Ian Smith looks at how the Great Lakes scheme used regulatory pressure and an innovative legal move to secure substantial funds for its members
The scheme had a sponsor with a US parent, which was temporarily insolvent. The trustees worked with the regulator to pursue financial support and protect their members' benefits.
The case demonstrates the rewards of robust negotiations with sponsors and their parent companies, backed by the threat of punitive action – even where, as in this case, the UK sponsor had not gone bust.
Schemes in the similar situation of having a sponsor with an overseas parent have been urged to monitor the strength of the wider group in which they are situated.
By using information-sharing protocols, taking appropriate advice and acting quickly where there are signs of trouble at the parent company, they can reduce the risk to their funding level.
The key actions required of the Great Lakes scheme were as follows:
Deciding on the initial approach the regulator with its concerns;
Agreeing a stipulation in the US court to kick-start the UK regulatory process;
Making representation to the regulator following the latter's issue of a warning notice against the US parent;
Confirming its support of the proposed regulatory action;
Negotiating throughout with the parties involved to agree the deal.
In the course of events, the trustees used a canny legal move to sidestep the US bankruptcy process by removing its claim in the country, freeing the UK regulator to pursue the funds.
Great Lakes eventually secured an initial payment of £30m, with a further £30m to be paid over the next three years, to plug the technical provisions deficit of the scheme, plus other “guarantee and security agreements”.
It also agreed further prospective sponsor contributions, if needed, to offset additional lost value which could be caused by equalisation.
Background
Great Lakes is a hybrid pension scheme with closed defined benefit and open defined contribution sections, and a deficit calculated in June 2009 as £95m on a buyout basis.
The sole sponsoring employer is Chemtura Manufacturing UK, which has a parent company Chemtura Group.
In March 2009, Chemtura Corporation, the ultimate parent, filed for chapter 11 bankruptcy protection in the US. While its UK subsidiary never went bust, the corporation re-emerged from insolvency in November 2010.
The Great Lakes trustees and the debtors made a stipulation in the United States Bankruptcy Court Southern District New York, where the underfunded scheme agreed to withdraw its proofs of claim, made in October 2009, for contribution payments by its ultimate parent.
As a result, the claims – including those for contributions or other financial support to the scheme – passed through the debtors’ chapter 11 bankruptcy, and were deemed secondary to the English regulatory process.
Discussions between the scheme and sponsor failed to reach a funding agreement and the regulator issued a warning notice the following month.
In its detailed report, the regulator said: “The target companies and the trustees were invited to make representations in relation to the matters contained within the warning notice.
“The trustees, who received independent financial and legal advice throughout the course of the regulator’s investigation, confirmed that they were in support of the proposed regulatory action.”
Legal lessons
Gary Squires, a partner at Zolfo Cooper – which acted as a financial adviser to the scheme – said in a statement the case could provide a “helpful precedent” for schemes which fall into similar problems.
He said: “It permits the debtor group to exit chapter 11 without the delays of working through the regulatory process, and provides the trustees and the regulator with a separate legal forum in respect of the restructured group, should it be required.
“This case demonstrates that even when trustees are faced with an employer group in financial difficulty, with appropriate advice and engagement, avenues may be available to put schemes onto a sound financial footing.”
Anne-Marie Winton, a partner at Nabarro, said schemes with a sponsoring employer backed by an overseas parent need to be “vigilant”.
She said: “This case shows the importance of understanding the strength of the wider group, putting in place an information-sharing protocol and being quick off the mark if there is any indication that the overseas parts of the group may be in trouble.”
The US stipulation demonstrated the importance of deciding when specialist advice is needed, in non-UK jurisdictions, avoiding a lengthy, costly legal process for members.
The strength of the scheme’s argument for financial support depends on the kind of funds the parent company has received from it, or given to it.
Roderick Morton, a partner at Herbert Smith, said this case was unusual in the regulator threatening a financial support direction where there has not been an insolvency of the UK company.
It is potentially “damaging” to the relationship with Chemtura Corporation, he added, as it questions why it is required to pay money to a UK scheme with a solvent sponsor.
