Pension fund deficit dispute forces viable company into administration

23 February 2010

Reader’s Digest Association Ltd (“RDA Ltd”) is owned by USA based Reader’s Digest Inc (“RDA Inc.”). RDA Ltd has a longstanding and unfunded deficit to its UK pension scheme amounting to circa £125 million. The RDA Ltd scheme has 1,600 members. RDA Inc. entered into negotiations with the trustees of the RDA Ltd pension scheme and the Pension Protection Fund (“PPF”) in order to resolve the continuing issue of the deficit.

An agreement was reached whereby a mitigation payment of £10.9m would be made by RDA Inc. into the pension fund. Additionally, RDA Inc would transfer a third of the equity in RDA Ltd to the scheme trustees. The scheme would then go into the PPF assessment period. The restructuring proposal would allow RDA Ltd to continue trading without its pensions burden whilst the members of the RDA Ltd scheme would receive PPF compensatory pension benefits.

The agreement needed the approval of the Pensions Regulator (“PR”). However, this was refused and a PPF spokesman has confirmed that it had received an official notice of insolvency from RDA Ltd. The PPF will now assess whether the pension scheme is eligible to enter the PPF fund without any mitigation or equity stake from RDA Inc. As a result, more than 130 employees of RDA Ltd risk losing their jobs following RDA Inc deciding to place its UK business into administration, rather than make the PR and PPF an improved offer.

Comment

This case illustrates an increasingly common occurrence of how a pension scheme deficit can push an otherwise viable employer into insolvency. It also highlights that the PR is willing and able to disagree with agreements reached by the PPF. The PR may have been motivated to veto the agreement because it felt that a larger lump sum, than offered previously, could have been paid by RDA Inc or that it is of the opinion that a bigger dividend would available to the scheme if the UK businesses be put into administration. The National Association of Pension Funds chief executive has been quoted as saying:

"There is a need for the regulator, at the first appropriate opportunity, to clarify its reasoning for turning down the deal offered, to ensure there is clarity and understanding for all employers running defined benefit pension schemes."

The PR has not officially commented on the reason why it would not approve the agreement and any action that may now be taken by the PR to resolve matters.

Hill Dickinson’s pensions team is experienced in such negotiations with the regulatory authorities should you have any queries in respect of this case.