The Corporate Insolvency and Governance Act 2020 received Royal Assent on 26 June 2020. Regulations have been introduced which give the Pension Protection Fund (the PPF) certain rights.
These rights are in respect of a Moratorium or a Restructuring Plan in place of pension scheme trustees. Since our initial article on potential pensions issues amendments were introduced in the Bill to both the Moratorium and the Part 26A procedures.
In the original draft bill, there was the possibility that unsecured bank debt and trade debts from the period of the Moratorium could be given super priority ahead of pension scheme debts because of the onset of a Moratorium. The final version of the Act preserves the super priority of those debts during the Moratorium, but if the company exits the Moratorium process without having paid them in full, the accelerated portion of the bank debt will not be afforded super priority during any ensuing insolvency process. This offers some comfort to pension schemes that they will be on a similar footing to other unsecured creditors if an insolvency process follows on the back of a failed Moratorium. This is of course subject to any action taken by creditors in advance of a Moratorium.
During the Moratorium, certain payments due from the company must continue whereas others are subject to a payment holiday. Debts or liabilities which a company became subject to before the Moratorium and debts or liabilities which are due during the Moratorium - but which relate to an obligation arising before the Moratorium - fall within the payment holiday. There are certain payments which must continue and these include wages or salary. The Act defines wages or salary to include contributions to an occupational pension scheme.
It is doubtful whether this includes deficit repair contributions (DRCs) and scheme expenses paid by the company. Pension scheme trustees may wish to consider the possibility of a Moratorium leading to suspension of deficit repair contributions when deciding whether to agree to a request by a company to a temporary suspension of DRCs. If a Moratorium seems likely, then trustees may be reluctant to agree to a general request for the suspension of DRCs.
In a Moratorium and where the Company is a scheme employer of a Defined Benefit (DB) scheme, the appointed Monitor must notify the pensions regulator and the PPF.
Under the new regulations, the PPF will have the same rights to challenge the Monitor and the company directors as the Trustees will have. Where the PPF exercises any such rights there is an obligation to consult the pension scheme trustees.
Restructuring Plans (“Part 26A Arrangements”)
In addition, where a company proposes to enter into a Restructuring Plan and where the company is an employer of a DB scheme, the PPF and the pensions regulator must receive notice of the meetings to approve the Plan as well as any other information to which the creditors of the company are entitled. Under the Regulations, the voting rights that are otherwise exercisable by the trustees of the DB scheme will instead be exercisable by the PPF. Again, this is subject to the requirement to consult the trustees.
Where a qualifying insolvency event takes place in relation to company which has defined benefit liabilities, pensions legislation provides that the PPF automatically steps into the shoes of the trustees. This means that the PPF takes over the rights and powers of the trustees and this includes any rights of trustees under insolvency legislation, such as in relation to a Company Voluntary Arrangement (CVA).
Neither the Moratorium or a Restructuring Plan are qualifying insolvency events under the Pensions Act 2004. The effect of the new regulations is to put the PPF into a similar position as it would be within insolvency proceedings meaning that the PPF, taking the rights of the pension scheme as a creditor, can challenge the Monitor and company directors in a Moratorium and can vote on a Restructuring Plan.
The PPF’s role is not conditional on the funding position of the pension scheme. A pension scheme whose employer is taking either of the steps outlined above, might be funded above PPF compensation levels and therefore would not otherwise be eligible to enter the PPF. In the case of the company proposing a Restructuring Plan, or asking its creditors to approve an extension of a Moratorium beyond its initial 40-day period, the PPF would still be required to vote for or against the proposal rather than the pension scheme trustees.
It is therefore clear that the PPF and to a much lesser extent the Trustees, will have a seat at the table in any Moratorium or Part 26A Restructuring Plan. Approval of the PPF will be needed in relation to any Part 26A procedure, although the courts will have the ability to impose a cross-class cramdown on dissenting voters. This means there could be circumstances where the PPF does not vote in favour of the restructuring proposals, but the Court decides to impose the proposals on all creditors in any event.
The introduction of certain powers and voting rights for the Pension Protection Fund may suggest that trustees can step out of the picture and leave the decision making to the PPF. However, trustees are required to be consulted by the PPF. Trustees should be aware of any particular powers they have within the scheme’s governing documents, particularly around the ability to trigger winding up of the pension scheme or to call for additional funding. The trustees should also consider the terms of any security or other support to the scheme. During a Moratorium, steps to enforce security cannot be taken unless the court consents.