Pension Insolvency

Since 2005, an insolvency event may cause a scheme to be assessed for and ultimately enter the Pension Protection Fund. Prior to that date, it may have become eligible for assistance under the Financial Assistance Scheme. Insolvency may cause a full or partial wind-up of the scheme.

An insolvency event applies to a wider range of events applicable to individuals, partners, ships, and companies, including formal court-based insolvencies, directors’ and members’ initiated insolvencies, administration orders, and notices.

An insolvency practitioner is obliged to inform the scheme trustees of their appointment within one month. An employer has an equivalent obligation to notify the trustees of the occurrence of any event which is of material significance to the trustees in the exercise of their functions. Failures of compliance are subject to a £5,000 penalty.

The insolvency practitioner or official receiver must communicate their appointments to the Pension Regulator. The Pension Regulator may appoint a statutory independent trustee. See the separate sections on the Regulator in this regard.

The Regulator may provide for payment of the independent trustee’s fees and expenses by the employer from the scheme resources or partly from both.

In certain cases, the pension scheme’s liability may crystallise, resulting in a debt due from the employer to the scheme referred to as a section 75 debt.

If the value of the scheme’s assets is less than the amount of its liabilities, it may trigger this a contingent debt. The triggering event may be insolvency. It will fall due if one of two alternative sets of events takes place. The first is that after that insolvency (or other event), a scheme failure notice is issued and becomes binding. A

fter the insolvency but before the issue of the scheme failure notice, no withdrawal notice has been issued and become binding, and this is not a possibility, and before the scheme failure notice becomes binding, no member’s voluntary winding-up resolution was passed in relation to the employer.

The second set of events is that the winding-up commences before a scheme failure notice or withdrawal notice is issued and becomes binding or before a voluntary winding-up is passed. Once the debt ceases to be contingent, it is deemed as arising immediately before the relevant event, here the insolvency. It is equal to the difference in value between the scheme’s assets and liabilities. More complex provisions arise in multiemployer schemes.

Insolvency is likely also to trigger a PPF assessment in relation to the scheme or part of the scheme. The PPF may exercise the trustee’s rights in relation to PPF claim to the exclusion of the trustees. The section 75 debt is not preferential.

If there are arrears of contributions due at the time of insolvency, some of these may be preferential debts under insolvency law. Employee contributions deducted are not yet paid over (effectively fiduciary/trust monies). Unpaid employer contributions up to 12 months before insolvency are preferential. They are preferential at 3% for contributory earners and 4.8% for non-contributory earners.

The pay contributions may be recoverable from the scheme in certain cases as unlawful preferences. This follows from the general principle that a person may not favour certain particular creditors on the eve of insolvency to the detriment of their creditors generally. The administrator may be in a position to exercise the company’s powers in relation to the scheme.

Administration and other insolvency may lead to the end of employer contributions. Contracts of employment may terminate, and so there is likely to be often no further employee contributions.

Certain unpaid contributions may be recovered from the national insurance fund. Where they fall to be paid by the scheme’s employer, they include contributions payable to the scheme or personal pension scheme by an employee of both on its own account and on behalf of an employee where the employee contributions have been deducted from salary but unpaid. There is a cap, which is broadly 12 months’ contributions, 10% of total remuneration, or the amount necessary to meet the scheme’s liabilities, whichever is less.

The Pension Protection Fund is designed to give members of eligible defined benefit pension schemes protection where the qualifying insolvency event occurs and there are insufficient assets to cover the PPF prescribed levels of compensation. The scheme must be eligible. For a qualifying insolvency event and its assets must be less than its protected liabilities.

An eligible scheme is one, an occupational pension scheme that is not a money-purchased scheme and not a prescribed scheme. Prescribed or excluded schemes cover many governmental section schemes for reasons that will be readily apparent.

If trustees enter an arrangement with the employer to settle a section 75 debt, this will generally disqualify the scheme from being eligible for PPF if it reduces the amount of debt due to the scheme under the statutory debt above. Prior to the commencement of the PPF assessment period, trustees may compromise a section 75 debt without preventing PPF entry.

This is provided the scheme’s actuary certifies PPF in relation to the effect of the compromise, and PPF determines whether to validate the estimate and statement. This may happen if it is the best alternative in the circumstances. It is also possible to enter an arrangement under section 425 of the Companies Act without prejudicing a section 75 debt. The PPF itself may compromise a section 75 debt.

A scheme may enter PPF if itself is a qualifying insolvency event or is unlikely to continue as a going concern and meets the prescribed requirements under pensions legislation. This will trigger commencement of a PPF assessment period.

