Since its inception in 2005, the PPF has been a welcome safety net for employees whose company pension scheme is in deficit and the sponsoring employer is on the verge of insolvency. The PPF’s major challenge has been preventing employers from deliberately engineering or recklessly creating such deficits in the pension scheme (to the benefit of other creditors) in the expectation that the PPF will simply pick up those liabilities without question. As the world of restructuring and insolvency continues to evolve in a challenging economic climate, the PFF has recently refreshed both its general guidance for restructuring and insolvency professionals and its (shorter) booklet on the PPF’s approach to employer restructuring.
This latest guidance sets out the key principles the PPF will consider in order to determine the eligibility for a scheme to enter the PPF on a restructuring plan, which has come under close scrutiny following the PPF’s role in the recent high-profile restructurings of Kodak, Monarch and Halcrow as well as the PPF’s criticism of the government’s proposals for the British Steel Pension Scheme. It is also a clear reminder to the industry that the PPF is not obligated to consider a restructuring proposal and will only do so if its key principles are met.
The PPF’s key principles to consider are:
- inevitability: the insolvency of the company must be inevitable (i.e. the employer will shortly become insolvent if a restructuring cannot take place);
- a significantly better outcome: the scheme will receive money or assets which are significantly better than it would have received otherwise through the ordinary insolvency of the employer;
- fairness: the offer to the pension scheme is fair in the light of what other creditors and shareholders will receive as part of the restructuring proposal. The example given in the guidance is that of an insolvent employer with £100m of bank debt and a £100m pension scheme deficit who offers the PPF £1m to take on the scheme. If the PPF takes on the pension scheme, the employer continues trading and the bank debt is more likely to be repaid, rather than being impaired in an insolvency process. If a similar situation were to happen, the PPF may seek to negotiate a contribution agreement with the bank reflecting the benefit to the bank of their enhanced chance of recovery;
- equity: the PPF will seek at least 10% equity in the restructured company for the scheme if future shareholders are not currently involved in the company (i.e. there is a third party acquisition of the business). If the current shareholders will continue to be involved in the company a 33% equity stake will be sought;
- the Pensions Regulator: the PPF will liaise with the Regulator to establish if a contribution notice or financial support direction from the Regulator would put the scheme in a better position than if it were adopted by the PPF;
- Regulated Apportionment Arrangements (“RAA”): on the rare occasion that an RAA is proposed, draft clearance must have been submitted to and considered by the Regulator;
- bank fees: such fees must be deemed reasonable by the PPF where the deal involves refinancing; and
- costs: the party seeking the restructuring pays the costs incurred by the PPF and the trustees in delivering the restructuring proposal (including legal fees and TUPE liabilities). The PPF provides standard form documents which it will expect to be used in deals.
Restructuring professionals seeking to ensure a smooth entry for an employer’s scheme into the PPF should take note of the criteria under which the PPF will take on a scheme and draft proposals accordingly. The overarching principle is that, in order for the PPF to participate, the employer’s pension scheme must be better off than it would be if the business was simply left to fail. The proposals must also carefully consider the risk of contribution notices and/or financial support directions being imposed by the Regulator.