The pension minefield could be a lucrative opportunity for IP’s

Brian Spence

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The introduction of new pensions legislation this year seems only to bring good news and opportunities for those insolvency practitioners who are prepared to become involved.

The first bit of welcome news is that following the introduction of Pensions Act 2004 from April 2005 Insolvency Practitioners no longer need to make a statutory appointment of an Independent Pension Trustee to the pension scheme. This move could result in IP’s taking even less of an interest in pension issues however to adopt this approach is not without risk and to do so I believe is to miss out on significant new opportunities.

The new Pensions Regulator (tPR) now has the responsibility of appointing the IT under section 120 of the Pensions Act. This same section now places a new duty on IP to issue notice to Pension Protection Fund (PPF) and tPR where there is a specified insolvency event and where the employer has an occupational scheme. It is important that the IP notifies the regulator of all occupational schemes and not just final salary schemes as in some circumstances it can be difficult to identify which type of scheme exists, for example where an underpin arrangement exists. The insolvency is a ‘notifiable event’ and notification is required within 14 days (or as soon as practically possible) using a pro forma which is available on tPR website (www.thepensionsregulator.gov.uk.)

As well as notifying the PPF, tPR and pension scheme trustees that a qualifying insolvency event has occurred the IP must also confirm if they believe that the pension scheme can be rescued either as going concern with no compromise of liability or where the employer business is sold and another company assumes liability for the pension scheme. Whilst such a rescue will be highly unlikely it is not impossible and it could be difficult for an IP in these circumstances to recognise if a scheme can be rescued without professional support. The IP could also find themselves dealing with the PPF in relation to their role as creditor of the employer.

The PA04 introduces the concept of the pensions creditor suggesting that pension debt should be viewed in the same way as any other form of corporate debt. Pension Debt ranks alongside unsecured creditors but in many circumstances it may be by some considerable margin the most significant creditor. Given this it is likely that scheme trustees will be seeking to improve their position amongst the creditors and we are already seeing trustees seeking guarantees, insurance, escrows and even in some circumstances an equity stake. IP’s will undoubtedly begin to see pension scheme trustees as much more active participants in the insolvency process.

This clearly highlights that the risk to which trustees are exposed is directly related to the ability of the sponsoring employer to continue to make payments to meet the pension deficiency. It is becoming increasingly common for trustees to want to satisfy themselves of the strength of this employer covenant and this has presented insolvency practitioners with a new potential source of work.

The new regulations also give tPR significant new powers which can be used to help access funds to meet the pension deficit. Perhaps the most significant amongst these powers for IP’s are financial support directions which permit the Regulator to pursue other companies within a group of companies or indeed connected individuals for funds to make up the pension shortfall. This will undoubtedly complicate the insolvency process where the insolvent business is part of a group of companies as pensions now a group wide responsibility.

New purchasers will want to convince themselves that they will not be liable for any pension deficits of the previous employer which will undoubtedly mean that share sales will become more unlikely where pension deficits exist. This will have a knock on effect of pushing more companies through formal insolvency process as they seek to ensure that they could not be subject to a financial support direction. A formal pre-clearance process exists with tPR which in certain circumstances could be sensible to pursue with business restructures. In addition while Bradstock style compromises are only now possible where benefits can be compromised above the PPF level of benefits it is now possible where a sustainable business exists without the pension scheme deficit, and where jobs could be protected, to enter in to compromise negotiations with the PPF.

So the picture looks very different now. Less onerous Trustee appointment process, more regulator guidance with only some additional potential notifiable events reporting plus more insolvency cases, more complex when pensions involved, opportunity for covenant reviews and insolvent re-structuring opportunities in conjunction with the PPF. It may not be worth running away from as quick as you think.

ENDS

783 words

Published in Insolvency Intelligence February 2006

Brian Spence

Post by Brian Spence

Fellow of the Institute and Faculty of Actuaries and Society of Actuaries in Ireland, scheme actuary, professional pension trustee

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