Insolvency may seem an unlikely scenario for your pension plan's employer today and for the foreseeable future but the Pension Protection Fund (PPF) has recently published guidance recommending that defined benefit pension plan trustees should make contingency plans for employer insolvency "as with any sensible business continuity or disaster recovery planning".
The guidance, "Contingency planning for employer insolvency", sets out recommended steps for trustees to take in order to mitigate against some of the risks resulting from an employer insolvency and to make any transition into a PPF assessment period (the period during which the PPF assesses whether it will accept responsibility for the pension plan) as smooth as possible.
Although the steps are tailored to reflect the strength of the pension plan's employer covenant, the key steps can (and, in our view, should) be taken by trustees even if the risk of employer insolvency is remote.
Key contingency planning steps
The recommended steps set out in the guidance will not come as a surprise to pension plan trustees as they reflect basic good scheme governance. For example, that trustees should:
- ensure that a complete set of pension plan documentation and member data is held and that it is available in more than one place in case it needs to be retrieved at short notice following an employer insolvency
- clearly document the participating employers which have joined and exited the pension plan and which members attach to which employer
- understand what charges and contingent assets are available to them on the employer's insolvency and ensure that the associated documentation is readily available, and
- ensure that access to the pensioner payroll and the trustee bank account will still be available should the employer become insolvent.
As well as good governance, these steps will help to ensure that should a pension plan enter into a PPF assessment period, communications to members are not delayed and the PPF can establish whether members are eligible for PPF compensation.
Other issues to consider
The PPF emphasises that trustees should ensure that they have the right expertise and experience to deal with the fall out when an employer looks to be failing so that robust and timely decisions can be made in the members' interests.
The guidance refers to experience in Company Voluntary Arrangements (CVAs), Regulated Apportionment Arrangements and the PPF. CVAs have been an increasingly common restructuring process entered into by an employer and its creditors in an attempt to restructure and/or compromise the liabilities of the employer, rescue the business as a going concern and allow pensions to be paid as normal. Our recent article looked at the pensions hurdles to be overcome when a CVA is proposed.
Where insolvency is a possibility, the PPF also suggests that trustees:
- provide efficient and effective member communications - trustees should consider preparing draft member communications in advance, explaining the impact of the employer's insolvency so that these can be sent out as soon as an insolvency event occurs
- prepare a media strategy with the Pensions Regulator (tPR) and the PPF if required
- ensure appropriate governance is in place for dealing with conflicts of interest which may arise, for example, during funding negotiations
- work with tPR to ensure that appropriate support is provided to members considering a transfer out in the context of a distressed employer or restructuring exercise (following a review of communications and support given to members of the British Steel Pension Scheme, tPR and the DWP are considering whether to introduce legislative changes to provide guidance for trustees facing restructuring and to simplify the choices available to members in the event of a restructuring), and
- manage the pension plan's cash flow position to ensure "that there are clear mechanisms for disinvestment, taking into account the expected outgoings during the weeks or months ahead."
Separately, a further complication may arise from recent proposals to restore HMRC's position as a secondary preferential creditor in company insolvencies for certain taxes, as floating charge holders and unsecured creditors (including trustees and the PPF where it assumes the trustees' rights as creditor during an assessment period) will sit behind HMRC in the proposed ranking of creditors and so potentially reduce the amount available to the pension plan.
Suggested next steps
Trustees should consider the PPF's guidance and introduce steps, as necessary, to help mitigate the risks identified in the guidance.
They should also continue to monitor developments regarding the restoration of HMRC as a secondary preferential creditor and the promised guidance from tPR.
If you would like to discuss any of the issues raised please contact a member of our Pensions team.