The defined benefit pension scheme is no longer a creditor – it is also a partner, and needs to work with the employer to keep it alive
In 2005, the Pensions Regulator (tPR) issued guidelines indicating that the pension scheme was a material unsecured creditor and, like a bank, should act like one. This was the foundation upon which all the principles for clearance by tPR were laid, and upon which a host of financial advisers (or some say locusts) entered the pension marketplace to offer their services to bewildered trustees and employers. The market is still behaving under this assumption today. Seven years on, this is not good.
The problem is that the majority of pension schemes are more than creditors; they are partners. How do they find out if they are? If the FD’s estimate of the value of the employer on a going concern sale basis (remembering not to include any group company not legally linked to the employer’s obligations) is less than the actuary’s estimate of the cost of an insurance company taking on the pension liabilities (the s.75 buy-out debt), the scheme cannot afford the employer to be sold. The scheme must be a partner and needs to work alongside the employer to keep it alive. But how?
When banks are in this situation, they swap some of their debt for equity, insist on significant management changes and transfer their credit risk to their specialised work out sections.
So why aren’t schemes doing the same? We believe they should. We would see the rapid emergence of equity-based solutions (what else is there left to take?), with new security structures, which grant schemes much better insolvency protection, but at the same time giving employers – often with rejuvenated management – much more freedom to work their magic in the turnaround plan.
The market is starting to realise this change and tPR will need to act accordingly. A “healthy employer, a healthy scheme” will need new guidelines.
