30th January 2019 Winton: use and abuse of pre-packs to drop pension liabilities
Anne-Marie Winton, Partner at ARC Pensions Law LLP, examines the pre-pack administration of published Johnston Press, which involved the abandoning of £109m in pensions liabilities, and asks whether regulators should have greater control of this practice.
It appears that very little escapes the eagle eyes of Frank Field MP, chair of the work and pensions committee, where corporate failure arises involving a defined benefits scheme. Currently, he is asking questions about the circumstances surrounding the pre-packaged administration of Johnston Press (owner of the I and the Yorkshire Post) in November 2018, with debts around £200m.
The pre-pack enabled a new business to rise from the ashes under new ownership unencumbered by those liabilities or any pensions deficit; it also triggered a Pensions Protection Fund (PPF) assessment period for the group’s defined benefits pensions scheme, at the end of which the Pensions Protection Fund is likely to take on around £109m of pensions liabilities.
What concerns the work and pensions committee is whether pre-packs are open to abuse as a way to dump pensions liabilities onto the Pension Protection Fund, and if so whether The Pensions Regulator (TPR) will do anything about this.
The Pension Protection Fund is funded by levies on other defined benefits schemes (ie, not by the taxpayer), and if a defined benefits scheme is accepted into the Pensions Protection Fund may well be better than if their employer suffered an uncontrolled insolvency event.
Pre-pack administrations typically operate on very short timescales. What happens is that the sale of the business and assets is negotiated prior to the appointment of an administrator. The sale then completes often immediately after the administration, as by agreeing on a sale in advance, the risk of reputational and financial damage to the business is reduced.
The appointed insolvency practitioner will have followed Statement of insolvency practice 16 (SIP16) published by the ICAEW, which stresses the need for transparency and gives clear guidance on the role of the practitioner, including acting in the interests of the company’s creditors as a whole (the largest of which may be the pension scheme itself as an unsecured creditor).
And if the sale is to a connected party, it is expected that that party approaches the ‘pre-pack pool’, an independent body of experts, for an opinion on the proposed sale.
For Johnston Press, however, the pre-pack pool was not approached as the buyer was its secured lenders, so not treated as connected parties (even though the directors of Johnston Press became directors of the acquiring vehicle, owned by those lenders).
Administration is a ‘qualifying insolvency event’ for Pensions Protection Fund entry purposes, which means that the insolvency practitioner must notify it of the event within 14 days. The Pension Protection Fund’s practice for pre-packs is to then consider the extent to which the pensions trustees (and the fund itself) have been effectively consulted prior to the practitioner’s appointment and whether their views have been properly taken into account.
Assuming that the pension scheme is the largest creditor, it is open to the Pension Protection Fund to appoint an alternative practitioner if it has any concerns about the circumstances leading up to the pre-pack and the pre-pack process itself.
If the fund has any concerns (for example that it does not think that maximum value for the business has been obtained by the sale), it will not doubt liaise with The Pensions Regulator to consider if the body can use any of its moral hazard powers against the seller and its group.
So what were the circumstances leading up to the pre-pack of Johnston Press?
It turns out that a month before the pre-pack (and after an earlier solvent sale under the takeover code having failed) an attempt was made by the group to get agreement from the trustees, the Pensions Protection Fund and The Pensions Regulator to a regulated apportionment arrangement.
This process, which is available where the insolvency of the scheme employer is inevitable, would have had the same end result of the pension scheme being legally separated from the business and entering with the Pension Protection Fund – but with an accompanying cash payment to the scheme as the price of getting an agreement.
The Pension Protection Fund repeatedly rejected the regulated apportionment arrangement proposal as not meeting its published criteria for acceptance (and it later transpired that the group was not, in fact, cash – flow insolvent).
The Pension Protection Fund has stated that it does not understand why a pre-pack swiftly followed after its last refusal to agree to the arrangement and challenged the prospective insolvency practitioner whether adequate marketing of the business had to take place. Having had sight of the SIP16 report, it says that it is unsatisfied by the response and so its investigations are continuing.
In practice, only a handful of schemes enter the Pension Protection Fund as a result of pre-packs each year, suggesting that this is not a process widely used or abused. The fund has no fundamental issue with pre-packs but every case has to be considered on its merits.
But ultimately it is The Pensions Regulator, not the Pension Protection Fund, that has the power to take action against the abandoning of pension liabilities on the fund where a pre-pack has been misused. In the case of Johnston Press, this is a live risk.
The regulator has been working with the trustees on scheme funding for a number of years, given its concern about the declining sector of the scheme employer and that a £220m bond was due for repayment in June 2019.
In 2014 the trustees had actually agreed to release security held in favour of the pensions scheme to enable the company to raise new equity and refinance its debt.
The regulator had agreed then that this was not an unreasonable approach and likely to achieve more in the long run for the scheme.
But it too is not looking at the SIP16 report and deciding whether any party connected or associated with the scheme employer ought to be required to pay money into the scheme, for example, if an insolvency event was engineered deliberately to avoid meeting the pension scheme liabilities.
Neither the Pensions Protection Fund nor The Pensions Regulator can stop a pre-pack from taking place, but the work and pensions committee is raising the challenge as to whether they should.
Partner Anne-Marie Winton
Read Anne-Marie’s article in Accountancy Daily
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.