DB pension schemes and company insolvencies

15 March 2010

A recent article in “Pensions Week” commented on the fact that defined benefit (“DB”) pension scheme deficits were to blame for preventing at least 100 British companies, on the brink of insolvency, being saved by recapitalisation, in 2009. The evidence arose from research received from private equity buyers who refused to invest or buy companies because they were not prepared to take on the businesses’ DB pension liabilities. The attitude of other potential investors, such as banks lending money for these deals, was also seen as a barrier. They seldom want to get involved with companies that could potentially have significant DB pension liabilities.

Many firms have been taking steps to limit their pension liabilities. Companies who have limited their exposure to DB pension liabilities have not infrequently found that their stock value and financial standing have increased. For instance, Royal Bank of Scotland, Arriva and ITV recently posted financial results which have been bolstered by their decisions to limit future accrual for members of their DB schemes. A further example of this can be seen in the action that RBS took last year to cap pensionable pay increases at the lower of 2% or the rate of inflation, in a move it predicted would cut its future pension liabilities by £500 million. Other firms that have followed the increasingly common trend to switch from DB to DC pension provision, have cut back on their exposure to pension liabilities.

However, the move from DB to DC and the limiting of pension liabilities is not without its problems. Trustees of schemes switching from DB to Defined Contribution (“DC”) or reducing benefits often face opposition from members and significant legal barriers. One issue trustees may face in the future is the potential criticism that some of them may have not paid sufficient attention to the question of whether the DC fund outcomes will be suitable or appropriate for younger employees. Arguably this may not be a trustee issue but one for the sponsoring employers. Even so, the perception in the eyes of the members may be that the trustees have, in some way, "recommended" the choices to them. Comments about such future claims against trustees have begun to arise amongst some pension administrators and trustees.

The Government is concerned about the “rush” from DB to DC pension provision. Much legislation has been devoted to protecting pension scheme members. For instance, in March 2010 the DWP published a response to its recent consultation on the draft Pensions Regulator (Contribution Notices) (Sum Specified following Transfer) Regulations 2010, (“Regulations”) which have now been laid before Parliament for approval.

The Regulations set out how the Pensions Regulator should calculate the amount due under a contribution notice issued following a bulk transfer of members' accrued benefits in a defined benefit scheme to a defined contribution scheme. This power was introduced by the Pensions Act 2008 and applies retrospectively to any accrued rights transferred on or after 14 April 2008. Subject to parliamentary approval, the regulations will come into effect the day after they are made. These regulations complete the implementation of the Regulator's power to issue contribution notices following bulk transfers and underline the increasing intervention that the Government feels is necessary to ensure members are not disadvantaged.

Despite all of the difficulties in limiting members benefits or switching from DB to DC schemes, for many sponsoring employers, taking action to limit pension exposure is an increasingly important objective that is being vigorously pursued.