Pension rules augur hike in bankruptcies

Lawyers have warned of a rise in bankruptcies due to the pressure on companies to plug pension deficits within only a few years.

Denton Wilde Sapte partner Elmer Doonan warned that company profits could be eaten away by the Pensions Regulator’s requirements for defined benefit pension schemes so as to meet higher funding standards within shorter recovery periods.

“We’re running the risk that these companies will not continue to operate and will be forced to enter insolvency. So the process [of trying to secure members’ pensions] is self-defeating,” said Doonan.

The comments follow the publication last Monday (31 October) of the Pensions Regulator’s consultation document on how it proposes to regulate the new funding regime for defined benefit pension schemes. The funding regime will be published in December.

The regulator recommends using the FRS17 national accounting standard when calculating pension deficits and prompts trustees to demand payment of any deficit within 10 years or risk a review by the regulator.

Lawrence Graham partner Ron Thom said: “Life’s going to get tougher for companies and trustees. It can’t be ruled out that, if trustees are robust in their demands, companies will say they can’t afford this and go into liquidation.”

However, Linklaters partner Tim Cox argued that the 10-year target was far more lenient than expected. The market previously feared that the regulator would impose a five-year target. “If a company can persuade the scheme trustees they need longer [to pay the deficit], then they should be able to persuade the regulator too,” he said.