Concerns are growing that firms may be using the insolvency system to renege on the pension promises they've made to members of defined-benefit (DB) pension schemes. Almost one in five schemes now run by the Pension Protection Fund (PPF), the lifeboat scheme for the pension plans of failed companies, ended up with it following a "pre-pack" administration procedure, with £3.8bn worth of pension liabilities passed on in this way, according to research published by the FT.
Pre-pack administrations are a controversial area of the insolvency system, since they enable businesses that are struggling financially to continue trading after shedding many of their liabilities, including their pension scheme responsibilities. Such businesses are typically sold once they are freed from such liabilities but in some cases, the buyer may be an existing director or owner.
The claims follows a series of controversies over pension scheme problems at struggling companies, including bed retailer Silentnight and turkey farmer Bernard Matthews (see column on the right). PPF chief executive Alan Rubenstein has already warned that pre-packs "can be used inappropriately to dump the company's liabilities, including the pension scheme", while MPs from the House of Common's Work and Pensions select committee said last year that pre-packs could be a way of "ripping off pensioners".
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For businesses concerned about the cost of a DB pension scheme, finding a way to pass this on to the PPF has obvious attractions. However, such deals are to the detriment of scheme members those who have yet to retire are instantly subject to a 10% reduction in the value of their pension benefits. There is also mounting concern about the cost of the levy charged to fund the PPF, which must be paid by employers with DB schemes.
The Pensions Regulator and the PPF have legal powers to prevent abuses of the administration rules, with businesses expected to engage with both organisations prior to a pre-pack arrangement or sale. However, critics say the law isn't strong enough and believe pre-pack rules need to be reconsidered.
Bernard Matthews ditches pension scheme liabilities
The administration of food producer Bernard Matthews is the latest case to prompt calls for a rethink of how the pre-pack administration rules relate to pensions. The loss-making business was until recently owned by the private equity investor Rutland Partners, whose ambitions of exiting the firm faced possible frustration because of a £20m deficit in its pension fund.
However, after placing the firm into a pre-pack, Rutland was able to sell the firm to the food tycoon Ranjit Boparan. Some £39m of the £87.5m sales proceeds went to Rutland, with the remainder used to settle debts to other creditors. However, the Bernard Matthews pension scheme, including its deficit, has been passed to the Pension Protection Fund (PPF).
The deal has been criticised by MPs, particularly since Boparan has subsequently revealed that his initial offer for the company, including its pension liabilities, was rejected. This first offer would still have financed a full repayment of Bernard Matthews' banking creditors, but would have meant Rutland received a much smaller sum.
"It's clear that the former owners passed up a better deal for pension scheme members in favour of lining their own pockets," said Frank Field, the MP who chairs the Work and Pensions select committee. Trustees of the Bernard Matthew scheme and the Pensions Regulator are now looking into how it was funded. The scheme is currently in a two-year assessment period prior to its entry into the PPF.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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