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Gerald Smith comments on employer insolvencies arising from DB Pension scheme deficits

Author: Gerald Smith
19 April 2012

Commentators on the defined benefits ("DB") pensions sector have, for a long time, observed that we would see a very significant increase in employer insolvencies as a result of their inability to support scheme deficits. Whilst there have been some failures, with the Pension Protection Fund having taken some 600 schemes into assessment over the last 6 years, it has not been the landslide that some predicted. The reason for this probably relates to a number of factors including scheme deficit reduction exercises, the closures of schemes to future accrual and guidance given by the Pensions Regulator ("tPR") to scheme trustees to be pragmatic and to seek to work with employers to maintain support for their schemes.

However, seeking to defer the problem by extending recovery plans, agreeing moratoriums on contributions or undertaking enhanced transfer value exercises and the alike do not solve the problem, especially when underlying scheme liabilities are only increasing. Many employers, already battered by the present economic environment and further weakened by the demands of their DB pension schemes, may be about to be confronted by yet further problems. 

It is my view that as a result of recent developments in the sector, the elephant in cupboard may now take on the guise of an albatross and employer failures, due to pension scheme issues, will 'ramp up' significantly in the coming months. This contention arises from the impact of a number of factors which can be summarised as follows:

• The easing of gilt yields as a result of quantitive easing and its impact on scheme deficits;
• EU Solvency II proposals to require the reduction of risk in pension schemes, and
• The increasing reticence of banks to lend to employers with DB schemes following the Nortel-Lehman judgement.

For many, the combination of these factors may potentially present an insoluble scheme funding problem for the stakeholders which can only realistically be resolved by the formal insolvency of the employer. Also in light of recent statements by tPR it seems that in circumstances where a DB scheme has no reasonable prospect of paying the benefits that have been promised without taking excessive risks that the employer cannot afford to underwrite, then tPR will be more active in taking action to trigger a scheme's buy-out debt and push the scheme into the PPF. This could result in a spate of insolvencies, particularly for smaller schemes. Clearly, at that stage, the focus must switch to rescuing the employer's business, especially if adding to the ever increasing number of unemployed is to be avoided. 

If you are a stakeholder involved with a DB pension scheme and you are confronted with seemingly insurmountable problems, we would be pleased to discuss possible solutions that may be available to you.

If you or your client need to discuss any of the issues above, please contact Gerald Smith on 0121 710 1680 or by email using the online form below.