Vol 4 (2007) - Issue 3

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Dealing with Pensions and the UK Pensions Regulator on Corporate Rescues

Pensions are increasingly becoming one of the underlying causes behind the need for corporate rescues as the real cost of maintaining the pension scheme is better understood. As a result, dealing with pensions and the UK Pensions Regulator (the ‘Pensions Regulator’) is now a key issue in a corporate rescue.

In any corporate rescue or corporate options review where pensions are an important issue, it is necessary to fully understand the pension creditor claim and the trustees’ position and to assess the scope the Pensions Regulator has in using its moral hazard powers. In terms of structuring a corporate rescue, the Pensions Regulator’s negotiating position has now been clearly established on a number of high profile transactions and this needs to be taken into account upfront.

Why have pensions become so important to corporate rescues?

Dealing with pensions has become an increasingly important issue on corporate rescues for three key reasons: the proactive role played by the Pensions Regulator in rescue situations, changes in legislation which have significantly increased the size of the pension creditor when a scheme is wound up, and, changes to scheme funding and pensions accounting.

Since coming into operation on 6 April 2005, the Pensions Regulator has had a major impact on rescue situations involving corporates with defined benefit pension schemes. Because its moral hazard powers extend to persons outside the UK, the impact has also been seen in cross-border rescue situations.

Changes in pension legislation, introduced to protect member benefits and the Pension Protection Fund (‘PPF’), mean that the pension debt on the employer (the section 75 debt) now triggered when a scheme is wound up, on insolvency of the employer or otherwise, is the scheme’s full insurance buyout cost. This often makes the pension creditor a significant unsecured creditor in a corporate rescue. Prior to 11 June 2003, the pension debt triggered was calculated on the basis of the scheme’s Minimum Funding Requirement (‘MFR’) which typically covers less than 50% of the scheme’s full insurance buyout cost and was often covered by assets in the scheme. This critical change has also been extended to cover cessation events in multi-employer schemes, a very common occurrence in corporate restructurings.

The Pensions Regulator is currently overseeing the move to a new scheme funding regime. As a result we have seen more prudent actuarial assumptions being adopted together with shorter recovery plan periods. This means larger pension deficits and greater cash demands on the sponsoring business. At the same time accounting changes (FRS17 and IAS 19) have put pension deficits onto company balance sheets and raised creditor awareness of the full extent of pension liabilities. The net result is that businesses with poor trading and large deficits to be funded are increasingly asking whether the status quo is viable.