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Regulated Apportionment – A lifeline for employers?


Most economic commentators are now upgrading their growth forecasts on the back of a steady flow of positive news over the last few months with increased activity in the manufacturing, construction and service sectors. Mark Carney, the Governor of the Bank of England has just announced upgrades in growth predictions from 1.4% to 1.6% for 2013 and from 2.5% to 2.8% for 2014. He considers that the recovery has finally taken hold and that the improvement has now to be sustained.

Despite this wave of optimism, there are still grounds for caution. The landscape of easy access to capital, cheap imports and overall confidence which helped to boost the UK economy, prior to the financial crisis, has been seriously undermined.

There continues to be fall-out from the depths of the recession. Analysis prepared by R3, the trade body for the UK’s insolvency practitioners, indicates that there are over 200,000 businesses that are either negotiating with their creditors or struggling to pay debts when they fall due. This includes 100,000 “zombie businesses” just managing to service interest on their debt but not the debt itself.

Many operators of defined benefit pension schemes face similar cash flow challenges, in preparing realistic recovery plans, to service deficits which have risen significantly with pensions liabilities increasing because of falling gilt yields.

The Government recognises the difficulties faced by operators of defined benefit schemes and is introducing legislation whereby the Pensions Regular (tPR) will have a new statutory objective to minimise any adverse impact on the sustainable growth of an employer. Steven Soper, the interim chief executive of tPR, said “Where businesses are in a distressed state, we’re prepared to be creative and work collaboratively with pension trustees and employers to explore the options in order to find viable outcomes. These situations are often complex and we encourage trustees and employers to approach us at an early stage if they are experiencing financial difficulties that threaten ongoing support to the scheme”.

One mechanism whereby an exit-route may be available to directors (who would have a viable business if it were not for pensions obligations, often committed to in periods in which prevailing economic circumstances and longevity predictions were very different from those faced by employers today) is a statutory process called a regulated apportionment arrangement (RAA).

The actual power to sign off on a RAA sits with tPR, but in practicality, both tPR and the PPF need to be in agreement for a successful approach. If a valid case can be put forward, it allows an employer to transfer the scheme to the PPF without disruption to its business.

The PPF is at pains to emphasise that it is not a dumping ground for unwanted schemes, nor a business support operation for UK plc. Richard Favier, the recently retired head of insolvency and restructuring at the lifeboat organisation, said that “levy payers should not be footing the bill for a scheme that they wouldn’t otherwise have to pay for, so we have to be satisfied we will get the scheme at some point anyway. If not, we shouldn’t go any where near it”.

There are three general principles that the PPF follows in assessing whether it can agree to a RAA.
Firstly, tPR has to be satisfied that an employer cannot fund a scheme fully, that all scheme funding options have been exhausted and, consequently, the insolvency of the employer is inevitable.

Secondly, the deal must provide for a “demonstrably better” outcome for the PPF than would be achieved if the employer became formally insolvent, through Administration or Liquidation. Guidance is not given on what might constitute a clearly better deal for the PPF; this is negotiated commercially, according to the specific circumstances of an employer.

The final principle is a very subjective one to measure, in that the PPF must be satisfied that any deal is fair, after considering the interests of the employer’s other creditors.

The tests set by the PPF are stringent and it can be difficult for an employer to get a proposal across the line, particularly if the circumstances faced by an employer and a scheme are complex. Only a relatively small number of deals, around fifty, have been approved since RAAs were introduced in 2004.

The case of Barrie Knitwear, a clothing manufacturer in the Scottish Borders, attracted press comment when Dawson International, its parent  company, went into administration following the break-down of negotiations with the PPF.

David Bolton, the Chairman of Dawson International, strongly criticised the PPF for rejecting proposals to resolve the company’s £129m pension deficit, saying that there had been “a flawed process, lacking in common sense and transparency”.

The PPF reiterated its policy in a statement saying: “On rare occasions, we will – alongside the Pensions Regulator – consider transactions which allow a company to continue to operate with the pension scheme being taken on by the PPF. We do not enter such arrangements lightly and only agree them if a number of stringent tests are met. Unfortunately, in this case the offers made to take on the pension scheme, given the size of the deficit in the scheme, were inadequate”.

Jackal Advisory has advised both employers and trustees in connection with proposed RAAs. It is essential that proposals are thoroughly considered by employers as substantial costs can be racked up formulating and reviewing a proposal, sometimes in situations where there can be little prospect of it being accepted by tPR and the PPF. On the other hand, there can be significant benefits to both an employer and a scheme if a viable proposal can be put together, which meets the regulators’ criteria.

Finally, let us look at some of the factors that could help aid, or otherwise, a Regulated Apportionment Arrangement.

