Pensions Regulator Report Gives Insight Into Its Approach To Unaffordable Pension Schemes

The Pensions Regulator has issued a report on last year's deal relating to the Uniq Pension Scheme

. The report gives guidance on how the Regulator approaches cases where an employer cannot afford to return a pension scheme to full funding.

In the Uniq deal, the pension scheme took a 90.2% shareholding in the scheme's sponsor, plus some cash, in return for a Regulator approved deal to end the employer's responsibility for funding the scheme. The shares were subsequently sold yielding 100m for the pension scheme, which was sufficient to allow the scheme to secure benefits above PPF compensation levels.

In its report, the Regulator states that its starting point in these cases is whether a recovery plan is viable. Various options were considered for Uniq, including plans with recovery periods of more than 40 years. However, the employer's covenant was considered too weak to support the investment risk which the scheme would have needed to take in order to have a chance of reaching full funding. Whilst the business was viable if it could get capital investment, it was not possible for the employer to raise capital due to its pension liability and so insolvency appeared inevitable if a solution could not be found to the pension funding liability.

Given this situation, and the fact that the Regulator concluded that its moral hazard powers were not available on the facts of this case, it was accepted that the employer needed to go through a restructuring so that it could be released from the pension liability.

In its report, the Regulator states that it applied the following principles when considering the merits of the various restructuring options which were considered.

The scheme members and the PPF must be significantly better off than if insolvency had taken place.

The scheme should get a sufficient stake in the surviving business to ensure the scheme and the PPF are not exploited after the restructuring and they get a proportionate share of any upside.

The risks to the PPF need to be acceptable.

The arrangements must demonstrate that proper account has been taken of the members' interests and appropriate ongoing arrangements are in place to manage any increase in member risk.

The costs are proportionate and fairly shared.

The Report also says that when applying these principles the Regulator will take account of the PPF's appetite for risk and the potential for the PPF deficit to widen over time. Regulator and PPF concern about 'PPF drift' was clearly a big factor in this case. This drift occurs over time as more and more members reach normal pension age and so qualify for 100% PPF compensation, which increases the PPF's liabilities. One of the key objectives of the Regulator seems to have been to crystallise the PPF's potential liability rather than letting the scheme run on.

Whilst the report emphasises that each case is specific to its facts, these principles will be relevant to any situation where a restructuring is proposed to resolve problems caused by an unaffordable pension liability.

by: Brendan Wilde

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