Hot on the heels of January's update, the PPF has issued further guidance relating to restructuring and insolvency. The further clarifications provided are a reaction to what the PPF described as inaccurate and misleading scrutiny of its involvement with the Halcrow and BHS debacles and the perception that it was too easy for employers to effectively "dump" schemes.1
The Guidance applies in the event that an employer is facing insolvency and the pension scheme is in deficit, but a restructuring package would allow them to continue trading. The PPF may take on the pension fund in such an instance to allow the business to continue trading, provided certain criteria are met.
The PPF has stated that it will only take part in a restructuring if certain principles have been met. There are seven principles that are to be applied to ensure that the pension scheme is in a significant better position than it would be through a normal insolvency process.
The criteria
Actual or inevitable insolvency
Insolvency must be inevitable. This has been significantly tightened to prevent companies overstating the risk of insolvency in order to dump an unpalatable liability so as to increase value.
Significantly better outcome for the pension scheme.
There must be a significantly better outcome for the pension scheme than if the scheme were to go into an ordinary insolvency, and such a consideration is deemed by the PPF to be realistic in relation to the anticipated or actual Section 75 deficit.
Fair
What is offered to the pension scheme can be considered to be fair when compared to what the other creditors and shareholders are to gain as part of the insolvency.
Equity
The scheme must be given at least 10% of the equity where future shareholders are not currently involved with the company and at least 33% if the parties are currently involved. This is designed to prevent the business increasing in value by jettisoning the pension liability. The PPF have a standard form of shareholder agreement and articles of association which must be used in order to protect the pension scheme's interest.
Pensions Regulator contribution notice or a financial support direction
These must not generate more money for the scheme than the deal that the PPF have negotiated. This prevents the PPF from settling for a lesser sum than could have been obtained otherwise.
Clearance
Pension Regulator must clear the deal. The PPF will work together with the Pensions Regulator to decide whether clearance can be granted and whether they can proceed with the restructuring proposal.
Reasonable charges by banks
Where there is a refinancing the fees charged by the banks must be reasonable. In addition, the party who is seeking the restructuring must pay the costs incurred by the PPF and the trustees, for example, legal fees for documents and execution, financial advice or TUPE liabilities.
Assessment period
If all of these criteria are met, then the PPF will work closely with insolvency practitioners during an assessment period which, in practice, will typically last between a year and two years. This period will vary subject to the complexity of the financial situation being reviewed.. This assessment period is activated once an insolvency practitioner alerts the PPF to an insolvency event. During the assessment period, the pension scheme continues to be administered by the trustees subject to some restrictions, save that the PPF assumes the role of creditor to the insolvent employer. The guidance sets out the criteria restructuring practitioners should incorporate in any proposals made to the PPF in respect of an insolvent pension scheme employer..
The PPF will consider whether a qualifying insolvency event has actually occurred, and also ensure there has been no rescue or withdrawal event relating to the pension scheme. The valuation of the pension scheme must also be such that its assets are below the amount required to fund the PPF level of protected liabilities. If the PPF are not satisfied during the period, the creditor rights pass back the trustees and the PPF’s involvement ceases.
Conclusions
The PPF have tightened their controls and guidelines in order to reflect the controversial nature of the process to emphasise they will only act when insolvency is certain and their involvement would provide a significantly better outcome than any other. They are not obliged to consider any proposal made and can veto it on any number of the criteria above to avoid ‘dumping’. The rules appear well defined and easy to follow, but there may still be some flex given the Halcrow restructuring programme involved equity of less than the required 33%, meaning that the interests of business may supersede the guidelines. It is likely there will be further refinement to the guidance as more restructuring proposals are dealt with; a likely forecast in the current economic climate.
1 http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/Restructuring_and_Insolvency.pdf at p3