Bob Hymas: Options to separate schemes from sponsors without an insolvency, in exchange for a meaningful equity interest may be sensible in some cases.
Bob Hymas says Tony Blair Institute proposals have sparked a debate on how some schemes could be separated from their sponsors without an insolvency event.
I noticed two very interesting stories in the press over the past few weeks. Firstly, there was the suggestion from London's Lord Mayor, Nicholas Lyons, that 5% of defined contribution (DC) funds should be invested in a ‘future growth fund'. The second was the idea put forward by the Tony Blair Institute (TBI) suggesting the Pension Protection Fund (PPF) should become a superfund and takes on defined benefit (DB) assets on a voluntary basis to provide long-term equity to invest in the UK's economic future.
Both ideas have the same intention of creating a form of long-term investment fund which, while arguably having the same intent as a sovereign wealth fund, is utilising private capital. As ever, there are positives and negatives and, while the positives of such a fund are easy to articulate, the negatives must also be considered.
On the DB side, the immediate questions on the TBI proposals are ones around how a voluntary arrangement would exist and whether a similar gateway to regulated apportionment arrangements (RAAs) would be required.
One must also question how it would impact on PPF's investment risk profile and the fulfilment of its statutory purpose. There is, of course, the obvious point that potentially the PPF could be a source of capital for a UK investment fund. That is not, however, my argument today.
An evolution in thinking
My immediate thought on the TBI paper is that it is a real positive in the evolution of thinking about the DB landscape.
I divide the DB pensions landscape into three broad categories: those that are at buyout funding; those that will get there in the short to medium term; and those that are a long way off. When you consider this latter category and add a weaker covenant into the mix, the achievement of low dependency or buyout funding may be regarded as a remote possibility.
The consultation on the new DB funding code essentially provided three options for such stressed scheme scenarios:
• Stopping future service accrual
• Maximising covenant support
• Considering wind-up
Most schemes will have already stopped accrual and covenant support is not always available as there are either no unincumbered assets or limited resources in terms of both assets/guarantor and ability to meet the costs of implementing a support framework.
A difficult option
Wind-up is a difficult option, as it will, in all likelihood, trigger an insolvency event. This puts at risk employment and in many circumstances the business could thrive if it were not for the funding requirements of the DB scheme. It is also possible that there is no inevitability of insolvency, the test required for an RAA.
This is often the case with legacy schemes with liabilities that have grown disproportionately to the business, due to increasing benefit requirements and tougher funding requirements. In many situations, the shareholders have continued to support the business, but have had no return for many years.
There will, therefore, be some situations where wind-up is not the ‘fair outcome' if it forces insolvency that was not otherwise inevitable. This is particularly the case if the shareholders have done all the right things and the business can invest and thrive. If the DB scheme is the only factor stopping this, then an option to separate the scheme from the sponsor without an insolvency, in exchange for a meaningful equity interest must be sensible.
If the TBI report starts a debate on how some schemes can be separated from their sponsors without an insolvency event and with a lower bar than an RAA, then that must be a good development.
Bob Hymas is a professional trustee at BESTrustees
