The Pension Protection Fund (PPF) has published guidance on company voluntary arrangements (CVAs), setting out the issues that it expects to be considered and addressed. The new guidance will be relevant to companies who are considering a CVA which could affect a DB pension scheme, and to advisers working with those companies or with pension scheme trustees.
What is a CVA?
A CVA is an agreement between a company and its creditors. If a company is facing insolvency a CVA can provide a way to restructure, or to address a particular issue, in order to allow the business to continue to trade
Why has the PPF issued guidance?
Where there is a DB pension scheme, a CVA proposal can include the compromise of pensions liabilities with a view to the scheme entering the PPF. Alternatively it can focus on other issues, with the intention that the pension scheme continues without being compromised or entering the PPF. In each case, the PPF is a key stakeholder. In many cases, the CVA proposal will trigger a PPF assessment period, with the result that the PPF (rather than the pension scheme trustees) will have the right to vote on the proposal. The PPF has issued guidance in light of its experiences in this area.
What does the guidance say?
In the guidance, the PPF explains that its approach will depend on what the CVA is trying to achieve. It also confirms that it will usually exercise its right to vote in favour of or against a proposal, rather than abstaining.
Where the proposal includes the compromise of DB pensions liabilities
The PPF confirms that it will apply the principles in its existing guidance note ‘The PPF approach to employer restructuring’. The key points in this guidance are that:
- the proposal should produce a significantly better return to the scheme than an administration or liquidation;
- the scheme should be given an “anti-embarrassment” equity stake in the employer of at least 33% where the existing shareholders remain involved;
- creditors should be treated equitably and the scheme should not be disadvantaged; and
- all costs incurred by the scheme should be paid by the company.
Where the scheme is to continue without being compromised
The guidance says that “addressing a single issue, usually related to property, is not likely to provide an overall solution for the employer. The history of these proposals shows that a significant majority are not successful in the medium to long term. During the period of the CVA, the pension deficit may grow and there may be an increase in the liability to the PPF primarily as a result of annual pension increases and members reaching normal retirement age”, and so becoming entitled to full PPF compensation (known as “PPF drift”).
In view of this, the PPF says that, in order for it to vote in favour of a CVA in these circumstances, it expect employers and their advisers to demonstrate how they have considered a number of issues. These include the following:
- Restructuring plan: Do the employer’s proposals have a reasonable prospect of being successful, and is there a viable business going forward capable of supporting the scheme?
- Management: Does the management have the right level of expertise to deliver the plan?
- Working capital & restructuring finance: Are there sufficient committed working capital facilities and is there sufficient funding / equity to deliver the restructuring proposals?
- Bank financing: Is the bank receiving an acceleration in its repayment profile or an increase in margin? Also, if secured debt is being repaid/replaced, is there scope for the pension scheme to obtain second ranking security?
- DRCs: What risks does the CVA pose to the DRCs plan and how will these risks be mitigated?
- Employer dividends: Are there any dividends forecast and what steps are proposed to ensure the scheme receives comparable amounts?
- PPF drift: What is the quantum of PPF drift and what mitigation is being provided (in addition to DRCs) to protect against this?
- PPF levy: What proposals are included to ensure the scheme is not exposed to levy payment contributions for the duration of the CVA?
- De-risking: What steps are being taken to de-risk the scheme to reflect the additional risk to the scheme of the CVA process?
- Exit protection: What is the exit strategy for finance providers / equity and what protections are included to ensure the scheme’s position is preserved?
Osborne Clark comment
Given the increased use of CVAs, it is helpful that the PPF has published guidance setting out what issues it expects employers and advisers to consider and address. Early consideration of these issues, as well as early dialogue with the PPF (and the Pensions Regulator, where appropriate), should lead to better outcomes for both employers and members.