Eastman Kodak is in the process of emerging from Chapter 11 bankruptcy in the United States. A key part of the process has been the settlement of the $2.8 billion claim by Eastman Kodak’s UK subsidiary pension fund, the Kodak Pension Plan. This has involved the sale of 2 businesses to the Kodak Pension Plan for a total of $325 million in return for a discharge from liability to the Plan. These businesses were valued at $650 million. This has attracted some criticism in the press towards the Pensions Regulator in the use of a regulated apportionment agreement to facilitate the settlement.
Eastman Kodak has been the victim of the general shift from film based to digital photography and the impact of smartphones and the internet. Falling sales forced EK into bankruptcy under Chapter 11 in the US.
It’s UK subsidiary, Kodak Limited, remains solvent and is the holding company for the UK group. It is the sole sponsoring employer of a large defined benefit pension scheme, the KPP.
The foundation of the trustees’ claim against EK is based on a guarantee from EK. The claim of $2.8 billion made by the trustees against EK correspond to the full buy out deficit in the plan, making the KPP the largest unsecured creditor of EK.
The question being raised is whether the Regulator’s acquiescence through a regulated apportionment agreement is a one-off situation, or does it signal a general change in approach by the Regulator and the PPF.
Regulated apportionment arrangements have existed since 2008. Relatively few have been approved, most notable being those relating to the Uniq scheme and the BMI scheme.
The Regulator’s guidance states that RAAs are extremely uncommon and the expectation is that they will be used rarely. The criteria that the Regulator and PPF use when considering situations remains somewhat opaque and it is difficult to predict a response from case to case. Whilst the Regulator’s guidance say that for an RAA to be approved the insolvency of the employer must be inevitable, this goes further than the legislation requires. The Regulator will want to see an estimate of the outcome for the scheme and the employer’s other creditors on insolvency and if there are any viable alternatives to the proposed RAA deal or insolvency, the Regulator will also be keen to see the expected outcomes of each such alternative, including the exercise of the Regulator’s moral hazard powers.
The income from the two businesses the KPP now owns will enable it to remain outside the Pension Protection Fund and provide benefits for the members above PPF level. There will however be no further covenant available for the trustees and it will now be up to them to manage these businesses and their other assets to develop a secure future for the KPP.
The settlement plan has now been approved by the US bankruptcy court for the Southern District of New York. The only thing that can be said with any certainty for the use of RAAs is that if the numbers are big enough, the Regulator seems to be interested.