The Pension Protection Fund (PPF) has issued new and updated guidance materials setting out its position on key pensions-related issues that might arise during insolvency proceedings.
The PPF was established to compensate those individuals who belong to Defined Benefit pension schemes in situations where their employer, or former employer, fails and the scheme lacks the funds to meet the pension liabilities. There has always been a concern however that employers might attempt to ‘dump’ schemes into the PPF, and so it works hard to ensure those schemes that do enter the PPF are the subject of a bona fide employer insolvency.
The new and updated guidance materials seek to provide information to Insolvency Practitioners (IPs) on how they should interact with the PPF in those cases where a sponsoring employer of an occupational pension scheme suffers an insolvency event and how an eligible scheme will be assessed to determine whether it should enter the PPF.
These materials contain updates on previous guidance notes, as well as new guidance setting out the PPF’s approach on “PPF drift” and the appointment of independent trustees. Please read on for an overview of the guidance materials and some immediate observations below.
1. Overview of the guidance notes
As well as the PPF’s general guidance note for IPs on insolvency and the assessment period, the suite of guidance materials available on the PPF’s website include the following (of which Guidance notes 6 and 7 are new):
- Guidance Note 1, setting out the PPF’s legal standing as a creditor and its approach to the governance of insolvency proceedings (including creditors meetings and committees).
- Guidance Note 2, dealing with IP remuneration and guidance IPs should consider before submitting fee requests.
- Guidance Note 3, providing an explanation of the PPF’s approach where a pre-pack administration is proposed or takes place.
- Guidance Note 4, explaining the PPF’s approach to potential legal actions IPs might bring.
- Guidance Note 5, setting out what matters the PPF will take into consideration when assessing a company voluntary arrangement.
- Guidance Note 6, explaining what is meant by “PPF drift”.
- Guidance Note 7, regarding the appointment of independent trustees. It provides an overview of why the PPF maintains a panel of scheme trustees to help with the assessment period and explains how IPs can assist with their appointment.
In order to access the PPF’s general guidance note to IPs and its in-depth guidance notes as referred to above, please click here: https://www.ppf.co.uk/insolvency-guidance-and-support
Finally, a further Guidance Note 8 is not yet available but is expected to follow during the first quarter of 2019. This will deal with those rare situations in which a new or successor scheme is created through an insolvency or restructuring procedure and relevant matters to consider where this is the case.
2. Immediate observations
As we touch on above, some of the guidance represents an update on previous guidance notes published by the PPF, but perhaps the most interesting items are the new guidance notes relating to “PPF drift” and the appointment of independent trustees.
“PPF Drift” is described as the increase in the PPF’s potential exposure as a result of the delay in a pension scheme entering a PPF assessment period. This stems from the expectation that over time scheme liabilities for which PPF compensation is payable are likely to increase. PPF exposure increases, for example, where members reach retirement age, because members who have reached the scheme’s “Normal Pension Age” (“NPA”) at the PPF assessment date are entitled to their total pension whereas members under NPA are subject to a reduction to 90% and the application of a “compensation cap” (for larger pensions). In its guidance note on the subject, the PPF gives the example of an employer who attempts to reach an agreement with its creditors via a Company Voluntary Arrangement (CVA) in order to continue trading. Whilst the employer’s intention may be to honour its commitments to the pension scheme, the submission of a nominee’s report to court in relation to a CVA proposal represents an insolvency event under the Pensions Act 2004, resulting (in many cases, although not all as it depends on the scheme rules) in the commencement of a PPF assessment period. During that assessment period, the PPF will exercise the rights and powers of the scheme trustees in relation to any debt due from the employer and the PPF will need to consider whether to vote in favour of the CVA proposal (so rescuing the employer and scheme and resulting in an end to the assessment period) or against. In making this assessment, the PPF says the quantum of PPF Drift needs to be carefully assessed. In particular, in order to mitigate the risk to the PPF, the CVA proposal should include a mitigation payment to the scheme or contributions paid into the scheme in order to cover the PPF Drift.
The PPF encourages employers and advisors to carefully consider the effect of PPF Drift whenever preparing proposals and to include appropriate levels of mitigation. Our pensions specialist, Gabrielle Holgate commented “This guidance is an extension of what we have seen in practice with recent CVAs – in many cases (such as in the case of Toys R Us, for example, on which you can see our previous commentary by clicking here) the CVA does not specifically seek to reduce the employer’s liability to the scheme – but nonetheless the PPF seeks to negotiate some mitigation for the scheme to protect against “PPF Drift”. Quite often the PPF is one of the largest creditors, so has considerable power to negotiate terms for it to agree to the CVA.”
Also of interest is the new guidance note on the appointment of independent trustees to assist a pension scheme’s trustee board. Independent trustees are favoured by the PPF because of the familiarity they have with the PPF’s processes and requirements. The PPF suggests that IPs should make such appointments as soon as possible whenever a scheme enters an assessment period. It also encourages IPs to use the pension scheme’s power of appointment and removal (to the extent available) to appoint an independent trustee rather than suffer the delays associated with The Pensions Regulator making such appointment.
Gabrielle Holgate commented “This new and revised guidance gives advisers and IPs a real flavour of the PPF’s approach to dealing with companies and schemes in distress. In the current economic environment, and given recent high profile collapses, this is very timely”.