Memorandum submitted by the Pension Corporation
OVERVIEW
1. In the current economic environment we
are seeing an increasing number of insolvencies and as a result
of this, the increasing number of cases of pre-packaged administration.
2. An increasing number of insolvencies
inevitably leads to a rise in the number and size of the pension
schemes going into the Pension Protection Fund's assessment period,
without necessarily going into the fund at the end of this process.
3. This is an uncertain period for scheme
members during which they receive lower pensions than those to
which they may be entitled, depending on the funding levels in
the scheme.
4. It is vital to protect what is usually
the largest unsecured creditor and consider whether the pension
scheme debt can be secured above the PPF level, protecting members
and reducing the cost for other levy payers.
PENSION CORPORATION
AND THE
MARKET
5. Pension Corporation is a major participant
in the UK pension insurance industry, specialising in pension
risk transfer solutions for defined benefit pension funds in the
UK. Since its inception, Pension Corporation has developed innovative,
affordable solutions for pension schemes and had a 22% market
share in 2008.
6. Pension Corporation underwrites pension
risk management solutions for defined benefit pension funds including:
Pension insurance buy-outs, Longevity risk insurance, Pension
fund stewardship, Asset and Liability Management.
7. The pension insurance market is a large,
fast growing and dynamic market, which exceeded £8 billion
in 2008, more than double the business written in 2007. This figure
is less than 1% of the potential market of DB pension schemes,
which is estimated at £1 trillion.
8. The market is being driven by increasing
numbers of sponsors looking to remove risk from their balance
sheets, and Trustees looking to secure their members' benefits
for the very long-term.
DEFINED BENEFIT
PENSIONS
9. Defined benefit pension funds remain
a live and worryingly important issue for many companies.
10. From a corporate perspective, being
a scheme sponsor means maintaining an open-ended commitment for
a very long period. This can have dramatic effects on its share
price, limit strategic options including refinancing and debt
restructuring, and ultimately damage the very security of the
commitments it is pledged to maintain.
11. The security which the members are seeking,
by paying into a pension fund, can in some cases act as a corporate
straightjacket when companies are looking at takeovers, mergers
or other re-structuring.
12. This can have immediate consequences
for the survival of a company. It can also impact adversely the
security and level of retirement benefits available to members.
13. In a recent survey by PWC, 90% of Finance
Directors stated that they are concerned about the risks their
pension scheme poses to the business; 30% intend to use contingent
assets to offer trustees security, while enabling the company
to limit cash contributions.
14. Given the level of concern with which
pensions are viewed by many companies, it is not surprising that
an insolvency event, with the ability to "dump" the
scheme on the PPF, is often seen by struggling companies and their
advisors as the only option.
15. This results in members receiving lower
benefits—even if the scheme is funded above the PPF level,
during the PPF assessment period only PPF level benefits are paid.
It also has a knock-on impact for all other companies with a DB
scheme, in that the PPF levy increases.
16. The PPF levels, for pension scheme members
who have not yet reached normal pension age will, on reaching
it, receive 90% of their pension, capped at around £28,000.
PRE-PACKAGED
ADMINISTRATION AND
DEFINED BENEFIT
PENSIONS
17. In insolvency, pension schemes are usually
the largest unsecured creditors. Unsecured creditors rarely make
any recoveries from the business. Members are often shocked and
frightened by the insolvency of the scheme sponsor and the resultant
reduction in their pension.
18. This was recognised in the Pensions
Act 2004, which established the PPF and gave them the ability
to take on the creditors' rights the scheme has, in order to best
protect members and levy payers. However, by the time an insolvency
event occurs it is usually too late for the unsecured creditors
to make any significant recoveries.
19. The increasingly used pre-packaged administration,
which allows companies to be sold on quickly, gives the insolvency
practitioner and the directors of the company time to pre-arrange
the value and terms of any sale.
20. Whilst this complies with the Enterprise
Act requirement to achieve the best possible results for creditors,
whilst keeping the business as a going concern, the result is
often the dumping of the pension scheme on the PPF.
21. Consideration should be given to making
it a statutory requirement that before any insolvency event, consideration
should be given to ways to secure the PPF level of benefits other
than via sending the scheme to the PPF. For example, if the scheme
does not have sufficient assets, equity or debt in the new business
(sometimes given to the scheme but only when the scheme enters
the PPF assessment period eg Heath Lambert) could be given to
the scheme prior to an insolvency event.
22. The scheme's assets may then be sufficient
to allow the scheme to compromise its debt above the PPF level
and purchase an annuity for members.
23. This would have a number of advantages:
1. There would be no additional calls on the
PPF and no resultant levy increases.
2. would not enter the PPF assessment period,
members' benefits would not have to be reduced and the costs associated
with this would not fall on the scheme.
3. Members would receive benefits from an FSA
regulated insurance company, at least and usually above the PPF
level of benefits.
24. The PPF's own figures show that 30 schemes
which had previously entered into the PPF's assessment period
have now come out of it due, in the main, to their funding levels
allowing for greater benefits than those which would be paid under
the PPF. The PPF currently has 291 schemes in the assessment period,
with a total of 122,622 members.
25. The PPF assessment process lasts for
around two years, during which, irrespective of the actual level
of funding in the pension fund, the scheme members have their
benefits cut to the levels of the PPF. During this process there
is a great deal of anxiety placed on the scheme members as they
wait to find out what their levels of benefits are. The administration
burden and cost of reducing benefits is also high.
26. In volatile market conditions when asset
valuations are constantly changing, this two year period could
mean the scheme missing out on options to secure the members'
benefits for the long term.
27. The level of attention given to pension
schemes during the pre-pack insolvency should be raised and a
statutory duty to consider securing benefits above the PPF level
before an insolvency event should be imposed.
16 February 2009
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