The proposal by the Pensions and Lifetime Savings Association to pool up to £1.5 trillion of assets in existing pension schemes into so-called superfunds is not the silver bullet for British businesses that it first appears.

That does not mean reform isn’t needed, and there has been a recent flurry of businesses struggling to get to grips with their funding promises.
Tata Steel UK finally offloaded its £15 billion pension scheme last month in exchange for a £550 million cash payment to the scheme from its parent group. Frank Field, chairman of the House of Commons work and pensions committee, is taking an interest in ensuring that members have received the best possible deal in the circumstances.

In many sectors, legacy-defined benefit schemes are a millstone around the neck of businesses. Business developments can take place over far shorter timescales than the duration of scheme liabilities. Monarch Airlines managed to separate itself from £600 million of pension liabilities in 2014 when it faced insolvency, but even this was not enough to ensure its long-term survival.

A business that was once a giant but is now trading at a fraction of its former level can have real problems stumping up the money to pay its pension bill.
The suggestion is that consolidation of liabilities via investor-backed superfunds is a solution for struggling businesses with struggling defined benefits schemes. However, there are significant commercial and legal hurdles to overcome before this model launches in the UK.

Superfunds may work in other countries, but that is because their pensions systems are not based on trust law principles. Standardising or simplifying legacy benefit structures is no easy task within current UK law.

What options are available for stressed businesses? To remove the burden, businesses facing insolvency within 12 months may be able to agree a regulated apportionment arrangement (RAA) with the pensions regulator, the Pension Protection Fund and scheme trustees, as in the examples of Tata Steel and Monarch.

However, the circumstances in which a company can legitimately be separated from its pension obligations using an RAA are rare and there is a delicate balancing act in seeking one.

An RAA can only take place if it will produce a significantly better outcome for the scheme than the employer’s insolvency. This is rarely a clear-cut decision, and the pensions regulator must be sure that it won’t get more for the scheme by using its powers against the wider group.

And for directors, the risk of wrongful trading is a real concern if a company continues to trade in the knowledge that there is no reasonable prospect of avoiding insolvent liquidation, for instance if it is unable to settle its pension liabilities as they fall due.

Anne-Marie Winton, Partner
This article was also published in:
The Times Law Brief
CCH Daily