Plugging a pension scheme deficit can be a contributing factor
to a business becoming distressed. Two recent business rescue
attempts show how reducing pension increases has become a key area
for trying to ease funding strain on distressed businesses and
providing members with greater than PPF-level benefits.
The High Court has ruled recently on a pension restructuring
proposal for Halcrow Group, aimed at avoiding Halcrow becoming
insolvent and its scheme going into the PPF. The proposal,
supported by the scheme's trustees, involved reducing the
scheme's deficit by transferring all members to a new pension
scheme, with lower, statutory minimum pension increases.
Because of commercial sensitivities, requiring Halcrow's
financial position to be kept confidential, the plan was to
transfer members without their agreement. Regulations meant
that the transfer could go ahead only if the scheme actuary
signed-off that benefits in the new scheme were broadly no less
favourable than in the existing scheme.
The court ruled that in deciding whether to give the sign-off,
the scheme actuary could take into account only the promised level
of benefits under the schemes. He could not take into account
that benefits might be more secure under the new scheme or, that
members might receive lower benefits under the current scheme if it
were wound up or Halcrow became insolvent and the scheme was
transferred to the PPF. As the headline benefits in the new
scheme were less generous than those in the current scheme, the
actuary could not sign-off on the transfer. Halcrow and the
scheme's trustees are now attempting to persuade sufficient
members to agree to a transfer.
Tata's pension problems are of a different financial and
political order to Halcrow's – a scheme with 130,000
members and a £7.5 billion buy-out deficit.
With the aim of trying to provide above PPF-level benefits, the
Government is consulting on two possible legislative changes.
The first, which would apply only to the Tata scheme, would ease
the restriction on reducing members' accrued benefits by
allowing pension increases to be rebased from RPI to CPI. The
second, which would apply to all large schemes (100,000 or more
members), would allow what Halcrow wanted to do and the transfer of
members to a new scheme providing lower increases. Member
agreement to the transfer of their benefits would not be needed,
although, unlike under the first proposed change, members would be
able to opt-out of the transfer and effectively choose to receive
PPF level benefits.
It is sensible to explore whether regulations can be made
more flexible to facilitate the rescue of large schemes.
Adequate safeguards, however, need to be in place to prevent abuse
and ensure that benefits can be reduced only where this is
essential to an employer's survival and members have a genuine
prospect of receiving benefits which are higher than those in the
PPF. These should include Pensions Regulator approval.
Protections are also needed for the PPF and levy payers who will
effectively be underwriting the rescued scheme's investment and
longevity risks and be exposed to potentially expensive priority
drift - members moving into the higher pensioner level bracket of
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