Getting the best deal – protecting pensions when a business goes bust

I recently spoke at the Association of Consulting Actuaries’ conference about the work we do at TPR and some of the challenges we face in the current economic and political climate.

We covered a lot of ground, including our attitude towards scheme consolidation, valuations and good record-keeping. I also touched on our approach to casework and corporate restructuring.

Some of the cases we deal with involve employers that are in financial difficulty and have large pension liabilities relative to the size of their business. In most cases, the employers and trustees are able to reach funding solutions using flexibilities within the defined benefit (DB) framework. But in more extreme circumstances, where an employer is at risk of insolvency, we may need to consider a rarely-used mechanism called a Regulated Apportionment Arrangement (RAA).

RAAs are rare because they involve a sponsoring employer severing its ties with the pension scheme and the alternative would have to mean the employer going bust. As such, we will only consider an RAA if a number of stringent criteria have been met, to avoid them being abused by employers seeking to offload their pension liabilities on the PPF, leaving the 6,000 DB schemes that pay the PPF levy to foot the bill.

RAAs are available under pension law, where trustees believe insolvency is reasonably likely within the next 12 months, and TPR has set criteria that we expect to be met before we will agree a proposal. We need to be satisfied that the sponsoring employer’s insolvency is inevitable and that the RAA proposal provides a better outcome for the scheme than could be achieved through insolvency and / or other means such as the use of TPR’s anti-avoidance powers. We also closely examine the circumstances of the wider employer group, and outcome of the proposal for other creditors. Additionally, the PPF, which has its own criteria for evaluating a pension restructuring, needs to confirm it has no objection to the RAA.

Cases involving RAAs are often complex and are likely to attract a greater level of public attention due to implications for business, jobs and pensions. We encourage schemes and employers to come to TPR where reaching an agreement on ongoing funding is challenging so that we can help parties understand whether and how the RAA route could be available to them, and what would be involved.

We want people to understand our decision making process. This is why we publish Regulatory Intervention reports, in order to be as transparent as possible about the way we use our powers. Last year, we explained our approach to a couple of high profile cases involving the Monarch Airlines and Halcrow pension schemes. Both are good examples of how the RAA process works, but with different outcomes. Due to the particular features of the Halcrow case, it was possible to set up a new scheme offering a level of benefits above PPF compensation. This result, however, is rare. In most cases involving an RAA, such as Monarch, pension scheme members will transfer into the PPF.

Some industry commentators have suggested that the conditions surrounding RAAs should be relaxed, making them available to more employers in difficulty. Notably, in its latest report on DB regulation, the Work and Pensions Committee recommended a consultation on this issue.

Alongside the PPF, it’s important that we explore the pros and cons and trade-offs that would be involved. We believe that it should remain difficult – very difficult – for a sponsoring employer to divorce themselves from their pension liabilities. RAA requirements are strict for good reason. Too loose an approach would be a risk to our statutory objectives to protect member benefits and limit calls on PPF levy payers. It is important we treat all schemes and employers fairly – we don’t want employers offloading schemes unnecessarily, while their competitors continue to honour their commitments.

Our line in the sand is that it isn’t acceptable for an employer to engineer financial distress to bring themselves within scope of a RAA application, or to try to unload their liabilities onto the PPF, for example through dubious use of a pre-pack administration.  Under circumstances like this, we may well take a view that their actions are avoidance, and we can – and will – invoke our anti avoidance powers.

We know that when companies, jobs and pensions are at risk, our actions are closely scrutinised – as they should be. That’s why we are as thorough and open as we can be about our case work, and, where we can, we’ll publish reports setting out the action we have taken and the solutions we have reached in cases.

Lesley Titcomb

By Lesley Titcomb
Chief Executive Officer