The PPF’s Seven Principles

The Pension Protection Fund (PPF) is the so-called pensions lifeboat, picking up the liabilities of Defined Benefit (DB) pension schemes attached to employers entering into insolvency processes and certain restructurings.

In order to reduce the financial burden of such insolvencies on surviving levy-paying employers, the PPF has needed to be innovative in its approach, to focus on recovering as much value as it can in these scenarios.

Enter the PPF’s restructuring and rescue offering, where in certain circumstances it is not viable for the corporate to continue with the DB pension scheme. In those situations, a Company Voluntary Arrangements (CVA) or a Regulated Apportionment Arrangement (RAA) can be used to decouple the DB pension scheme from the corporate entity.

In some CVAs and RAAs, the PPF will take over a failing employer’s DB pension scheme to enable the business to continue to trade.

How can you be sure that an employer isn’t simply discarding their pension obligations at the expense of other levy-paying sponsors?

The PPF applies the following Seven Principles or ‘tests’ to DB pension scheme restructurings to determine whether to support them:

  1. The Gateway test, is the insolvency of the employer inevitable
  2. Insolvency benchmark, will the pension scheme receive more money or assets than in an insolvency
  3. Equitable treatment, will the outcome for pension scheme be equitable compared to other creditors and stakeholders
  4. Anti-embarrassment equity protection, 33%+ of the equity (or not less than 10%, if future stakeholders are unconnected) in the restructured company to go to the pension scheme/PPF
  5. Moral hazard claims, the pension scheme would not be better off if TPR used its moral hazard powers
  6. Reasonable prospect of success, the proposals are realistic and reasonably expected to succeed
  7. Restructuring costs, of the PPF and the trustees are paid by the party seeking the restructuring.

In an effort to discourage dishonest behaviour, the PPF’s overriding message before agreeing to a restructuring of this nature is for the employer to demonstrate that their DB pension scheme will not be worse off as a consequence.

Are these principles applied appropriately in practice? Do they provide a sufficient deterrent to less scrupulous employers? Are the pension schemes really better off?

Since 2009 there have been circa 30 RAAs. There will always be examples where these restructurings have not gone to plan and the corporate has benefitted more than the members of the scheme, but in general, restructurings via a CVA or RAA can result in a better outcome to members than an insolvency.

The most recent update to the Seven Principles was published in January 2019. There is now a heavier emphasis on the 33%+ of equity sought for the DB pension scheme and on the PPF finding the proposal realistic and reasonable: the PPF is aiming to maximise its returns where a business does succeed post-CVA or RAA, as well as ensure that the business plan will hold out. It is clear the PPF is regularly reassessing and amending its approach as necessary to maximise the benefit to levy-paying employers and their DB pension schemes.

Written by Nick Agius and Flo Gracey

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