New options for distressed sponsors: what are the implications for pension schemes?
26 June 2020
The Corporate Insolvency and Governance Act makes significant changes to the toolkit available to struggling businesses, starting today. The moratorium option provides breathing space in relation to some types of debt and a new pre-insolvency rescue and reorganisation option allows companies that are in financial difficulty to compromise creditor rights, subject to court approval. Here we signpost some of the key implications in relation to occupational pension schemes.
How does a moratorium in relation to a pension scheme sponsor affect the scheme?
The moratorium provides 40 business days of protection without court or creditor approval, during which a payment holiday will apply to all pre-moratorium debts (except for certain limited categories). Normal payroll pension contributions that have fallen due before the moratorium or that fall due within it are excluded from the payment holiday.
During the moratorium, no steps may be taken to enforce any security over the company’s property except with the permission of the court, and statutory demands or winding-up petitions may not be issued.
The Act provides super-priority for certain types of pre-moratorium debt where a winding-up or administration occurs within 12 weeks of a moratorium – that is, it could weaken the scheme’s position as an unsecured creditor in any future insolvency proceeding. However, following amendments in the final days of the Bill’s passage, accelerated financial services debts are excluded from super-priority status in this context. The possibility of lenders accelerating loan repayments to ensure super-priority (and so weakening the position of a defined benefit (DB) pension scheme) had been the subject of significant industry concern prior to this amendment.
Other late-stage amendments require notices relating to the moratorium to be given to both the Pensions Regulator (TPR) and the Pension Protection Fund, and give the PPF the ability to exercise the trustees’ rights as a creditor alongside or to the exclusion of the trustees in relevant situations.
Pensions implications of a moratorium
Sponsors and trustees of DB pension schemes should confirm whether, based on the wording of their scheme rules, a moratorium could trigger wind-up provisions (for example, as the result of a failure to pay deficit reduction contributions (DRCs)), thereby triggering a section 75 debt which might jeopardise the recovery of the company as a going concern.
Trustees and sponsors should also give careful consideration to conflicts issues that could arise if a moratorium is under consideration by the scheme sponsor, and how the trustee board would manage these (including quorum requirements).
A moratorium is only available if: (a) in the view of the directors, the company is, or is likely to become, unable to pay its debts; and (b) in the view of the proposed monitor, it is likely that a moratorium for the company would result in the rescue of the company as a going concern (or, for a short period, that it would do so if it were not for any worsening of the financial position of the company due to Covid-19). DB trustees who believe that this may apply to a scheme sponsor may wish to consider measures such as:
- Reviewing cash requirements (as no DRCs will be payable during the moratorium). Are they able to call on any existing group guarantees in these circumstances?
- Obtaining more frequent covenant updates (and considering whether the existence of the regime itself has implications for their consideration of covenant strength). Any sponsor requests for the suspension/waiver of DRCs should also take the possibility of a moratorium into account.
- Reviewing current forms of security and considering whether additional protection against ‘moratorium risk’ is required.
What is the Restructuring Plan option?
A Restructuring Plan (RP) allows the court to impose a compromise on a company’s creditors and shareholders without their consent, including a ‘cross-class cram-down’. The company must have encountered or be likely to encounter financial difficulties that are affecting, or will/may affect, its ability to carry on business as a going concern. The compromise would need approval by the court and 75% by value of the creditors in each class (subject to the ability of the court to override rejection by one or more dissenting class, if certain conditions are met).
This is not an insolvency event (that is, it does not trigger assessment for PPF entry for eligible schemes), but again the Act gives the PPF the ability to exercise the trustees’ rights as a creditor in relation to matters relating to the RP including making representations to the court, receiving notices and voting on the proposed compromise – in each case either in addition to, or to the exclusion of, the trustees.
It remains to be seen how aspects of the regime will operate in practice – for example, creditor classes are based on the similarity of rights prior to and as a result of the RP: would a DB scheme be considered in the same class as other unsecured creditors, or would the nature of its reliance on the scheme sponsor be a differentiating factor? How would the scheme’s creditor claim be valued, in the absence of a section 75 trigger?
In practice, if it is proposed that a restructuring would involve any significant impact on a sponsor’s liability to a DB scheme, this is in almost all cases likely to be dealt with separately/in parallel with the RP, using existing tools such as a regulated apportionment arrangement. On the other hand, where that liability is not affected, it is possible that a sponsor could seek trustee support to help it achieve an RP.
Trustee preparedness for an RP
Court consent is required for an RP, so trustees will have an opportunity to consider the proposal in detail. Again, this raises potential conflicts issues for any company directors on the trustee board; trustees should also consider whether the trustee body would be quorate in the absence of any conflicted trustees and would be able to properly consider the proposal (with appropriate adviser support). Any notice or document that is sent to a creditor must (where a DB and PPF-eligible scheme is involved) also be sent to TPR and the PPF, so trustees can also expect significant regulatory involvement in this process.
Trustees should also consider whether the triggers for funding/wind-up in current forms of security are appropriate. As with the moratorium, any sponsor requests for the suspension/waiver of DRCs should take this change in the legislative landscape into account. Fire drill training for restructuring scenarios can be very helpful in ensuring that trustees are properly equipped to deal with situations that may require complex solutions to be reached at pace.
Find out more
This is only a brief overview of two particular aspects of a complex new Act. Join us for the first session in our Pensions Academy Online (6 July at 8.30am) to find out more about how the rules are likely to affect pension schemes in practice – click this link to register for this or our other Pensions Academy sessions.