Swings and roundabouts: will new insolvency legislation adequately protect pension schemes?
With almost every area of the economy under financial pressure as a result of Covid-19, it’s no surprise that the Government has identified a need for companies to be supported in avoiding collapse. The Corporate Insolvency and Governance Act (the Act) has been enacted to help meet that need. It makes a number of changes to the insolvency regime which aim to provide additional protection to companies whose trading levels have taken a hit. In particular, the Act introduces a 20-day moratorium period during which a company can apply for a payment ‘holiday’ from pre-moratorium debts, and creditors will be unable to launch legal proceedings to recover sums owed to them. The moratorium can be extended to 40 days without creditor consent. The idea is that this window will allow the company breathing space to restructure or secure additional funding, thereby hopefully avoiding insolvency.
The best asset a pension scheme can have is a strong employer, so anything that helps save an employer is good news for its pension scheme – right? Well, not quite. The first draft of the Bill caused widespread concern in the pensions industry, with many highlighting that it could have unintended but highly damaging consequences for defined benefit (DB) pension schemes.
DB schemes are, in the absence of any contingent security, unsecured creditors of an employer. This means that, in an insolvency situation, debt owed to the scheme ranks below that owed to secured creditors. In practice, this means that a significant amount of scheme debt is often left unpaid, leaving the Pension Protection Fund (the PPF) to pick up the tab for paying members’ benefits.
In light of these concerns, some mitigating amendments were made to the Act shortly before it was passed. These amendments give the Pensions Regulator and / or the PPF (as appropriate) an increased role in any moratorium period or restructuring, and include obligations to provide the Pensions Regulator / PPF with information at various points during the process. The proposed concept of ‘super-priority’ status for certain non-secured creditors should the company enter insolvency after a moratorium was removed.
While these amendments are welcome, it is unfortunate that some proposed amendments were dropped as the Act passed through Parliament. These included, for example, a proposal whereby the PPF would have to consent to the disposal by a court of any property pledged to the scheme. The Act as brought into force fails to address all of the issues previously identified, and concerns about its impact on DB schemes remain.
The Act still contains a number of provisions which could place an employer’s DB pension scheme at a disadvantage in an insolvency scenario. For example:
- Deficit recovery contributions appear not to be payable by the employer during the moratorium period. This would have a negative impact on the scheme’s funding level and may inhibit its ability to operate.
- The mechanism under the Act for agreeing a company’s restructuring plan means that there may be limited scope for scheme trustees to protect the scheme’s interests.
- During the moratorium period, trustees would not be able to issue winding-up petitions in respect of unpaid scheme contributions. They would also be unable to enforce any charges or obligations under guarantees given by the employer without the court’s permission. This means that even a scheme holding security might struggle to recoup any debt owed to it.
- Any statutory demands (a formal demand for payment of an outstanding debt) issued between 1 March 2020 and 30 September 2020 cannot be relied upon by creditors to issue a winding-up petition. Trustees use statutory demands to enforce unpaid contributions to the scheme and the temporary loss of this power could, in the short-term, affect negotiations with the employer with possible long-term consequences.
- Failures by the employer to pay contributions may trigger the wind-up of the scheme under its governing documentation, and trustees may be powerless to do anything about it.
However, it’s not inevitable that DB schemes will be worse off in every case.
The aim of the Act is to support the viability of companies that would otherwise be destined for insolvency. If an employer manages to use the new regime to avoid collapse, the outcome for its scheme will likely be a positive one. Any short term financial damage suffered by the scheme is likely to be outweighed by the benefit of continued employer support over the medium to long term, and any contributions that were missed during the moratorium period can be recouped from the employer over time.
But there will inevitably be cases where the ending is not so rosy. If an employer’s position worsens during the moratorium period and it becomes insolvent, there is limited scope under the Act for the scheme to recoup debt owed to it before it’s too late. The less debt that is recouped from the employer, the greater the portion of members’ benefits that will need to be covered by the PPF. If the PPF sees an increased demand on its resources across the board, we should not be surprised if it feels the need to increase its levy – and that’s not something employers will welcome.
20th November 2020
The UK Government confirmed its intention to introduce regulations to help prevent pension scams.
3rd November 2020
The Pensions Regulator has published guidance on defined benefit superfund pension schemes.
10th September 2020
The Police Foundation has published its much anticipated Report on pension scamming in the UK.