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What Is The Role Of The PPF? UK Coal Deal Heats Up The Debate

What Is The Role Of The PPF? UK Coal Deal Heats Up The Debate

UK Coal last week announced an innovative restructuring of its mining division, which will see its pension scheme enter the Pension Protection Fund (PPF). The PPF is a lifeboat fund which provides compensation to pension scheme members where their employer becomes insolvent. It is funded by an annual levy payable by pension schemes in the UK.  

The restructuring will result in UK Coal’s pension liabilities transferring to the PPF with the remaining viable parts of the mining business being moved (together with the assets) to individual companies owned by a new business. The deal is unusual as this is the first time that the PPF will not hold an equity interest in the new operating entity; instead it will retain an interest in the new business by receiving payments as part of a series of debt instruments. The PPF argues that restructuring the business in this way will result in greater sums being recovered in the long-run than would be the case if UK Coal became insolvent.

It will be interesting to see if the UK Coal case represents a shift in the PPF’s approach. Conversely, it may simply be the PPF’s answer to UK Coal’s specific circumstances. For now, it raises a lot of questions. 

If deals of this type are to become the norm, the attraction for struggling companies burdened by defined benefit (DB) pension scheme liabilities, and the funding requirements attached to those liabilities, is clear. With the pension liabilities transferred to the PPF and the company required only to make smaller payments as part of a debt instrument, the restructured company is given an opportunity to thrive. A company without the burden of a DB pension scheme would also be more attractive to outside investors. 

But what happens if the restructured company is unable to thrive and continues to experience financial difficulties even after removing the pension liabilities? Taking UK Coal as an example, if the business continues to struggle post-restructuring, could (or perhaps more importantly would) the PPF force closure of a mine which would result in job losses or even push the company into insolvency? 

The UK Coal deal also raises political questions. UK Coal is one of Britain’s largest providers of coal and supplies around 5% of the country’s electrical energy needs. Some have expressed surprise at the sudden change in approach by the PPF and have suggested that UK Coal’s standing as an iconic British industry may have lead to pressure from the UK Government to ensure that the business survived. Would another company in a similar situation to UK Coal have received the same assistance and support from the PPF?

The impact of the deal for companies in similar situations remains unclear. Further information and transparency on the details of the deal would be useful to better understand why the PPF came to the agreement it did. It would be of particular interest to understand whether this sort of restructuring will be available to other struggling companies. But the PPF has in the past refused to provide such clarity saying that only “on rare occasions” will they consider transactions which allow a company to continue to operate with the pension scheme being taken on by the PPF and that they “do not enter such arrangements lightly and only agree them if a number of stringent tests are met”.

Finally, what will the impact of the deal be on the PPF and its members? The PPF has taken on a sizeable liability from UK Coal, estimated to be between £450m to £500m (reportedly the single largest liability to date). Will the PPF seek to mitigate the impact of this considerable liability by increasing the annual PPF levy charge payable by schemes? Will it be forced to reduce members’ benefits just to break even? If either or both of these scenarios are the result of this latest “rescue” then it will be innocent scheme members and corporate UK who will need to dig deep.

Cameron McCulloch
Senior Solicitor

LChalmers