Between a rock and a hard place

Neil Copeland

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“There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency”

Well said, that man! That man being David Norgrove, chair of the Pensions Regulator.

So why have we seen two such failures in a week? Both HJ Berry, a Preston based cabinet maker, and the Readers Digest suffered insolvency, ostensibly due to an inability to fund their pension scheme deficits. I haven’t seen any comment on the Regulator’s role, if any, in the HJ Berry case but it appears from press reports that the Regulator vetoed a deal that was acceptable to the employers, trustees and the Pension Protection Fund in the case of the Readers Digest. I can only conclude that neither business was deemed “otherwise viable” by the Regulator but a representative of Moore Stephens, the administrator, sounded confident on 5Live last night that there was a viable, profitable Readers Digest business to be bought by someone. Though I guess it was his job to sound positive.

Whilst the details of the proposed deal aren’t known, the broad outline appears similar to other deals we have seen accepted in the past by the Regulator, with an equity stake being taken by the trustees.

We have advised on cases where having satisfied very stringent conditions and following lengthy discussions with all parties, the Regulator has given clearance to an insolvent restructure of the business, with the pension scheme being left behind in the old company to ultimately fall into the PPF. This clearance was not, and should not be, easily granted.

It would appear that the Regulator is becoming more reluctant to sanction such deals, even as a last resort – and in fairness to David Norgrove he has stated quite clearly that the Regulator does not consider that it has an obligation to maintain employment.

However if you compare the likely outcomes of the Readers Digest case with a sanctioned insolvent restructure, with appropriate safeguards for the trustees and/or PPF, they will be little different other than the preservation of jobs in the sanctioned restructure. Whilst the Regulator may not consider that it has an obligation to the employees of Readers Digest to preserve their jobs, if all other outcomes are broadly the same, then it is difficult to understand why the Regulator did not clear the proposed deal.

Clearly the Regulator has to guard against unscrupulous employers simply contriving circumstances to allow them to dump their pension liabilities on the PPF, and it may see sanctioning such deals as distorting the market and unfair to a firm’s competitors, but such arguments are likely to be of cold comfort to Readers Digest employees facing a very uncertain future.

The latest news is that the Regulator has not ruled out pursuing the US parent over pension funding. The Regulator could in theory seek to issue a Financial Support Direction (FSD) against the US parent. It has been loathe to use its powers in this area, even against UK employers. It has been suggested that the Regulator is concerned that courts could overturn FSDs, considerably reducing the size of the stick that the Regulator can wield. It must be even less certain that a US court would support the enforcement of an FSD on a US company.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.