On 2 March 2012 the Pensions Regulator ("TPR") issued a report outlining the approach it might take in dealing with a distressed pension scheme. Whilst the report focuses on the Uniq pension scheme (last mentioned in our May 2011 article) it also provides useful guidance to other schemes in difficulty.
TPR confirms that its initial objective is to help employers and trustees identify whether a scheme is viable without a strong enough employer covenant.
If it is not, the employer, trustees and TPR will need to work together through various preliminary questions which will include:
- Whether a recovery plan would be viable?; and
- Whether the insolvency of the employer is inevitable?
Having considered these two questions TPR may then consider whether its moral hazard powers under the Pensions Act 2004 are available and exercisable in the circumstances.
In the Uniq case, having considered these questions, the parties concluded that no viable scheme funding solution could be found. In these circumstances TPR has indicated that the trustees' focus should be on capturing and maximising the value of the scheme's interest in the employer for the benefit of the members. TPR has suggested that where trustees fail to achieve this, it may decide to wind up schemes using its statutory powers.
TPR may also exercise its wind-up powers in situations similar to that in Polestar1 . In Polestar, complications arose when Polestar UK Print Limited ("UK Print") failed to maintain payments to the scheme's sole sponsoring employer as part of a TPR approved restructuring. Initially, the Trustee took security on behalf of the scheme in return for the deferral of the agreed payments. Later however the Trustee was forced to choose between accepting a reduced sum offered by UK Print in full settlement of its liability or face the prospect of ranking as an unsecured creditor in its administration.
The Trustee chose the former option and the scheme ceased to have an employer. TPR, having examined the Trustee's future funding prospects for the scheme, concluded that there was no reasonable prospect of the scheme ever meeting the benefits promised to the membership. In addition, the lack of an employer meant that both the PPF (directly) and the levy payers (indirectly) were exposed to any increase in the scheme's liabilities measured on the PPF basis. In these circumstances TPR indicated to the Trustee that the scheme should be wound up, failing which it would exercise its statutory power to do so.
Whilst any TPR guidance indicating how it might choose to exercise its powers as far as, distressed pension schemes are concerned is welcome, several important questions remain unanswered:
- Firstly, given the present economic environment the affordability of paying down scheme deficits remains an issue. Recently, both Trinity Mirror Group and Premier Foods have negotiated reductions in their existing recovery plan funding levels because of changing fortunes in the underlying businesses, yet neither employer appears to have sought TPR's prior approval. TPR may yet investigate these revised funding arrangements and in particular whether the respective trustee boards obtained and properly considered sufficient advice on the strength of the employer's covenant.
- Secondly, the question of whether an employer is, or is expected to become, insolvent will often be difficult to answer. The formal tests of solvency are contained within the Insolvency Act 1986 and are known as the 'cash-flow' and 'balance sheet' tests. The latter test was recently considered in BNY Corporate Trustees v Eurosail UK Plc2 . In Eurosail the Court of Appeal decided that balance sheet insolvency occurs only where the business has reached the "point of no return".
Finally as we have previously mentioned, Uniq is a rare case as there are no secured creditors ranking in priority to the scheme's deficit. It remains unclear what approach TPR will take where secured creditors are involved.
We expect TPR to issue a further statement which will hopefully throw further light on TPR's attitude to the problems schemes and their sponsoring employers face.