Dealing with distress - part three: PPF assessment & PPF+ buy out

Topic:

Legal & governance

Date published:

Friday, 3 May 2019

Author:

Alex Davies

Assuming you’ve read ‘Dealing with distress part one (keep calm and carry on) and part two (radical surgery)’, we’ve reached the point where a distressed scheme sponsor cannot be saved. What remains vital is securing the best possible outcome for pension scheme members.

All eyes will naturally turn to the Pension Protection Fund (PPF) to provide compensation to members following the insolvency of the scheme sponsor. The key question is…

Do you qualify?

It is vital to ensure PPF Entry Rules are met and there is plenty for pension trustees to consider.

• Are you sure all your pension scheme members were employed by companies that have had (or are capable of having) qualifying insolvency events? Administration is the most common form of insolvency and this is a qualifying insolvency event for PPF assessment.
• Are there any historical unpaid debts lurking in relation to former sponsors that have ceased to participate in the pension scheme?

Where there is doubt, investigative work should begin immediately to address loose ends. The last thing you want as a pension trustee is to have members who cannot find a home in the PPF. Knowing whether you’ll meet the rules can be quite a tricky technical question to answer and specialist help is likely to be needed.

As the PPF will look to bring in a member of their Trustee Advisory Panel for underfunded schemes in PPF assessment, appointing a professional trustee on the panel earlier in the distressed scheme journey can avoid the need to change trustee later in the process at what can be a scary time for members. It could be easy to forget your scheme members in all the turmoil and technicality – please don’t. You need to keep them up to date with what’s going on.

PPF+

Having a funding position above PPF compensation levels at the assessment date can lead to a better outcome for members. As trustees, you’ll need to try and secure members’ benefits with an insurer (known as a PPF+ buy out).

In some cases, there may be further assets available to the scheme in the form of a dividend or the realisation of a shareholding. Here you need to secure an early ‘buy in’ with an insurer to fix a price above PPF benefits with the option to augment the policy when the additional assets become available.

Case study: PPF+ buy out

SR Technics was a supplier of components to the airline industry, supporting a medium sized defined benefit (DB) pension scheme. The UK business had suffered significant losses over a number of years and reached the point where it was unable to continue to support the scheme.

The Swiss-based parent group didn’t have legal liability for the scheme but had made repeated extraordinary payments over many years. We held detailed and robust negotiations with the parent group, which led to a debt compromise agreement cleared by the Pensions Regulator. A lump sum payment was made to the scheme enabling us to secure better than PPF benefits with an insurer.

The scheme entered PPF assessment. As it was funded above PPF benefits, a ‘light touch’ assessment process was agreed. We then completed a buy out at c120% of PPF benefits with the insurer.

Final thoughts

Distressed cases are complex to handle and tensions are usually heightened. Clear, impartial thinking is needed. If there is a practical solution that avoids insolvency of the pension scheme sponsor, we’d always recommend working together to try and achieve this. If sponsor insolvency and the PPF is the inevitable destination for the scheme, you’ll want to ensure an efficient passage through the assessment process so members’ queries and concerns are handled with care.

I know I’m bound to say it but, when pension trustees get professional help early in the process, outcomes can truly be improved for members. As a trustee, that’s who you’re there to look after.

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