Pensions. Briefing. The PPF Entry Process. Stage 1. Stage 2. December Summary

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1 Pensions FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Briefing The PPF Entry Process December 2011 Summary This month s briefing considers the Pension Protection Fund (PPF) entry process and assessment period. The process consists of a number of defined steps and stages as identified here. Stage 1 The first step is that an employer who has a liability towards an eligible pension scheme suffers a qualifying insolvency event. As a result of an insolvency event, an insolvency practitioner or official receiver (IP) is appointed in relation to the employer. The IP is under an obligation to issue a notice under section 120 of the Pensions Act 2004 (PA04) (S.120 Notice) to the PPF, the Pensions Regulator and the pension scheme trustees within 14 days of the insolvency date or within 14 days of the IP becoming aware of the pension scheme. Stage 2 Once the PPF receives the S.120 Notice, it needs to determine within 28 days whether the eligibility criteria have been met. This means it has to establish whether the pension scheme is an eligible scheme and that there has been a qualifying insolvency. In making this assessment, the PPF will request a high volume of documentation and information from the trustees of the pension scheme, inevitably to be provided within a short timeframe. This information request will include copies of the formal scheme documentation (for example, trust deed and rules, deeds of amendment), recent actuarial valuations and advice, and copies of the minutes of recent trustee meetings. Law Firm of the Year The Lawyer Awards 2011

2 Eligible schemes A number of pension schemes do not qualify as they are exempt, such as unfunded public service schemes, public sector schemes providing pensions to local government employees, and schemes with fewer than 12 members where all the members are trustees of the scheme. In addition, a previously eligible pension scheme ceases to be eligible if it has compromised an employer s debt under section 75 of the Pensions Act 1995 (Section 75), unless validation for the compromise is received from the PPF. In most situations, a validation from the PPF to a compromise is only valuable where a multi-employer scheme is involved. This is because once a Section 75 debt is compromised, the trustees lose the power to trigger an insolvency of that employer, as it no longer owes any debt to the pension scheme, and a qualifying insolvency is required to trigger the whole assessment process. Qualifying insolvencies An employer having a pension scheme could include a company, partnership, charity or even an individual. However, the insolvency events listed below focus on the employer being either a company or a partnership, which is the case in the majority of situations. An insolvency event occurs in relation to a company where: the nominee under Part 1 of the Insolvency Act 1986 either: (who is not the liquidator or administrator) submits a report to the court stating his opinion that meetings of the company and its creditors should be summoned to consider the proposal (who is an administrator or liquidator) summons a meeting of the company and its creditors to consider the proposal the directors of the company file with the court documents and statements which begin a moratorium where the directors propose a voluntary arrangement an administrative receiver is appointed in relation to the company the company enters administration a resolution is passed for a creditors voluntary liquidation or an administrator issues a notice which converts the administration to a creditors voluntary liquidation a creditors meeting is held which converts a members voluntary liquidation into a creditors voluntary liquidation a winding up order is made or an administration is converted to winding up by court order. 02 Norton Rose LLP December 2011

3 An insolvency event occurs in relation to a partnership where: an order for the winding up of the partnership is made or an administration is converted to a winding up by court order sequestration is awarded on the estate of the partnership under section 12 of the Bankruptcy (Scotland) Act 1985 or the partnership grants a trust deed for its creditors the nominee under Part 1 of the Insolvency Act 1986 either: (who is not the liquidator or administrator) submits a report to the court stating his opinion that meetings of the partnership and its creditors should be summoned to consider the proposals (who is an administrator, liquidator or trustee) summons a meeting of the partnership and its creditors to consider the proposal the members of the partnership file with the court documents and statements which begin a moratorium where the members propose a voluntary arrangement the partnership enters administration. Stage 3 When the PPF confirms the criteria have been met, it will issue a validation notification in relation to the S.120 Notice and will confirm that an assessment period has begun from the date of the insolvency. It is important to note that the assessment period starts on the date of the insolvency, even though there may be almost two months delay in the PPF confirming that the eligibility criteria have been met. Care should be taken as some of the PPF s published guidance can be misleading in this respect. Care should be taken as this can lead to practical difficulties, especially if, at the end of this validation process, the PPF confirms that the pension scheme is not eligible. The PPF will assign an assessment team member to the scheme. If the pension scheme is not eligible, the PPF will reject the S.120 Notice and will cease to have any further involvement and the pension scheme will not progress any further through the PPF assessment process. Norton Rose LLP December