If the value of the scheme’s assets before a qualifying insolvency event is less than its protected liabilities, it may enter PPF. Protected liabilities include the cost of securing benefits for members corresponding to compensation, which will be payable in relation to the scheme if PPF assumes responsibilities, liabilities of the scheme which are not liabilities to members and estimated cost of winding up.

A scheme may enter PPF after it goes through an assessment period. It commences on insolvency and may enter the PPF. It ceases to involve when the trustees receive a transfer notice or when certain conditions have been met, where there are sufficient assets to meet protected liabilities.

During the assessment period, PPF assesses the value of the scheme’s assets and liabilities, predicted liabilities and to whether a scheme can be put into effect.

The IP is to give a notice, a scheme failure notice to the effect that the matter is either not being validly compromised or the employer is not continuing as a going concern and no other person has assumed responsibility for the pension liabilities.

A withdrawal notice may issue to confirm that a scheme rescue has occurred. If this occurs, the PPF will cease to be involved, and the assessment period will come to an end.

The PPF then issues a determination notice approving the IP’s notice if it is satisfied that the notice is validly issued.

The PPF then issues a notice regarding the status of the scheme. It obtains an actuarial valuation at the relevant time, i.e. before the qualifying event to establish whether the scheme’s assets are less than the protected liability. The PPF may approve the valuation and give notice that it is valid, that it is binding.

The PPF may give a transfer notice where it is required to assume responsibility for the scheme. This must be given to the trustees, the regulator, and any insolvency practitioner. The PPF then assumes responsibility for the scheme.

The effect is that the property rights and assets and liabilities are transferred to the PPF, trustees are discharged, and the PPF is responsible for securing compensation.

There are restrictions on the scheme during the assessment period. No new members may be admitted. No further contributions other than those due to be paid before the assessment period may be made. No new benefits may accrue. The winding up of the scheme may not commence.

No transfers are to be made from the scheme, and no steps can be taken to discharge other member’s liabilities except in limited circumstances. Benefits payable to members must be reduced in line with PPF compensation level.

The PPF may make directions to relevant persons including the employer, trustees, and administrators during the PPF assessment period. This may be even in respect of investment of the scheme’s assets, expenditures, amendment of rules, discharge of liabilities, conduct of legal proceedings.

There are limitations on benefits that may be paid during the PPF assessment period. They must be reduced in line with the PPF compensation levels.

PPF compensation depends on the agent status of the member prior to the assessment aid. In that case of individuals reaching normal retirement date or in receipt of survivor’s or ill health benefits, compensation is paid at 100%.

In the case of individuals who have not reached normal retirement age, a 90% compensation applies. This includes persons below retirement age, who have taken early compensation.

In the case of those limited to 90%, there is a compensation cap which varies with age being approximately £35,000. This is subject to annual CPI increases.

PPF will cease to be involved and will on the occurrence of the first withdrawal event after the assessment period. There may be a withdrawal event if there is a scheme rescue (see above). PPF is not satisfied the scheme is eligible throughout the period or was established in order to gain PPF entry or no insolvency event has occurred or is likely to occur.

PPF is not obliged to assume responsibility for a scheme if its assets at the relevant time are equal to or more than the amount of its protected liability.

The PPF establishes reviewable matters including determinations or issuing of notices. There is a separate PPF Ombudsman, who may investigate and reconsider decisions by the PPF.

The position is more complex in respect of multiemployer schemes. The rules are modified, with different provisions applying to segregated and non-segregated schemes. The same broad principles apply but detailed special provision is required to reflect the nature of the schemes.

There may be a partial winding up, which itself triggers a segregation of assets. Segregation requirements may be triggered for the purpose of PPF rules. The segregated part is treated as a separate scheme.

The PPF is not guaranteed by the government and is funded by levies on eligible schemes. The levy is calculated by reference to risks of insolvency in accordance with risk assessment criteria which it uses.

The regulator may approve PPF taking an equity stake in return for assisting pension scheme liabilities. It may do so if this will produce a greater recovery than an alternative. A number of instances have taken place within recent years under voluntary arrangements. The Regulator has powers which it may use to reduce moral hazard, the existence of the PPF might otherwise create.

A contribution notice may be issued requiring payments of a sum specified. A financial support direction requires a business to secure financial support is put in place for a scheme within a period specified.

The regulator will give warnings of its intention to exercise powers which may persuade the employer to support the relevant scheme where required. The issue has arisen in the context of pre-packaged insolvencies where the schemes are arranged in prejudice of the pension liabilities.