Kodak deal could 'set precedent' for benefit change

A settlement finalised last month between Eastman Kodak Company and the defined benefit scheme to save the company from insolvency in the US left individual scheme members with the choice to enter a new pension arrangement or go into the Pension Protection Fund.

In the deal, approved by the Pensions Regulator, the scheme bought two of Eastman Kodak’s businesses for $650m (£421m) and withdrew its £1.9bn of legal claims against the company.

A spokesperson for the Kodak scheme said the settlement also includes a new Kodak UK pension plan, whose sponsor is a special purpose vehicle held in a separate corporate group. This group will not trade, hold any of the assets transferred from the company or pay contributions. Income is expected from the acquired businesses’ cash flows.

“The existing scheme was unsustainable, so therefore there was no opportunity for that to continue, or for members to stay within that scheme,” said a spokesperson. The original scheme had assets of approximately £1bn.

“Members are being given the opportunity to join KPP2, the new scheme that will be launched, or they can vote no to that proposal, in which case [they] will go into the PPF. But importantly if they don’t vote, that will be counted as a no vote and they will go into the PPF,” the spokesperson added.

Voting on your pension

The members’ choices are on an individual, not consensus, basis. If any members do choose the PPF, the old scheme will start the assessment period for possible entry into the organisation.

Bottom line, get as much information as possible

Clive Pugh, partner at law firm Burges Salmon, said usually it is quite hard to change benefits, even if members’ permission is asked beforehand.

“Even if you get those consents, you have the problem that sometimes you can’t give up the benefit, you have to exchange the benefit under the law, depending on the law,” he said.

“But here, because the original scheme is dropping into the PPF, they don’t have that problem if this is what is being used, because the new scheme is given those different benefits.”

Pugh added: “If that’s a new technique I could see it being a precendent.”

Schemes can ask for support during successful periods to prepare for possible bankruptcies, said Simon Kew, head of pensions at Jackal Advisory.

If schemes thought sponsor insolvency was likely, they should try and get involved in the discussions as early as possible, Kew said, adding that trustees generally should have a standing item on their agendas for employers to give financial health updates.

He suggested schemes watch out for the inevitable positive spin from the company during discussions. “Bottom line, get as much information as possible. Do not put heads in sand and think it will be okay – it might not be. Look at all the possible outcomes,” he said.

A spokesperson for the PPF said the scheme was not yet in the assessment period as it had yet to receive an s120 insolvency notice, triggering entry.

“Anything that provides better benefits for members and does not increase our liabilities is to be welcomed,” the PPF spokesperson said.