4 Stage 4 During the PPF assessment period, the trustees, their professional advisers and the IPs continue to play an important role and have key responsibilities. Trustee Responsibilities The pension scheme will continue to be administered by the trustees, subject to various restrictions and controls. For example, the trustees will still be responsible for informing members about all aspects of the assessment process and the progress it is making, paying pensions to members (at PPF compensation levels), responding to queries from members, and pension scheme investment (including providing PPF with quarterly updates). The trustees will also have the additional responsibilities of co-operating with the PPF by preparing and monitoring progress against a management plan, commencing preparation tasks for the actuarial valuation of the pension scheme under section 143 of the Pensions Act 2004 (a Section 143 Valuation), including data cleansing activities and reconciliation of guaranteed minimum pensions and providing the PPF with information relating to the pension scheme such as: copies of minutes of trustee meetings on a timely basis any changes in relation to the pension scheme generally and its administration information on investments during the assessment period. PPF Responsibilities During the assessment period, the PPF will assume all creditor rights of the scheme s trustees (whether contingent or not) in relation to the insolvent employer. All documents, such as notices of creditors meetings, will be sent to the PPF, so it can be properly informed and exercise the creditor rights of the pension scheme in the insolvency. The PPF may monitor the actions of the trustees to ensure they are fulfilling their responsibilities. It also has power under the Pensions Act 2004 to issue trustees with directions relating to: investment of scheme assets incurring expenditure instigating or conducting legal proceedings. 04 Norton Rose LLP December 2011

5 There is no strict legal requirement for trustees to follow the PPF guidance. However, the PPF will monitor closely any pension schemes which fail to apply the guiding principles it has set out and if a pension scheme continually performs badly, the PPF can apply certain powers and, in extreme circumstances, seek to remove trustees. The PPF will also report on trustees conduct to the Pensions Regulator. IP Responsibilities The responsibilities of the IP also continue during the assessment period. Under section 122 of the Pensions Act 2004 IPs need to issue another notice (S.122 Notice) to the PPF and the trustee once it becomes clear that: financial support for the pension scheme will continue known as a scheme rescue (for example where the business continues) financial support for the pension scheme will not continue (for example where the business is closed down) the appointment of the IP comes to an end before a view can be formed on whether support for the pension scheme will continue or not (for example because the court brings the insolvency proceedings to an abrupt end by rescission of a winding-up order on the grounds that it ought not to have been made). Stage 5 Once the S.122 Notice is received by the PPF, it will determine whether it is approved. Where a scheme rescue occurs, the PPF withdraws from the pension scheme and the assessment period ends. Where a scheme rescue is not possible, the pension scheme continues to the next stage of the assessment period. At the final stage of the assessment period, the appointed actuary (usually the existing pension scheme actuary) produces a section 143 Valuation for the scheme. This is a confirmation of whether the pension scheme can pay member benefits at or above PPF levels. The valuation is checked by the PPF s own actuaries before approval. If the pension scheme cannot pay members benefits at or above PPF levels, the pension scheme will enter the PPF. If the pension scheme is sufficiently funded on a section 143 Valuation basis to fund members benefits at or above PPF levels, the assessment period will cease. If it subsequently transpires that such a pension scheme cannot secure a buy-out at PPF levels, it becomes a closed scheme for the purposes of the PA04. These closed schemes are required to carry out regular valuations (under section 156 of the PA04) to determine their funding position and so ascertain if they should reapply for entry to the PPF under section 157 of the PA04. Valuations under section 156 of the PA04 are carried out using the same assumptions as for a s.143 Valuation for determining the funding level of the protected liabilities. Norton Rose LLP December

6 Stage 6 This transition stage involves reviewing and transferring the pension scheme s assets and member data, and reviewing and terminating any contracts. The transition stage starts during the assessment process itself to minimise the time taken to complete the time taken to complete the overall assessment period. The transition stage generally takes about six months from the date at which the PPF requests the section 143 Valuation and ensures that the pension scheme is prepared to pass from the trustees into PPF ownership. n 06 Norton Rose LLP December 2011

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8 nortonrose.com FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Contacts If you would like further information please contact: London Peter Ford Partner Norton Rose LLP Tel +44 (0) Lesley Browning Partner Norton Rose LLP Tel +44 (0) The purpose of this publication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose LLP on the points of law discussed. Norton Rose LLP Norton Rose LLP is a member of Norton Rose Group, a leading international legal practice offering a full business law service to many of the world s pre-eminent financial institutions and corporations from offices in Europe, Asia Pacific, Canada, Africa and the Middle East. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this publication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose OR LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates. Norton Rose LLP NR /11 (UK) Extracts may be copied provided their source is acknowledged.