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On 2 March 2012 the Pensions Regulator ("TPR") issued
a report outlining the approach it might take in dealing with a
distressed pension scheme. Whilst the report focuses on the Uniq
pension scheme (last mentioned in our
May 2011 article) it also provides useful guidance to other
schemes in difficulty.
In detail
TPR confirms that its initial objective is to help employers and
trustees identify whether a scheme is viable without a strong
enough employer covenant.
If it is not, the employer, trustees and TPR will need to work
together through various preliminary questions which will
include:
Whether a recovery plan would be viable?; and
Whether the insolvency of the employer is inevitable?
Having considered these two questions TPR may then consider
whether its moral hazard powers under the Pensions Act 2004 are
available and exercisable in the circumstances.
In the Uniq case, having considered these questions, the
parties concluded that no viable scheme funding solution could be
found. In these circumstances TPR has indicated that the
trustees' focus should be on capturing and maximising the value
of the scheme's interest in the employer for the benefit of the
members. TPR has suggested that where trustees fail to achieve
this, it may decide to wind up schemes using its statutory
powers.
TPR may also exercise its wind-up powers in situations similar to
that in Polestar1 . In Polestar,
complications arose when Polestar UK Print Limited
("UK Print") failed to maintain payments
to the scheme's sole sponsoring employer as part of a TPR
approved restructuring. Initially, the Trustee took security on
behalf of the scheme in return for the deferral of the agreed
payments. Later however the Trustee was forced to choose between
accepting a reduced sum offered by UK Print in full settlement of
its liability or face the prospect of ranking as an unsecured
creditor in its administration.
The Trustee chose the former option and the scheme ceased to have
an employer. TPR, having examined the Trustee's future funding
prospects for the scheme, concluded that there was no reasonable
prospect of the scheme ever meeting the benefits promised to the
membership. In addition, the lack of an employer meant that both
the PPF (directly) and the levy payers (indirectly) were exposed to
any increase in the scheme's liabilities measured on the PPF
basis. In these circumstances TPR indicated to the Trustee that the
scheme should be wound up, failing which it would exercise its
statutory power to do so.
Comments
Whilst any TPR guidance indicating how it might choose to
exercise its powers as far as, distressed pension schemes are
concerned is welcome, several important questions remain
unanswered:
Firstly, given the present economic environment the
affordability of paying down scheme deficits remains an issue.
Recently, both Trinity Mirror Group and Premier Foods have
negotiated reductions in their existing recovery plan funding
levels because of changing fortunes in the underlying businesses,
yet neither employer appears to have sought TPR's prior
approval. TPR may yet investigate these revised funding
arrangements and in particular whether the respective trustee
boards obtained and properly considered sufficient advice on the
strength of the employer's covenant.
Secondly, the question of whether an employer is, or is
expected to become, insolvent will often be difficult to answer.
The formal tests of solvency are contained within the Insolvency
Act 1986 and are known as the 'cash-flow' and 'balance
sheet' tests. The latter test was recently considered in
BNY Corporate Trustees v Eurosail UK Plc2 . In
Eurosail the Court of Appeal decided that balance sheet
insolvency occurs only where the business has reached the
"point of no return".
Finally as we have previously mentioned, Uniq is a rare case as
there are no secured creditors ranking in priority to the
scheme's deficit. It remains unclear what approach TPR will
take where secured creditors are involved.
We expect TPR to issue a further statement which will hopefully
throw further light on TPR's attitude to the problems schemes
and their sponsoring employers face.
Footnotes
1 See TPR Report on Polestar dated 1 November
2011
2 [2011] EWCA Civ 227
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