Insolvency bill leaves huge questions on interactions with DB schemes

While some of the bill is specific to the Covid-19 pandemic – such as protections for directors over the April 1 2020 to June 30 2020 period – the core elements of the bill are a 20-day moratorium protecting the business from some creditor actions (with an option to extend) and a new form of court-approved restructuring plan, similar to a Companies Act scheme of arrangement but with the ability to ‘cram down’ dissenting creditors. 

There are several key risks to pension schemes arising from these uncertainties that together could prejudice member outcomes in any retirement plan relative to current alternatives

Although the bill includes very specific provisions for the treatment of creditors such as landlords and suppliers, it is currently unclear how it will interact with pension legislation. Here are four areas where there could be challenges:

Are deficit reduction contributions included in the moratorium?

The bill stipulates that, as a component of wages and salaries, contributions to occupational pension schemes are excluded from the moratorium – that is to say, they need to be paid.

However, it is unclear whether this relates only to ongoing accrual or also to agreed deficit reduction contributions.

If the latter, it is also unclear how alternative structures designed to pay down deficits, such as asset-backed funding structures, would be treated.

Not an insolvency event

The moratorium and associated restructuring plan exit route are not ‘insolvency events’, but rather Companies Act procedures, much like schemes of arrangement.

As the moratorium is not an insolvency procedure, and absent any clarification in official guidance, affected pension scheme trustees will need covenant and legal advice on the following areas:

• Whether schemes become eligible for the Pension Protection Fund if compromised via a restructuring plan (see below).

• The triggering of a scheme’s section 75 debt.

• The triggering of other powers that may rely on insolvency, such as segregation or wind-up powers.

• The triggering of insolvency clauses in contractual arrangements, such as guarantees and asset-backed funding structures.

How will the scheme be treated in any restructuring plan?

The bill contains provisions for a new form of court-approved restructuring plan, where creditors are placed into classes and given the opportunity to vote on turnaround proposals. If 75 per cent of each class of creditors approve, then the restructuring plan will pass.

However, the court can still approve a restructuring plan even without a 75 per cent agreement, where dissenting creditors would not be worse off than in the likely alternative outcome. Consequently, such creditors, including pension schemes, may have no voice. 

As such, from a scheme perspective there are several further relevant questions that need to be resolved:

• Will DB schemes form a separate class for voting purposes or be included by default with general unsecured creditors? 

• What value of debt should be used for voting purposes, noting that the s75 debt may not have triggered as the moratorium and recovery plan are not insolvency procedures? 

• Who controls the scheme’s vote in the absence of an insolvency event – is it the trustees or the PPF? If the latter, it may not be necessary to meet the strict criteria of the Pensions Regulator’s and the PPF’s restructuring tests.

Will TPR’s powers be available?

The bill also brings into question the role and powers of the regulator. The nature of the new restructuring tool, being a debtor-led procedure that allows actions such as issuing secured debt, could mean that TPR’s powers are restricted given the court’s supervision. 

There are several key risks to pension schemes arising from these uncertainties that together could prejudice member outcomes in any retirement plan relative to current alternatives, or cause issues for directors looking to take advantage of the proposed moratorium.

There is a consequent need for TPR and the Department for Work and Pensions to engage with the legislation to address both existing pension laws and its interaction with the forthcoming pension schemes bill.

This latter includes several provisions that raise the bar for directors and other stakeholders in handling pension schemes, whereas the bill as drafted could make this easier. Unless resolved, this apparent conflict could lead to adverse outcomes, such as a court-approved compromise becoming the focus of an investigation from TPR. 

In the meantime, trustees and corporates should work with their advisers to consider the position of schemes in any possible restructuring. This would effectively be an extension of existing contingency planning. 

Dan Mindel is managing director and Luke Hartley is a director at Lincoln Pensions