2017 March 17 by Sarah Moppett
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)
2016 September 9 by Sarah Moppett
Insolvency in the 1980’s and 1990’s was much simpler. Working in those days for a “Big 5” bank panel accountancy firm, you would receive a call from a Bank looking to appoint the old Administrative Receiver to a company. If the company had sufficient assets and potential goodwill value to justify trading, then a Receiver was appointed and the business advertised for sale as the Receivers traded for 3-6 weeks. If trading was likely to result in losses, then more often than not the company went into liquidation and the business closed.
Trading by Receivers was often expensive and Banks unsurprisingly began to look for buyers for the business before making the decision to appoint a Receiver. If the Bank was in a big shortfall position then as the secured creditor the price could in certain circumstances be dictated by the Bank. If no obvious buyer was evident, then the Banks began to engage Insolvency Practitioner (“IP”) firms to look for buyers and the “pre pack insolvency” came into being.
The reason for the walk down memory lane was to point out that there were often good commercial reasons for the pre pack. IP costs were significantly reduced, the business did not deteriorate in a trading insolvency situation, the IP did not have to find funding for the trading period and more often than not a better overall outcome was achieved.
However, where the purchase price was close to a Bank’s the secured debt, then issues arose. The responsible IP sought to protect his position by insisting on appropriate marketing. More often than not the sale was not to a connected party as the secured lender preferred not to risk their Newco lend with the same management.
The real issues began when the process became director led, and in specific industries (printing for example) where the line between pre pack and phoenix became blurred. The outcry from printers who had been in business for many years, paying suppliers, landlords and taxes and then competing against “Phoenix (2002) Limited” was understandable.
The Graham Report published in June 2014, and effective from 2 November 2016 introduced the Pre Pack Pool (PPP”). The PPP are 20 unconnected, impartial and experienced business people who are available, on a voluntary basis, to scrutinise and consider the appropriateness of a connected party’s bid in a pre pack process. The thought process behind the introduction of the PPP was to provide transparency to the process.
There are many criticisms of the process;
- The process is voluntary and it is the connected purchaser rather than the Administrator who makes the submission. The threat is that the Government has reserved the right to ban connected party pre packs outright within the term of this Parliament if the voluntary regime proves ineffectual. Indeed R3 have the view “If the conditions are appropriate, a pre pack can be advantageous for all involved and can be the best way of extracting value from a dire situation” The Graham Report has already concluded that pre packs are a valuable recovery tool, and the threat is unlikely to concern any director looking to reacquire his business in the current regime.
- The PPP will conclude its report giving one of three prescribed opinions;
- Not unreasonable to proceed
- Not unreasonable to proceed but with minor limitations in evidence; or
- Case not made
Duncan Grubb, a director of PPP Limited recently, commented in Recovery Magazine “In Iaymans terms I suppose this could be referred to as a “this is not a stitch up “certificate”. As no reasons or explanations will be given by the PPP to the proposed Administrators for a case not made opinion, this rather flies in the face of the Government’s wider “Transparency and Trust” agenda. Our point is that the criteria is opaque and if Administrators are uncertain then surely stakeholders will also be uncertain.
- By making the purchaser the applicant, we believe that the process is flawed. In order to give an opinion on the appropriateness of a pre pack, surely the PPP will need to understand competing bids, valuations of assets, alternative options, and other considerations known to the Administrators such as better realisations from book debs as a result of business continuity. In a competitive bidding process an Administrator would be negligent in releasing details of other bids and valuations.
The process is still in its infancy and the only information available to date is that since inception, the PPP has been utilised 20 times, involving businesses of varying sizes and sectors, and the opinions in all but three cases were positive (“no reason not to proceed”), with the remaining three being “no reason not to proceed but with minor limitations in evidence provided”. Information on the total number of connected party pre packs is currently being compiled and will be published shortly. