With Wedgwood having to sell its pottery collection to fund its £134m pension deficit, Pippa Stephens looks at how understanding section 75 debt could minimise insolvency risk
Multi-employer schemes must ensure they have a thorough understanding of section 75 debt rules to avoid being saddled with debt in the event of insolvency;
Timely and specialist legal advice can prevent cases such as Wedgwood, which resulted in the £134m sale of several pottery masterpieces;
Schemes should not assume anybody else is looking out for them and should work out any debt they would be responsible for if their parent companies become insolvent.
A thorough understanding of section 75 (s75) debt and timely legal advice could have prevented Wedgwood Museum having to sell its pottery collection for £134m.
The company was forced to sell its collection to fund a pension deficit, following the museum entering administration in 2010.
With companies increasingly getting into financial difficulties, multi-employer schemes face the risk of one or more of their employers becoming insolvent.
In such circumstances, overlooking s75 debt legislation could lead to some members being unfairly affected.
Consultants have called on schemes to take their own specialist advice and not to assume anyone else is looking out for them.
Devi Shah, restructuring partner at Mayer Brown, said scheme managers and trustees need to understand the structure of their scheme, who is liable to contribute to it and whether there are other companies in the employer’s group that have a strong balance sheet.
“The mantra is to 'stay close to assets'," she said.
"Make sure the companies that have the obligation to fund or pay the s75 debt are those that have valuable 'free' assets, such as unsecured assets, not held on trust for any other person.”
Shah added that it would be too late to improve the recovery once the group was in financial difficulty. Employers should, therefore, seek guarantees and security from the strongest employers in the group.
The Wedgwood case
Wedgwood Museum in Stoke-on-Trent has been forced to sell its £11m-£18m pottery collection to cover the deficit of the 7,500 member-strong pension plan, with 3,500 members currently receiving a pension.
Masterpieces in the collection must be sold to pay creditors, which include the Pension Protection Fund (PPF).
S75 works on a last-man-standing basis. This is where if there is more than one participating employer in a pension scheme, each employer is liable for only its share of the total s75 debt.
The key is to take your own specialist advice in these situations and not assume someone else is looking after you
In the Wedgwood case, the museum’s share was very small.
The other employers, however, triggered their own debt by going insolvent, leaving the last employer responsible for the entire s75 debt, irrespective of the number of employees it had in the plan.
“In terms of practical advice, the key is to take your own specialist advice in these situations and not assume someone else is looking after you," said one lawyer close to the case.
“If other groups of companies are insolvent, their interests may no longer match your interests.
“Similarly, the interests of the trustees and the employers are often directly opposed in these circumstances and so employers cannot expect trustees to help them out.”
CMS Cameron McKenna, which acted on behalf of the Wedgwood Group Pension Plan and the PPF, highlighted that the trustees were under a “legal obligation” to clarify the ownership of the museum collection.
“While it is regrettable the museum did not take the appropriate action to separate the collection itself from the museum’s liabilities to the pension plan, the trustees are pleased the ownership of the collection has been clarified,” the response continued.
It stated transferral to the PPF was likely given the size of the deficit of the plan, unless very substantial sums were recovered from the museum’s collection, or other sources, so “members can benefit from the compensation it provides”.
Preventative action
Philip Smith, head of defined contribution at Buck Consultants, said the relevant employers should have taken steps to ringfence the collection by transferring it to another owner, such as a charitable trust, designed to hold and preserve it.
“By holding onto the collection in the sponsoring employer’s name, it was always at risk from any of the employer’s creditors – of which the pension scheme trustees are but one," he said.
The employer should have taken legal advice as soon as it realised it was liable for the debt, he added.
The downside of such legal advice could have been the sponsoring employer being given a lower valuation, which may have resulted in an increase of contributions into the fund.
“That situation would only be reflecting the reality that the employer had a debt to the scheme and the trustees were required to do all reasonably within their power to ensure the debt was covered,” Smith added.
