Corporate Insolvency and Governance Bill 2020 receives Royal Assent followed by new PPF regulations
The Corporate Insolvency and Governance Act 2020 (the "CIGA") came into effect on 26 June 2020. The CIGA made a number of changes to the insolvency regime however, the key parts of the Bill which caused debate centred on the potential effects of the CIGA from a defined benefit ("DB") pensions standpoint. The changes made are discussed in this article along with the potential impact of the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 (the "PPF Regulations") which were brought in on 6 July 2020 and amended on 23 July 2020.
The new processes
The new moratorium allows a breathing space from enforcement for a period of an initial 20 days (extendable up to a year with court approval) subject to applicable tests regarding potential for rescue being satisfied. It is not a formal insolvency process.
- Restructuring Plan
- what reliefs may be available, such as an extension of time for performance; and
- whether terms should be renegotiated to preserve the viability of such contracts.
- the “super-priority” status for lending debt on a post-moratorium insolvency (even if the debt is accelerated during the moratorium);
- lending debt would continue to be payable during a moratorium but pension scheme deficit contributions might not; and
- neither the proposed moratorium nor the restructuring plan was an “insolvency event” for PPF purposes so the PPF would not step into the pension scheme's shoes to vote, as they do on (say) a CVA.
- There is now better clarity as to which debts will have 'super-priority' status (in any administration or liquidation which occurs within 12 weeks of a moratorium). The amendments prevent lenders gaining super-priority for debt which is accelerated during the moratorium, though this will not necessarily prevent a lender accelerating its debt before a moratorium and gaining that super-priority.
- Lending is still considered to be pre- moratorium debt without a payment holiday and repayments must therefore be made as they fall due during a moratorium. Lenders also remain entitled to accelerate their loans during the moratorium bringing it to a premature end.
- Under CIGA and the new PPF Regulations, where an eligible DB pension scheme is in play:
- The PPF and TPR will be entitled to certain notifications as if they were creditors;
- subject to consultation with the trustees, the PPF will now step into the shoes of the trustees to participate in decisions as to moratorium extension and challenges to the directors’ actions.
- in relation to a RP, certain rights are exercisable by the PPF in addition to the rights of the trustees, and the PPF will now step into the shoes of the trustees to vote (again, subject to consultation with them).
- In recent years, we have seen the combination of Trustees, the PPF and TPR being a force to be reckoned with at the restructuring/insolvency table (in cases such as BHS and Toys R Us). In circumstances where the government has been looking to further strengthen that force by enhancing TPR's "moral hazard" powers, this Act seems out of place. However, it is plainly driven by a short term need to keep corporates going in a time of crisis. Perhaps unsurprisingly (given the legacy status of most DB schemes), the pension scheme is considered insufficiently core to the business to warrant protection in those circumstances. Perhaps also, the PPF has been a victim of its own success (in having generated a healthy funding position) and that has led the government to think it can cope with lower recoveries. Frank Field has also lost his seat.
- Trustees can only hope that:
- the ultimate result is that more businesses do survive to offer the DB scheme support over the long term; and
- the Act's impact is closely monitored and the regulation making powers are further used if needs be to ensure the DB scheme is not thrown under the proverbial bus.
- In the meantime, it is likely that both trustees and TPR are going to be adding an extra layer of caution to any funding discussions and looking for things like fixed security to help put them up the pecking order.
First rectification of pension schemes after landmark decision in 2019
Rectification of the Univar Company Pension Scheme has been granted in the first claim of this type to be decided since the Court of Appeal's landmark decision in FSHC Group Holdings Ltd v GLAS Trust Corp Ltd.
The Claimant was seeking rectification of the 2005 definitive deed and rules from 13 March 2008 ("2008 DDR"). This included increases to pensions in payment and revaluation of pensions in deferment to be calculated by reference to the Retail Prices Index (RPI).
Univar argued that it never intended that the 2008 DDR would "hard code" RPI as the basis for calculation of pension increases and that the departure from the previous DDR position (which simply tracked the statutory requirements) was due to a drafting error.
In making his decision, the judge set out the law on rectification of pension scheme documentation. He noted that rectification amends documents so that they reflect the true intention of their drafters. This is available where there has been a mistake as to the legal effect of the words used.
The judge held that based on the evidence, it was clear that neither Univar nor the trustees had intended the pension increase rules in the 2008 DDR to have the legal effect that they did. He noted that such a significant change in approach would have been included in the schedule of changes supplied by the drafters of the 2008 DDR, and this had not been the case. As such, the rectification was granted.
Consultation on Public Service Pensions OpenedA consultation has been opened by the government relating to the 2015 public service pension scheme reforms. These reforms included the fact that those within 10 years of retirement would remain in their legacy pension schemes in order to give them transitional protection and certainty. In 2018 however, the Court of Appeal found that this part of the reforms was unlawfully discriminatory. Younger members of the judicial and firefighters' pension schemes were held to be discriminated against under the reforms due to the fact that the transitional protection was only offered to older members of schemes. The proposals in the consultation seek to remedy this.
It is proposed that members will have the option to choose between the legacy or reformed scheme in respect of their service between 1 April 2015 and 31 March 2022. Views on this proposal are requested in the consultation. There are two potential approaches to this:
- an immediate choice
- a deferred choice underpin (DCU)
These differ in terms of the point in time at which the decision of whether the member choses between the legacy or the reformed scheme is made. With immediate choice, the members would make the decision in the year or two after the point of implementation in 2022. Under DCU however, the decision would be deferred until the point at which the member retires. Both of these options will rectify the issue of discrimination highlighted by the court.
The consultation will run until 11 October 2020 and will allow the government to explore stakeholders' views on both approaches, and to understand the issues relevant to them.