For many schemes and members, the strategy of kicking deficits down the road will probably be the order of the day. With returns expected to be low for some time to come, increased contributions in the short term are unlikely to suffice. (Indeed, contributions that are too high might be positively detrimental – if they hold back investment in a sponsor business.)
Extended recovery plans allow both schemes and shareholders to have a meaningful interest in future profits and the sponsor’s well-being. Which is fine, so long as profits and covenants hold out that long.
Unfortunately, the strength of no covenant can be guaranteed and sometimes, irrespective of the recovery plan period, the pressure of the deficit becomes so great that the sponsor has to fold. Sometimes there is just not enough profit for it to be worthwhile shareholders staying in the game. Enter stage left the PPF. The sponsor winds up, jobs are lost, members’ benefits are cut materially and the PPF becomes the pension guarantor.
Surely there must be a half-way house between paragraphs one and two above? A compromise position that eases the financial burden of a pension scheme before it sucks out the last vestiges of shareholder motivation. A compromise that cuts benefits by less than the PPF, allowing the scheme to continue, jobs to be preserved and shareholders to maintain a meaningful interest.
The recent Halcrow case suggests that enlightenment is approaching. (http://www.professionalpensions.com/professional-pensions/news/2467960/halcrow-members-embrace-new-scheme-following-restructure) In a nutshell, the Pensions Regulator has sanctioned such benefit reductions, albeit only where members themselves have agreed to this. (But why wouldn’t they when the alternative is the PPF?)
There are some key features to this case though, so it is not necessarily a precedent that will be copied easily. In particular:
(a) the legal hoops of a Regulated Apportionment Arrangement were jumped through
(b) the overseas parent that struck the deal (CH2M) appears to have had no legal obligation to contribute to the scheme of its UK subsidiary pension scheme
(c) since acquiring the UK subsidiary, (Halcrow), the parent had not drawn any dividends from it, and
(d) CH2M agreed to cede some further, limited, financial assistance.
Initially a member action group was against the proposal, but eventually it was persuaded that the deal made sense. The Pensions Regulator also concluded that it would likely be in the PPF’s own financial interest to acquiesce.
Our view: the commercial attitude shown in this case by members, trustees, pensions regulator and sponsor is refreshing. Whilst the Halcrow case might not be an easy precedent to follow it might not be an isolated case.
The QuIP Team
30 August 2016