Dealing with distress - part two: radical surgery

Topic:

Funding & investment

Date published:

Wednesday, 3 April 2019

Author:

Alex Davies

So, your pension scheme sponsor is in distress and, having assessed the situation (see part one – keep calm & carry on), it is clear the employer cannot support both the scheme and continue trading. Insolvency is inevitable. It is just a matter of time…

Time for a rescue attempt

Although it may seem like the end of the line, it may be you’re just at the start of the next stage of the journey. It is worth investigating a couple of options that could enable the sponsor to continue trading, while the pension scheme enters the Pension Protection Fund (PPF) and the sponsor’s obligations to cease it. These are a Regulated Apportionment Arrangement (RAA) and a Company Voluntary Arrangement (CVA).

From experience I know these are not easy alternatives to supporting the pension scheme. Both require conditions to be met and are entirely dependent on the support of the pension trustees and regulatory bodies if they are going to succeed.

Anti-embarrassment stakes

RAAs must be cleared by the Pensions Regulator, which has to be sure it could not achieve a better outcome for the pension scheme by exercising its regulatory powers. This clearance will not be forthcoming without support from the pension trustees and the PPF support, but having that support doesn’t make clearance inevitable.

The PPF will require a dividend that is materially better than it would get from a conventional insolvency. It will also take an anti-embarrassment stake in the continuing business of the former sponsor. Sounding good? The reality is the costs of agreeing a Regulated Apportionment Arrangement are considerable and must be borne by the sponsor – and this means successful RAAs are rare.

Company Voluntary Arrangements, on the other hand, don’t need clearance so the process is likely to be cheaper and more straightforward. Under a CVA, the PPF will assume creditor’s rights on behalf of the pension scheme and the CVA will be a qualifying insolvency event for PPF assessment. If the CVA is successful, the scheme will move into the PPF and the former sponsor can continue to trade. Easy.

Well, maybe not. To approve the CVA, the PPF require a whole host of conditions to be met: insolvency must be inevitable without it, the pension scheme must be treated fairly compared to other creditors and the proposed dividend to the pension scheme from the CVA must be a substantially better return than from a liquidation and must be a reasonable proportion of the scheme’s s75 deficit. Apologies for the techy stuff.

Anti-embarrassment equity must also be available and the continuing business must be viable. The stake needs to be realised and all likelihood is the PPF will look to do this as soon as practicable.

CVAs in practice: saving an employer caring for 13,500 people

I was a professional trustee to the UK’s largest homecare provider’s two defined benefit (DB) pension schemes. The business (which was owned by an overseas private equity vehicle) delivered care to 13,500 people and worked with 150 local authorities and 90 clinical commissioning groups.

The employer became distressed after it was faced by additional unexpected liabilities, some of which had to be back-dated six years. It couldn’t continue to trade and support the DB pension schemes. Thousands of jobs and the provision of care to vulnerable people were at risk.

We liaised with the private equity owner, employer group and Pension Protection Fund to agree a CVA whereby the pension schemes entered PPF assessment in return for an enhanced dividend and 40% shareholding in the continuing former sponsor.

Thanks to the CVA, the business continued to trade with jobs and future care provision safeguarded. One of the DB schemes entered the PPF and the other was able to buy out benefits in excess of PPF compensation levels.

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