Whilst the practical implications of Brexit have some way to be resolved for Theresa May and her cabinet, it is fair to say that enough time has elapsed to assess at least some of the impact on UK businesses and their balance sheets. It will most likely be many years before the impact is fully known but one group of businesses and organisations that have been hit especially hard is those operating a Defined Benefit (“DB”) pension scheme.
A DB pension plan is a type of pension plan in which an employer promises a specified pension payment, lump-sum (or combination thereof) on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, DB pension schemes are associated with mainly governmental and public entities, but importantly these affect a great many corporations which often include those that have been previously been part of the public sector.
The key area of the DB pension scheme market affected by Brexit is the way in which pension liabilities are affected by gilt yields. Gilt yields fell and have continued to fall since the Brexit vote and has resulted in the combined liabilities of UK pension schemes rising to an all-time high of £2.3 trillion on 1 July 2016*. To put this into context, this resulted in DB pension scheme deficits rising 12.7%* on 1 July 2016 alone, from £830 billion to £935 billion.
DB pension schemes are required to produce a valuation at least once every three years and the impact of the Brexit result and subsequent effect on gilt yields could have a potentially devastating impact on any schemes where this falls in late 2016 or beyond. Any Scheme Actuary has twelve months from this triennial anniversary to produce the valuation which has to be subsequently represented in any future accounts. This will undoubtedly lead to some difficult negotiations with Trustees and ultimately has the potential to bring solvency of a business or organisation into question. Undoubtedly, some businesses or organisations will face either a major financial re-structure, via either an informal arrangement or an insolvency event, as a result of Brexit impact on their DB pension schemes.
In 2016, KRE Corporate Recovery LLP (“KRE”) were asked to provide advice to a non-profit organisation with in excess of 100 employees. This was an organisation that was part of the public sector until the early part of the 1990s and these employees were pre-dominantly members of a DB pension scheme with long service records. At the stage of taking the initial advice, which came about as a result of the organisation losing a major national contract, the Company’s DB pension deficit stood at approximately £20m.
Paul Ellison and Rob Keyes were ultimately appointed Administrators and, as part of the appointment, were responsible for overseeing the handover of the majority of employees to the new service providers, alongside the wind-down of the organisation’s activities and realisation of the various assets. At the time the final employees were made redundant and the value of the DB pension scheme could be formally assessed, the deficit has risen to £45m, a huge 125% rise from the previously available assessment.
The key advice to any business or organisation in a similar position is to take early advice from a Corporate Recovery professional to understand the full position alongside the future landscape. Ideally, this should take place prior to entering into complex negotiations with Trustees and other stakeholders. Also, directors need to be aware of their own responsibilities with respect to potential claims against them, including wrongful trading. It is also worth noting that the Pensions Regulator will not look kindly on Employers using the Pension Protection Fund as an easy get out from their liabilities and again we would stress the importance of having a professional on your side with respect to any discussions with the regulatory bodies.
Alongside significant experience in dealing with all types of formal and informal corporate recovery events, KRE will work alongside leading pension and legal professionals to ensure that any business or organisation in a similar scenario is given the best advice in all areas of the process and that the interests of all stakeholders, including the pension scheme, employees and other creditors, are properly considered.
* Source: Hymans Robertson (an independent pensions consultancy)