Government attempts to mitigate the risk its new insolvency legislation poses to defined benefit pension schemes have only been partly successful, and company moratoriums could still see schemes lose out on valuable contributions, experts have said.
The controversial corporate insolvency and governance bill received royal assent on Friday, after a sustained lobbying effort by a range of industry bodies, including the Society of Pension Professionals and the Pensions and Lifetime Savings Association, aimed at changing the wording of the bill.
Pensions experts had argued that the provisions for a moratorium, designed to allow struggling companies breathing space to create a recovery plan free from the threat of legal action during the Covid-19 crisis, would in fact damage the position of DB schemes as creditors to their employer, and the Pension Protection Fund as their guarantor.
In a letter to the Department for Work and Pensions, Fred Emden and Daniel Gerring, chief executive and chair respectively of the SPP, said the legislation “could result in a dramatic enhancement in the position of ‘lender’ creditors to an insolvent company compared with the position of its other ‘non-lender’ unsecured creditors” such as DB pension schemes, criticising the elevation of other creditors, including the taxman, to “super-priority” status.
Trustees may need to rebalance their investment portfolios or even alter their statements of investment principles in light of these adjustments
Emma King, Eversheds Sutherland
A number of amendments to the bill were tabled in the House of Lords with the aim of restoring protections to pension schemes, but Rosalind Connor, partner at Arc Pensions law, told Pensions Expert that “the more significant amendments don’t seem to have been accepted”.
“Rather miraculously, after they’d ignored us over the pension schemes bill, there were some changes put in as a result,” she said, citing the requirement to notify the PPF and the Pensions Regulator at the start of the process, and the powers given to the PPF to act as creditor.
“If you’re the regulator and you think this is being used by directors of a company in a way that puts the pension scheme in a worse position, that’s a moral hazard scenario. The regulator will know about that and come talking to directors,” Ms Connor added.
But the fundamental problem is that a company that enters a moratorium will not have to pay any new debts, such as top-up contributions or deficit repair payments. Combined with the fact that pension schemes will not benefit from the “extra special treatment” afforded to other organisations and creditors, schemes may stand to lose out under the new arrangements, she argued.
Trustees must make adjustments
Opinion is split as to how severe the impact on pension schemes could be.
Emma King, partner at law firm Eversheds Sutherland, told Pensions Expert that a moratorium ending in insolvency would result in a pension scheme missing out on valuable deficit repair contributions, while an extension of the moratorium could mean trustees that have poured into alternative assets lack sufficient liquid securities to meet cash flow requirements, unless they now begin to divest.
“Trustees may need to rebalance their investment portfolios or even alter their statements of investment principles in light of these adjustments,” Ms King said, and added that employers skipping DRCs would probably see deficits increase.
But Richard Favier, trustee representative at Dalriada Trustees, gave a more sanguine response.
“Anything that gives an employer extra time and a short window to sort itself out, free from creditor pressure, has to be helpful and should improve outcomes for everyone,” he said.
Mr Favier added that the ability to earn breathing space without triggering a PPF assessment “and all that they bring” made sense, as "a moratorium exit may not be an insolvency."*
Pensions bill would be welcome ‘sooner rather than later’
The lack of PPF assessment, combined with the prospect of pension schemes having new arrangements “crammed down” on them, is controversial, however.
“One of the things you have to do when you’re making an arrangement is to say, if we’re going to compromise, we have to end up doing better than we would have done in the most likely alternative outcome, for example insolvency,” explained Dan Mindel, director at Lincoln Pensions.
While under ordinary arrangements a company becoming insolvent would trigger entry into the PPF assessment period, that is not the case under the provisions for a moratorium as the company is being – if only temporarily – rescued, he said.
“If the debt is compromised and no further payments are made to the scheme as a result, and the funding falls below PPF level, how do members then qualify for PPF benefits if there’s no assessment?” Mr Mindel asked.
Industry bodies lobby government to change insolvency bill
Pensions industry bodies are lobbying the government to make changes to the corporate insolvency and governance bill, which unless revised will “inevitably lead to more pensioners not receiving their benefits in full and greater strain on the Pension Protection Fund”.
He said without this assessment, arrangements out in place under a moratorium could compromise members’ benefits while the company is on life support. Coupled with the ability of the employer to “cram down” unfavourable terms on pension schemes via the courts, the bill “removes some of the protections in place currently”.
“There are other protections in place... but it takes some of the leverage away from the regulator and the PPF to get more out of it than they could have done,” he said.
While acknowledging that most seek to do the right thing, Mr Mindel urged the accelerated passage of the pensions schemes bill – which contains hefty fines and criminal sanctions for DB bosses – to sharpen corporate minds: “The less room there is for mischief the better.”
*This article has been updated to clarify reporting of a statement by Richard Favier.
