Essex Pension Fund has produced a map to help predict employer insolvency after a liquidation left it saddled with orphan liabilities.
The £3.5bn scheme was left to deal with the contributions of one of its employers in the tourism sector after the organisation became insolvent in 2011.
Orphan liabilities require an organisation to make up contributions into the fund on behalf of members whose employers are no longer sponsors of the scheme.
Kevin McDonald, group manager at the scheme, said the fund had taken on the employer¹ with “no discussion” on what the scheme would have to pay in the event of an insolvency, when he addressed delegates at the National Association of Pension Funds local authority conference last week.
“The last thing you really want is your actuary to ask you if there are orphan liabilities,” he added. To protect against future liquidation events, the scheme’s management team and actuary have produced a map showing its analysis of employer insolvency risk.
McDonald said the initial assessment of risk or security would “starkly differentiate” between a tax-raising body and a small local charity.
The tool measures the risk a particular employer poses, using a rating score provided by agency Dun & Bradstreet. “Liquidations are a fact of life,” he said. “The position you don’t want to be in is seen to be triggering one.”
Schemes can talk to their employers and actuaries as soon as they join, to prevent having to cover unknown payments at a later date.
Clifford Sims, partner at law firm Squire Sanders, said schemes could set up early warning and monitoring systems and segment all of the risks each employer poses to the fund, including the probability of insolvency.
“Prevention is better than cure,” he said. The Pensions Regulator’s new statutory objective, announced in the Budget earlier this year, could make it more difficult for schemes to negotiate with employers in the event of insolvency, he added.
Mark Packham, director at PwC, advised schemes: “Establish a strategy, differentiate where situations will impose a change. Identify points of common interest, and establish a dialogue at an early stage.”
Also at the conference, scheme managers debated the proposal to merge some or all of the local government pension scheme in order to gain economies of scale in investment management and administration.
¹The original version of this article referred to the employer as being taken on with a "legacy of debt". As there was no debt when the employer was admitted, in 1974, these words have been removed.
