L v M Ltd is an important decision dealing with the interaction between apportionment of Employer Debt (see further below) and the Pensions Protection Fund (PPF). An eligible scheme cannot enter the PPF where the trustees have entered into a legally enforceable agreement to reduce the amount of Employer Debt which the trustees may recover. However, the Employer Debt legislation allows an employer’s debt to be apportioned (which might look like a reduction of an employer(s) debt).
L v M Ltd decides that a legally enforceable agreement to apportion the Employer Debt made before the triggering event which gives rise to that Debt would not itself prevent the scheme entering the PPF.
This briefing note considers the L v M Ltd decision.
Employer Debt requirements: a quick reminder
Where there is a defined benefit scheme with a deficit on the buyout basis, and either:
• A single employer becomes insolvent or puts the scheme into winding-up, or
• A participating employer ceases to participate, a debt calculated on the statutory basis is due from the employer (“Employer Debt”).
The Employer Debt due is normally the employer’s share of (or in the case of a single employer scheme, the whole of) the scheme’s buy-out deficit. However, the Employer Debt legislation provides that scheme rules may allow the employer’s debt to be apportioned in a different way.
Apportionment is a useful mechanism, particularly on internal reorganisations, in order to avoid Employer Debts arising only because the business is streamlined or rationalised.
The PPF Entry requirements: a quick reminder
Broadly speaking, defined benefit schemes (and the defined benefit parts of hybrid schemes) are eligible to enter the PPF where:
• There is a qualifying insolvency event in relation to an employer after 5 April 2005,
• There are insufficient assets on wind-up to secure PPF levels of compensation for scheme members, and
• There is no chance of a scheme rescue.
A scheme which would otherwise be eligible ceases to be an eligible scheme where the trustees enter into a legally enforceable agreement to reduce the amount of Employer Debt due.
L v M Ltd: the facts
M was part of a multi-national group. It was also the sole employer of a scheme with a buy-out deficit. Although M had suffered financial losses over the last few years it had been supported by the wider group. Financial down-turn of the group as a whole meant that M could no longer rely on that support. M decided to restructure to ensure its continued survival. Part of that restructuring involved the following, properly documented, pensions proposal (Proposal):
• Newco would be established and will be admitted to participation in the scheme.
• The scheme rules would be amended so that M’s Employer Debt would be apportioned with the result that M would pay £1 and Newco would pay the balance.
• A scheme wind-up would be triggered. This would also trigger the Employer Debt as apportioned.
• M would pay its debt of £1 and so cease to be a scheme employer.
• Newco would be unable to pay its debt and so would go into insolvency.
• The scheme would enter the PPF.
• The PPF would take an equity stake in M going forward.
The trustees and M had approached both the Regulator and the PPF about the Proposal. All parties agreed that the Proposal should be implemented with the result that the scheme enters the PPF.
What was actually decided?
The judge (Warren J) decided the following:
• The existence of the agreements which effected the Proposal would not prevent the scheme from entering the PPF. Whilst the Proposal resulted in a legally enforceable agreement which operated to apportion the Employer Debt, the debt is not “due” at that time. The agreement would be made before an Employer Debt triggering event. This meant that at the date of the agreement there would be no Employer Debt due to the trustees.
• The implemented Proposal would not prevent the scheme entering the PPF. The PPF entry requirements only prevent a scheme entering the PPF where the Employer Debt is already due at the time when the apportionment takes place. A scheme is not prevented from entering the PPF merely because an agreement is in place which will reduce an Employer Debt but that the Employer Debt itself will not be triggered until some future event.
• The Regulator would regulate any agreement to apportion the Employer Debt reached before the scheme entered a PPF assessment period. In doing this, the Regulator would work closely with the PPF.
Legislation requires the Regulator and the PPF to work together for the better regulation, protection and control of pension provision. The approach taken is more likely to achieve the statutory objective of minimising burdens on the PPF. Any other analysis would make it impossible for schemes to ever introduce a provision to apportion an Employer Debt.
What was not decided?
• It is not clear whether or not it is possible for scheme rules to be amended after the Employer Debt triggering event, but before the Employer Debt is quantified, in order to secure an apportionment. Warren J did not need to go into this point in order to decide the case.
The L v M Ltd decision is reassuring. In particular, it confirms that apportionment may be used to avoid the more illogical effects of the Employer Debt legislation, for example, on reorganisations and transactions where “withdrawal arrangements” might not work.
The safest approach to ensure that a valid apportionment exercise has occurred, without risk of losing PPF compensation, is for it to take place before the event which triggers the Employer Debt occurs. Only where this has happened can trustees and employers be reassured that the scheme has not ceased to be eligible for entry to the PPF. L v M Ltd did not need to consider whether it is possible for an apportionment to take place after the Employer Debt triggering event has occurred.
The apportionment of an Employer Debt in accordance with legislation and scheme rules must be distinguished from any compromise of an Employer Debt. The case of Bradstock confirmed that trustees are able to compromise an Employer Debt. However, employers and trustees need to take special care when considering a compromise as opposed to an apportionment not least because:
• Bradstock was decided before the Regulator and the PPF existed, and
• On the basis of the L v M Ltd decision, the PPF entry requirements are aimed at preventing Bradstock compromises, although Warren J did comment that the Bradstock decision did not articulate exactly what such a compromise should entail.
It is implicit in Warren J’s comments that parties to an apportionment proposal should consider carefully whether they should apply for clearance from the Regulator before proceeding. This case (certainly from the facts we have) appears to be one where it was appropriate to seek clearance. The Proposal was structured in such a way that M would only pay a nominal amount before the scheme ended up in the PPF and the PPF was going to take an equity stake in M. At the same time there would appear to be plausible reasons for granting clearance not least the safeguarding of employee jobs as well as maximising benefits for the scheme members.
The facts should be carefully considered, therefore, before a decision is taken whether or not to obtain clearance, which remains voluntary. Apportionments may occur for a wide variety of reasons, for example, as a result of corporate transactions or on internal restructurings where there may well be arrangements put in place to ensure that there is adequate financial support for the scheme going forward. In such cases it is possible that it would not be appropriate or necessary to seek clearance.