Positive factors:

  • The employer has pledged its assets as part of a wider banking facility, meaning the return to the scheme is likely to be negligible, if anything.
  • A third-party can make a payment to the scheme or PPF.
  • Intellectual property / contracts are held by the wider group, rather than the employer.
  • The core business is owned and operated offshore.
  • The mitigation made available to the PPF is significantly above the value of the employer on insolvency.

Detrimental factors:

  • Scheme deficit is relatively small, or insolvency of the employer would be deemed ‘low profile’.
  • No evidence of ‘PPF drift’.
  • Charities and ‘not for profit’ employers, especially, are likely to find it difficult to fund a large enough mitigation payment.
  • TPR believes that there is a high probability of a larger recovery, via use of its ‘moral hazard’ powers against connected parties.
  • Banks, or other core creditors, are not willing to share in any losses.

To discuss any of these issues we raise in this piece, please feel free to make contact with us.

Category : Employer Covenant — admin @ 8:21 am November 25, 2013

Reading between the lines of TPR’s ‘Annual Funding Statement ‘

Earlier this month, the Pensions Regulator (TPR) released their second ‘Annual Funding Statement’, which created a great deal of buzz around their ‘new-found flexibility’.

Right off the bat, let me say that there is NO NEW FLEXIBILITY. What we have seen from a large section of the Industry is the usual ‘king’s new clothes’ reaction, to any missive from Brighton, from those that don’t know how TPR works. There has ALWAYS been flexibility in the system. I know, because my colleagues and I have been there, seen it and employed it ourselves

Whilst I’m talking about Industry misunderstanding, I have to mention the 10 year trigger, as I have done many times before. It is and always has been a trigger. Not a target. It was a way that TPR could quickly split the data they received into two, broad piles. How many of you, in the early days of Scheme Funding, received a very quick response when a 9 year 6 month recovery plan was submitted? Quite a few, I’d wager. It was never a bar that had to be kept under, like a financial limbo competition. So, when TPR says they are “moving away from setting triggers focused on individual items”, it is not a huge step for them. They’re probably just sick to the back teeth of trotting out the ‘trigger not a target’ line!

Now, let me address the remainder of the statement. In short, it follows a similar brief to last April’s release, in that it collates previously available information/guidance and brings it together in one place, to encapsulate current regulatory thinking. Not ground-breaking, but certainly a useful summary, for us to gauge where TPR’s thinking is at.

Covenant and affordability remain at the heart of the funding process, with an increased focus on investments. TPR have named this “Integrated Risk Management”. This is what Trustees and Employers should have been doing since the start of the Scheme Funding regime. So, whilst there is little we have not heard before, there is a new abbreviation to add into the mix – IRM.

Employer Strength
We have always said that the strength of the employer, along with their ability to make good the scheme deficit, is the key factor to be considered. Pre and post retirement discount rates are part of that, as is the investment strategy for the scheme. Let me use a rather extreme investment strategy, to underline that point – if the Trustees were to place all (or part) of the scheme funds on the Epsom Derby, how able is the Employer to replenish the funds if the horse doesn’t win? If the answer is ‘very’, then Trustees may wish to look at a more adventurous investment policy. If the answer is ‘highly unlikely’ or ‘not at all’, the Trustees need to exercise greater prudence.

Future Changes
An autumn consultation is in the offing which, we are told, will include TPR’s regulatory approach and how they assess risk. I can’t encourage you enough to take part in this, if you have the time to do so – I know I certainly will. It is far too easy to hit the regulator with brickbats, without providing constructive feedback when the opportunity arises. We may not all get what we want from the consultation, in fact I’d pretty much guarantee it (TPR has to take an objective approach based on the overall good, rather than any vested interests) but that should not be a barrier to participation.

I mention ‘objective’ in the previous paragraph, so it would be wrong of me not to address the spectre at the feast being TPR’s new objective. The Chancellor said in his budget statement that “The Government will provide The Pensions Regulator with a new objective to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation”.

The draft 2013 Pensions Bill provides further clarification stating that, when carrying out its scheme funding duties, TPR should “minimise any adverse impact on the sustainable growth of an employer”.

I will cover this in full, in a separate newsletter, when the regulator indicates how it intends to interpret the new objective. In the meantime, I shall say this. The Chancellor provided a significant caveat in his speech, when he says growth should be supported where “…fully consistent with the 2004 funding legislation…”. In other words, TPR can carry on regardless…unless BIS or No. 10 decide to get involved. ‘Twas ever thus!

Category : Employer Covenant — admin @ 9:20 am June 12, 2013

Pressures on DB scheme affordability and the options available to trustees and sponsors


What I am about to say, will come as no surprise to the vast majority of you reading this newsletter. Employers, in the main, are currently faced with increased financial pressure. Not the most earth-shattering statement I have ever made, especially with the added burden of Auto Enrolment on the minds of Finance Directors up and down the country. However, because of these financial constraints the pressure naturally increases on trustees, especially in negotiating their triennial recovery plan.

