The Pension Protection Fund (PPF) is responsible for paying compensation to members of defined benefit occupational pension schemes where the scheme is in deficit on a PPF funding basis and the employer becomes insolvent. One of the criteria that must be satisfied by a scheme to enter the PPF is that the participating employer(s) suffer a "qualifying insolvency event" (QIE). It can be difficult for schemes to satisfy this requirement where they have a foreign sponsoring employer as the legislation that governs PPF entry does not recognise foreign insolvencies as a QIE.
This issue was highlighted by the Olympic Airlines case in 2013, which involved a scheme which couldn't access the PPF due to its employer being based in Greece. The Greek insolvency didn’t trigger an insolvency event in the UK, and EU rules mean the employer can't be put into a UK insolvency process here if the employer has already entered one in another EU member state. The case seemed particularly unfair as the Olympic Airlines scheme had been required to pay a PPF levy but wasn't eligible for compensation from the PPF when the employer became insolvent.
The government made a limited amendment to the PPF entry rules at the time, to help this particular scheme, but it didn’t have a wider application. Recently, however, there has been a more general change to the rules. From April this year, the entry criteria have been extended so that trustees can apply to the PPF to be admitted in similar circumstances to the Olympic Airlines case where their employer is an EU company.
The position is different for a non-EU company – a UK creditor (which would include trustees) can apply to the UK courts to request UK insolvency proceedings in respect of a non-EU company. The EU rules don’t apply and, although there is no guarantee that the Court will exercise its jurisdiction to wind up the foreign company, the Court will usually do so provided various conditions are met, including the requirement that there is a "sufficient connection" with the UK. An operating UK branch would probably do, but the "sufficient connection" has to exist at the point of the application to Court.
There are some other potential solutions to address the risk of a scheme with an overseas sponsor being ineligible for the PPF:
- Substitute a UK group company (which could suffer a QIE) for the overseas company as statutory employer. If there is concern about the UK company's covenant to support the scheme, the trustees could request a guarantee from the overseas employer or a parent company.
- Keep the overseas employer as sole employer with additional protection and security, such as an agreement from the employer about the activity to be carried on in the UK (the "sufficient connection") and an undertaking to keep the trustees updated on this.
- Arrange contingent funding or security to secure members' benefits equal to PPF level in the event that the employer fails to maintain a sufficient connection with the UK or the suffers an insolvency event and the scheme is barred from PPF entry.
Comment & Actions
- This issue highlights the point that payment of the (compulsory) levy is no guarantee of eligibility for PPF entry.
- Where schemes have an overseas employer they should take advice on the implications for PPF eligibility.
- The recent changes to the PPF entry rules (assuming they are preserved post Brexit) do offer a potential solution for schemes with employers based in EU member states other than the UK/Denmark. But trustees have a limited time from becoming aware that the employer is unlikely to continue as a going concern to apply to the PPF.