There have been a number of ‘plain vanilla’ RAAs where approval is given in return for payments in excess of the insolvency dividend to a scheme, and which ultimately results in the scheme transferring into the PPF (for example, Jessops in 2009 and BMI in 2012). However, both the PPF and TPR have shown a willingness to consider more imaginative structures which, atypically, have enabled significant scheme liabilities to survive outside the PPF. Examples of these are considered further below.
Uniq plc (2012)
As at March 2010, the scheme’s buy-out deficit was estimated at around £430 million. The employer’s market capitalisation at the time was below £10 million and it had been unable to raise external capital due to the size of the pension creditor. Conventional funding plans were not realistic as the only affordable payment schedule would have led to a recovery plan in excess of 40 years. Without a corporate restructuring, insolvency was inevitable and, as TPR acknowledged in its section 89 report, the economic reality was that the pension scheme effectively owned the group.
The result was a deficit-for-equity swap effected through an RAA, under which the scheme took ownership of over 90 per cent of the equity in Uniq plc in return for the scheme surrendering its claim as a creditor. The company’s shares were subsequently sold, with the trustee receiving in excess of £100 million, which enabled purchase of a buy-in policy to pay benefits at least equal to the compensation that would have been payable if the scheme entered the PPF.
The US parent (EKC) of the scheme employer entered chapter 11 insolvency proceedings in the US. Whilst the UK employer remained solvent, it was clear that if EKC (which also provided a guarantee in favour of the scheme) failed to emerge from the chapter 11 process, the UK employer’s insolvency was inevitable. The trustee was by far the biggest creditor in the chapter 11 proceedings with an unsecured claim of $2.8 billion under EKC’s guarantee.
During the chapter 11 process, EKC had sought to sell its viable document and personal imaging business (known as Alaris), but given its weak bargaining position, had attracted low bids. The trustees considered the Alaris business to be profitable with long-term cash flows which matched the profile of a significant part of the scheme’s liabilities. A deal was struck to sell the Alaris business to the trustee for $325 million, approximately half the value at which it had originally been marketed, in return for the trustee releasing its claim under the guarantee.
Following significant due diligence, the trustees were satisfied that the value of the Alaris business far exceeded the dividend the scheme would otherwise have received in insolvency. However, as the effect of an RAA would be to remove all material employer covenant, the PPF remained concerned that it would effectively be underwriting the scheme. Therefore, a proposal was made to members under which they could elect to join a new scheme, which would provide lower benefits than the original scheme but higher than those in the PPF.
Following an extensive communication exercise, members representing more than 94 per cent of liabilities agreed to transfer to a new scheme with the unconsenting remainder of the membership transferring to the PPF. In return for supporting the RAA, TPR also negotiated additional governance requirements for the replacement scheme, ensuring that the PPF’s related ongoing risks were kept under review.
Following failure to agree a recovery plan which was affordable to the struggling UK business, the trustees and the employer explored ways in which the scheme could avoid entering the PPF.
The employer’s US parent had historically provided significant assistance to the UK employer to help fund the scheme but was unwilling to provide this indefinitely, or on a formal basis. The employer had originally agreed with the trustee to a transfer without consent of all members to a new scheme which provided benefits higher than the PPF but lower than the original scheme. In order to effect such a transfer, an actuary’s certificate would be required confirming that the members’ benefits would be “broadly no less favourable” in the new scheme. The trustees sought a declaration from the High Court on certain issues before proceeding with the transfer. One of the trustees’ claims was that the actuary should take into account the comparative security of benefits in each of the schemes. In her judgment, Asplin J held, somewhat reluctantly, that the scheme actuary could not take account of the fact that members’ benefits would be more secure in a new scheme in assessing whether a certificate for a no-consent bulk transfer could be given.
Instead, in conjunction with TPR, an alternative approach was agreed under which members were offered the chance to transfer to a new scheme and those who elected not to would transfer to the PPF. An RAA was entered into releasing the UK employer from its liabilities to the old scheme and the US parent agreed to pay a further cash sum to the new scheme. The PPF also took a stake of between 25 per cent and 45 per cent in the surviving UK employer. Non-consenting members entered the PPF and additional restrictions on the length of the recovery plan and the investment strategy for the new scheme were put in place.
Throughout its engagement with the parties, and in particular in connection with the RAA proposal, TPR continued to consider whether it would be reasonable to use its anti-avoidance powers against the US parent and decided that it would not. In reaching this conclusion, TPR’s section 89 report states that it took into account the significant financial support which the US parent had provided voluntarily, and which had allowed the UK employer to continue to support the scheme. As in the Kodak case, it was highly unusual for a successor scheme to be allowed to survive outside the PPF with prospects for future entry. However, as TPR was satisfied that:
- members would receive better benefits than in an insolvency situation;
- they had actually consented to join the new scheme with lower benefits; and
- the extra governance protections would further protect members;
it could therefore approve the RAA.