The Government’s Corporate Insolvency and Governance Bill will result in big changes to the insolvency market.
The aim of the Bill is to prevent otherwise viable businesses facing the threat of insolvency due to COVID 19. This in itself is a positive step, however, the pension implications were not thought out as clearly as they should have been. As a result, much debate and a return to The House of Lords for discussion has followed.
So how will the proposed changes to the UK insolvency regime negatively impact pensions?
In short, if there are distressed corporate sponsors, the position of a defined benefit (DB) scheme and in turn the Pension Protection Fund (PPF) will be placed in danger.
The provisions put forward in the Bill which will affect pensions are:
- Temporarily suspending the ability for creditors to issue statutory demands and winding- up petitions where a company has been prevented from paying its bills by the pandemic.
- Introducing a new form of “moratorium” where companies can obtain 20 to 40 days breathing space to put in place a rescue plan without threat of legal action of debt enforcement.
- Changing termination clauses in supply contracts and enabling companies to form a restructuring plan, which dissenting creditors would be forced to accept if approved by the Court.
The first two bullets put into jeopardy DB schemes as normally such schemes are unsecured creditors and therefore will be unable to enforce debts in the short term. In addition, DB schemes and the PPF may have no say over any restructuring plans. The new form of moratorium to be followed, will mean that newly created unsecured bank and financing debts will have “super priority”, which results in less for other creditors including pension schemes.
The risk to pension funds has been raised numerous times, most prominently by Baroness Drake, Baroness Warwick and Baroness Altmann. Their main objection was that bank finance debt would have “super priority“ and that the moratorium and restructuring would not be regarded as an insolvency event for pension purposes.
Lord Callanan replied to this on behalf of the Government saying that they were working closely with key stakeholders to determine any implications for the PPF, The Pensions Regulator (TPR) and pension schemes.
The UK Government has had to re-visit proposals and has agreed to amend the Bill so that the PPF and TPR will now play a key role in ensuring that pension schemes are fully considered in any restructuring plans.
Sir Steven Webb, former Pensions Minster, commented “this amendment is a major recognition by the Government that the Insolvency Bill could have put pension schemes at the back of the queue when a company was in financial difficulty”.
Oliver Morley, Chief Executive of the PPF added “the amendments were important not least because they make sure we continue to have a seat at the table and can work to influence the outcome and mitigate the risks for ourselves and those we stand to protect.”
Also, to be considered is the impact the Corporate Insolvency and Governance Bill will have on the Pension Scheme Bill which is still making its way through Parliament. Baroness Bowles of Berkhamstead commented “I am now quite glad that we have not finished the Pensions Bill because, if these new priorities are enacted, they will take a wrecking ball to the paying down of deficits”.
The Government is being forced to react rapidly to unprecedented circumstances and have brought in emergency funding options and are also seeking to bring in new laws to prevent a flood of insolvencies. When threatened by insolvency, business owners and their advisors need to be aware of how all these new options could affect the decisions they need to take.
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