Among the biggest challenges an IP faces are pension schemes – and auto-enrolment means more pain is on the way, says Alexander Forbes Trustee Services director Nick Boyes.
Sometimes the pension issue can affect IPs in a very real sense. The Nortel/Lehmans ruling is a case in point. The Pensions Regulator decided that the way in which the respective companies had dealt with their affairs amounted to “moral hazard”, in that they had deliberately left the companies that acted as principal employers to the pension schemes with insufficient resources to meet their liabilities.
The regulator used its powers to ‘follow the money’ and imposed Financial Support Directions (FSDs) against the companies, which they considered to be an expense of the insolvency. This, the regulator argued, gave the FSD super-priority over the other claims.
The High Court’s support for this interpretation sent shockwaves through the insolvency world, with some declaring that pre-pack administrations would be rendered obsolete. This was not true, of course, as few firms now have defined benefit pension schemes, but it did put a spanner in the works when there is a scheme of this type.
However, the Supreme Court has recently ruled that FSDs and Contribution Notices are provable debts and thus should join the queue with the rest of the unsecured creditors. This is great news for IPs, but it does highlight the fact that defined benefit pension schemes are complex beasts with the potential to disrupt a company’s plans for restructuring and rationalisation. The potential for tripping over some obscure aspect of trust law is ever present, as is the likelihood that some of the trustees will be severely conflicted.
Understanding the nature of the scheme and structuring the deal with a proper awareness of the ramifications in respect of the pension scheme is vital. Alexander Forbes Trustee Services’ PensionBrief report is a good starting place, and often leads to us acting as independent trustee.
The auto-enrolment issue
Enjoy this moment of respite, however, because a new pensions headache looms large. While laudable in intent, auto-enrolment is going to be a hassle and expense for employers, and IPs must take this into account if a company is going to continue to trade during an administration. They should also note that in the future virtually all companies will have at least one pension arrangement.
Very briefly, every employer will have to have a qualifying pension arrangement, and enrol all ‘eligible job holders’ into it on the company’s Staging Date. Employees can opt out of the scheme, but the employer must have systems to identify these employees and put them back into the scheme in three years’ time. The system must also be able to identify any employees who become eligible, due to crossing age or earnings thresholds, and enrol them into the pension scheme.
The employer must make pension contributions to the members’ pension pots; initially at a rate of 1% of earnings per annum, but increasing to 2% from 1st October 2017, and then 3% from 1st October 2018.
It is unlikely that these obligations will be lifted simply because an IP has been appointed, and they will have to ensure that they are aware of the arrangements that are in place to comply with the requirement, or face potential fines or other sanctions from the Pensions Regulator.
The best cure for this looming headache is to ensure that you have at least a basic understanding of the requirements and can assess the degree to which a company is able to comply. Alexander Forbes Trustee Services has been helping IPs understand their obligations in respect of pension schemes for decades. We can help IPs to prevent this headache developing into a full-blown migraine.
Alexander Forbes Trustee Services Ltd (formerly known as Bradstock Trustee Services) has helped IPs understand their responsibilities in respect of pension schemes for over 30 years, and Nick Boyes has been with them for more than 20. His previous incarnation as a teacher means Nick is adept at explaining the complex issues that can arise in this field. As part of a very experienced team, AFTS is well able to guide IPs and restructuring professionals through the pensions maze.
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