Making the pensions market work
The 2004 Pensions Act effectively decreed that defined benefits pensions schemes should be treated like material unsecured creditors – and that they should act like them.
This has meant that insolvency lawyers have become increasingly involved in pension-related work, leading to a need for much greater knowledge of the pensions market.
BDO Partner Richard Farr sees this at first hand: “It’s imperative that insolvency lawyers now help to provide client solutions for pensions," he says.
“Rather than being a bit part in a team, pensions lawyers now have the power to be a deal blocker or a deal maker. This means there is now a need for all lawyers to use their skill set in this area. It’s no coincidence that firms who have taken this approach on board have flourished during the recession and those who haven’t have floundered. It doesn’t require a radical re-shaping of your firm, just a considered understanding of all the issues involved.”
This sounds simple enough – so why haven't all law firms moved swiftly to cater for the new dynamic?
“The problem of pension funds going into free fall has grown almost overnight”, says Farr, “and what was once a manageable situation now threatens to overwhelm under-prepared legal teams. Added to that, employers may also have been unaware of the level of responsibility they owed to the pension scheme and its holders.
"However, a plus point for lawyers is that the pension scheme holders can sometimes exaggerate the problems they face and therefore legal action can also be taken on behalf of the employer. Of course this also requires an understanding of the issues from their perspective.”
BDO have highlighted five of the key issues with which lawyers working in this area need to be familiar…
1. Financial Support Directions
If the employer company is worth less than half the buy-out deficit, then the trustees may be able to ask the Pensions Regulator to force a full buy-out guarantee from any connected or associated party/parties (more than 33% shareholders are caught).
2. Type A events
If the employer group is subject to a transaction which can weaken the Employer Covenant (e.g. granting security or cross guarantees, dividends, returns of capital, tax restructurings, value shifting offshore), then the Pensions Regulator has up to six years to consider the actions of the parties involved. Both corporate and individuals could be liable for an amount up to the full buy-out cost.
3. Multiple Employers
When the last active member leaves a participating employer, ie the employer leaves the scheme, the employer's share of the total buy-out cost of the scheme could become payable immediately.
4. The weakness of the Employer Covenant
Expressed in terms of a Dunn & Bradstreet credit score, this will be used to calculate the Pension Protection Fund annual cash levy. This levy is very sensitive to changes in the group's overall legal structure.
5. Scheme Specific Funding
This drives how much cash is paid to the scheme. It is highly dependent on the strength of the Employer Covenant and how that covenant fits within the overall group structure.
