The final act
1 May 2006
5 December 2005
23 May 2008
24 March 2003
4 February 2008
16 January 2006
Pension fund trustees are looking to the provisions of the Pensions Act 2004 to protect the interests of members in the case of bankruptcy. By Andrew Visintin and Grant Jones
Much coverage has been given to the state of UK pensions, with estimates of a pension fund deficit of around £130bn in relation to the FTSE100 companies alone. The Confederation of British Industry (CBI) recently recognised that the Pension Protection Fund (PPF) would cost UK industry more than £500m in contributions. The CBI has further warned that, as a result of the legislative changes, which require companies to put their defined benefit pension scheme deficit on to the balance sheets, up to one in five UK companies could technically be insolvent.
Pension fund trustee v BBB
Pension fund trustees have been asked in such circumstances to act as if they were a bank when looking to protect the interests of beneficiaries. On 21 March 2006, a pension fund trustee so acted in petitioning for the administration of Berkeley Berry Birch (BBB), a quoted top five independent financial adviser. BBB was in the process of selling off its subsidiary companies. The pension fund trustee felt that the appointment of an insolvency practitioner from a firm other than that proposed by the company would be in the best interests of the pension fund beneficiaries. It is believed that this is the first time a pension fund trustee has issued a creditors' petition for administration.
The case is significant in that it is emblematic of a shift in the attitude of pension fund trustees. In many cases, the pension fund trustee will be a major creditor, and as such will exercise their power in the same way as banks and bondholders have in the past. The trustees will be conscious that the Pensions Act 2004 provides for defined benefit (DB) member compensation in the event of insolvency. Delay in finalising an insolvency process delays compensation.
The Pensions Act and accountancy changes mean that the full ongoing deficit will appear on the balance sheet. However, the act also provides that, immediately upon insolvency, the deficit calculation is based on the cessation, not the ongoing basis. As a rough rule of thumb, deficits increase threefold upon cessation. This is because the ongoing calculation is an actuarial series of assumptions. The cessation basis is based upon what is available in the insurance market now for annuities.
No other creditor would normally face such a dramatic increase in liability post formal insolvency. The question, therefore, is: what status would the court accord the DB trustee? Would the court look to the ongoing or cessation basis when quantifying the DB claim? This is especially relevant since the Enterprise Act has reduced creditor vote democracy. Can the DB trustee argue at the petition stage that their views should be given the weight of the cessation calculation rather than the ongoing calculation? If successful with this argument, the pension fund trustee becomes even more powerful.
The Pensions Act allows the regulator (and any trustee acting through the regulator) to pursue "antecedent transactions", as against the company. Notably, the act gives the regulator a power to pursue "transactions at an undervalue" as against the employer company, in the same manner that any administrator of the employer company could pursue a third party. Consequently, if accountants had been advising the company as to disposals prior to the insolvency, the potential for a conflict of interest, where they also have to be appointed as the insolvency practitioner, is magnified.
The lessons learnt
While the Enterprise Act altered the Insolvency Act to make the preservation of the company the prime objective of an administration, "a better realisation for creditors" remains the principal rationale for an administration. For members of a DB pension scheme, an insolvency may itself lead to a better realisation. The Pensions Act creates the PPF: a quango insurer providing capped compensation to DB members in the event of an insolvency. For members, the sooner they get their PPF compensation the better.
The Pensions Act also requires that DB employers and trustees agree a recovery plan, whereby the deficit is erased over a period of time, say five years. During the recovery plan period, the trustees are actively encouraged by the regulator to take security over the employer. Therefore, in many cases, the pension fund trustee will become a material secured creditor. If the trustee acts like a bank, they will take a 'qualifying floating charge', causing the trustee to become a major player in the administration petition process. Under the Insolvency Act, the trustee will thereafter have rights to be notified and to object to petitions. The DB trustee is therefore set to be possibly the most important person in the administration process for UK plc.
Andrew Visintin is European head of restructuring and bankruptcy and Grant Jones is counsel at Squire Sanders & Dempsey