Category : Employer Covenant,Uncategorised — admin @ 10:49 am October 23, 2012

Life changes affect pensions “opt-out” decision

Jackal’s Simon Kew was recently asked for his thoughts on a prediction by an industry body that up to a third of staff may opt out of auto-enrolment schemes.

Speaking to the Financial Times, Simon suggested that a report report by National Association of Pension Funds (NAPF) suggesting high opt-out rates for new auto-enrolment pensions could be caused by changes in employee lifestyles.

“Those returning from maternity leave or career breaks will no doubt have additional drains on their finances, so will pull out”

The full article can be read here (registration required).

Category : Employer Covenant,Savants in the News,Uncategorised — admin @ 3:59 pm September 17, 2012

Simon Kew explains the importance of employer covenants in a challenging economic environment

With reports that the economy is once again in a downward spiral, we look at how we should be protecting our assets.

After yet another report of negative growth from the National Office of Statistics, Simon Kew explains how looking after your pension is more important than ever. (more…)

Category : Employer Covenant — admin @ 4:05 pm August 22, 2012

Simon Kew on changing the culture of UK spending to saving

Writing in Financial News in August, Jackal’s Director of Pensions, Simon Kew, sets out his thoughts on how to help change the culture of the UK from spending to saving, through education and auto-enrolment.

The full article can be found here, on the Financial News website, but is copied below for convenience. (more…)

Category : Employer Covenant,Savants in the News — admin @ 6:41 pm August 7, 2012

Jackal Advisory’s Director of Pensions, Simon Kew, speaks to the Financial Times

On the July 15 edition of the Financial Times, Simon was asked for his views on pension funding calculations.

He said “if a scheme’s employer has a strong covenant and support commensurate with that [they could consider] taking into account gilt yield reversion.”. Putting it more basically, Simon added this advice to trustees “if you’re being optimistic, make sure you have some back-up if it goes wrong”.

The full article can be read here.

Simon has also recorded a video for the newspaper’s SchemeXpert website, where he discusses the benefits of a covenant adviser being present during scheme funding negotiations. Ever mindful of keeping costs down for trustees and employers, therefore preserving funds for the pension scheme Simon states, amongst other things, that the right adviser can be very helpful to the process, but they should only be called in when appropriate. The adviser “should not be sitting in the corner with nothing to do” as that can be very costly and unrewarding.

The video is available here

Category : Employer Covenant,Savants in the News,Uncategorised — admin @ 10:58 am July 25, 2012

Pensions Week: The National Audit Office’s thoughts on DC regulation

Jackal Advisory’s Simon Kew was recently asked to comment on recent statements by the National Audit Office concerning defined contributions schemes having too many regulators.

In short, the NAO’s recently published review noted that the abundance of regulators for DC schemes made “regulating schemes, setting them objectives and measuring performance wasteful”.

The review highlights the lack of integration between the regulators – namely the FSA and the Pensions Regulator – and the difficulty as a result, in evaluating of the Pensions Regulator’s work in protecting the benefits of work-based pension schemes.

Simon Kew sees an opportunity for a “land grab” from the FSA in the wake of the report, but notes that “huge amounts of money would need to be poured in to enable it to expand”.

The full article can be read on the Pensions Week website.

Category : Employer Covenant,Savants in the News,Uncategorised — admin @ 9:50 am July 17, 2012

TPR Statement

Simon Kew - Director of PensionsOn Friday, The Pensions Regulator (TPR) issued its long-awaited statement on pension scheme funding and how valuations should be approached, in the current economic climate. The 33 points issued by TPR, are at the end of this newsletter.

I thought it may be helpful to provide Jackal Advisory’s initial thoughts on the statement, based on our considerable experience of TPR and of the issues being faced by trustees and employers.

In short, the statement does not appear to change the regulator’s position. Undertake an assessment of covenant, which allows the scheme actuary to advise on appropriately prudent assumptions. These assumptions, which include the assumptions on investments, provide a Technical Provisions ‘target’ which will be reached over a number of years, determined by what is ‘reasonably affordable’ for the sponsor to make available in deficit repair contributions i.e. the recovery plan. (more…)

Category : Employer Covenant — admin @ 10:32 am May 9, 2012

Pensions World: DB Who is Responsible

Pensions World - April 2012

Pensions World - April 2012

Simon Kew’‘s latest piece for Pensions World focuses on the trustees’ duty to identify the statutory employer, along with potential problems that might arise should the trustee not understand who is legally “on the hook” for paying part or all of a pension scheme’s liabilities.

Read the full article on Pensions World

Category : Employer Covenant,Savants in the News — admin @ 12:14 pm April 11, 2012

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