereby the floodgates are opened for similar restructurings and will probably continue to look at each case on its own merits.
• Our view is that the bigger the deficit, the greater the likelihood of a deal being struck. Does the PPF really want to be lumbered with a scheme with a billion pound deficit which in turn adds to its PPF risk? Ironically therefore, schemes with a larger deficit may stand a better chance of getting TPR's attention and doing a deal. In Kodak's case, it is difficult to second-guess what went on behind closed doors – what is clear, however, is that the circumstances, financial and otherwise conspired to produce the right conditions for TPR to allow this deal through.
• TPR plans to publish a report outlining how it approached the Kodak case in due course – a response which in part is due to industry demand and in part to fulfil its statutory obligation to publish such reports.

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