Last week, the Pension Protection Fund ("PPF") published an interim guidance note on the Corporate Insolvency and Governance Act 2020 ("CIGA"), which includes details of its approach to a restructuring plan proposed by an employer of an eligible defined benefit pension scheme ("DB scheme"). Any group with a DB scheme considering a restructuring plan as a solution to their financial distress will need to take this guidance on board. The key takeaways are:
- Time will need to be factored in for PPF and trustee consultation. Pursuant to secondary legislation supplementing CIGA, where a restructuring plan compromises liabilities owing to a DB scheme, the PPF is entitled to exercise the creditor rights of the pension scheme trustees to vote on the plan. The PPF is required to consult with the trustees before exercising the voting rights, and the guidance note states that the PPF expects the directors of the company proposing the plan to factor this into the restructuring plan timeline to ensure that there is sufficient time for meaningful consultation and for the trustees to obtain professional advice. Adequate time for creditors to properly assess restructuring plan (and scheme of arrangement) proposals has been a theme of recent cases in any event, and this guidance reinforces that message.
- The PPF considers that its vote for the purposes of the creditors' approval of the restructuring plan should be valued at the estimated section 75 "buy-out" debt level. The PPF's reasoning for this is that should the restructuring plan fail with the company subsequently falling into an insolvency process, then a debt under section 75 of the Pensions Act 1995 will be triggered. A section 75 debt is equal to the total liabilities of the DB scheme calculated on an insurance buy-out basis and is usually substantially higher than alternative methods of valuation of the pension fund deficit. As such, this could heavily inflate the size of the pension vote, potentially changing the dynamics of relevant unsecured creditor class(es) dramatically, particularly as trade creditor turnout can be low. If this leads to a class voting against the restructuring plan, it may still be possible for the plan company to bind the dissenting class using the new cross-class cram-down tool available under the restructuring plan, but this tool is still novel as it has only been used once and increases litigation risk.
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"Where the "relevant alternative" under a plan is an insolvency process, then valuing the PPF's vote at the estimated section 75 "buy-out" debt level may well be the right approach. But where the relevant alternative is not an insolvency process (and therefore the evidence is that a section 75 debt would not be triggered if the plan failed), it is debatable whether this basis of calculation of the pension debt would still be appropriate, particularly if it would make a difference to the creditor vote."
Giles Boothman, RSSG Partner
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Separately, the Pensions Regulator has today published a consultation on its approach to the controversial new criminal offences under the Pensions Schemes Act 2021. The consultation closes on 22 April 2021. For further details on the new criminal offences, see our client briefing 'Defined benefit pension schemes: new criminal offences for corporates, lenders, counterparties and advisers'.
