Restructuring and insolvency. The PPF approach. Protecting people s futures

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1 Restructuring and insolvency The PPF approach Protecting people s futures

2 A message from Malcolm Weir, PPF s Head of Restructuring and Insolvency If an employer becomes insolvent and it has a pension scheme which we protect, we will act as creditor on behalf of the scheme and seek to maximise recoveries from the employer to reduce the pension deficit. But, sometimes an employer that is facing insolvency - and has a pension scheme with a deficit - will propose a rescue or restructuring package which will allow the employer to continue trading, with the PPF taking on the pension scheme. We don t enter into such agreements lightly. We will only support such proposals if they provide a significantly better return for the pension scheme than it would receive through a normal insolvency. Because these agreements can sometimes be controversial, we feel it is important that people have a better understanding about our approach to these agreements. Background Since we opened our doors for business in 2005, we have been involved in restructuring or rescue deals affecting employers which otherwise face certain insolvency. The negotiations that take place to agree these deals are, by their very nature, complex and confidential because of commercial sensitivities. Recent high-profile cases such as Kodak, Monarch and UK Coal have meant that our role in this type of agreement has received greater scrutiny and analysis which has often been inaccurate and misleading. In this factsheet, we explain why we enter into these agreements and summarise the principles we use to make our decisions.

3 Recovering assets This is the process we normally go through when an employer of a pension scheme we protect becomes insolvent. As soon as we are informed of the insolvency, and the pension scheme enters our assessment period, we rather than the scheme trustees exercise the scheme s creditor rights. We will then try to recover as much as we can from the former employer in an effort to reduce the pension deficit. Normally, we do this by putting in a claim for the scheme debt in the formal insolvency proceedings and closely liaise with the insolvency practitioner on strategy and costs. By doing this, we help improve our own funding if the scheme transfers to the PPF. Also, it could potentially reduce the scheme deficit to such an extent that the scheme could leave our assessment period with enough assets to pay PPF levels of compensation, or above. Every pound of recoveries we make is a pound less we need to collect from our pension protection levy paid by all eligible pension schemes. Since 2005, we have made recoveries of nearly 1.7 billion. Restructuring and rescues Sometimes we can take part in the restructuring or rescue of an insolvent business. This can mean that the employer s pension scheme will be better off than if the business had been simply left to fail. It usually involves removing the pension debt from the company which can then continue to operate with a positive cash flow and potentially make a profit. To some observers, this can look like we are involved in pensions dumping which is contrary to the Pensions Act So, we will only take part in restructures or rescues if certain principles are met. These are designed to make sure that we are in a much better position than we would have been if we had done nothing. Most negotiations will take place alongside the Pensions Regulator which usually needs to clear the deal before any agreement can be made.

4 Main principles We judge every proposal that is put to us on the specific facts relating to the case. Here are the main principles we apply: 1. Insolvency has to be inevitable this means that we will have to take on the pension debt whatever happens. 2. The employer s pension scheme will receive money or assets which are significantly better than it would have received through the otherwise inevitable insolvency and are considered by the PPF to be realistic compared to the pension buy-out deficit. 3. What is offered to the pension scheme in the restructure or rescue is fair compared to what other creditors and shareholders will receive as part of the deal. For example: The insolvent employer has a 100 million bank debt. Its pension scheme also has a deficit of 100 million. The dividend we would expect through normal insolvency is zero. The employer offers us 500,000 to take on the pension scheme so it can continue trading. If we agree, the bank debt becomes fully recoverable rather than being written off through normal insolvency. This means we would seek a more appropriate price from the bank for giving it the opportunity to get its money back over time. 4. The pension scheme will be given 10 per cent equity in the new company if the future shareholders are not currently involved with the company. It will receive at least 33 per cent if the parties are currently involved. This is anti-embarrassment protection to make sure we haven t taken on a large pension debt without having much to show for it while the new company goes on to become very profitable as a result of losing its pension deficit. 5. We need to make sure the pension scheme would not have been better off by the Pensions Regulator issuing a contribution notice or financial support direction. 6. The fees charged by the bank(s) are reasonable where the deal involves a refinancing. 7. The other party pays legal fees incurred as part of the deal for both ourselves and the scheme trustees.

5 Case study While every individual case is different, here is an example which demonstrates how this process might work. No rescue: Company A is hopelessly insolvent and has a large deficit in its pension scheme. The bank will not support the company further. This means the company cannot afford to pay out for wages or vital supplies. Insolvency is, therefore, inevitable. If the company enters insolvency, secured creditors such as the bank would only get a small proportion of what they are owed and unsecured creditors, including the pension scheme, would get even less. The pension scheme would then enter the PPF assessment period, the PPF would have to take on the deficit with very low recoveries to help fund compensation to members. Rescue proposal: Company A puts forward a rescue proposal which involves a management buy-out to allow the business to keep trading. It also proposes that the pension scheme enters the PPF assessment period. We only agree to this after negotiating on behalf of the pension scheme: a substantial cash payment to the scheme, and a 33 per cent equity stake in the new company. This means that, after completing assessment and the pension scheme transferring to the PPF, the cash sum and any subsequent value in the equity stake will be used to fund compensation payments. If we did not agree to the deal, the pension scheme and, ultimately, the PPF, would have got virtually nothing from the inevitable insolvency that would have followed and our levy payers would have had to fund the deficit.

6 Further information: Pages/insolvency-practitioners.aspx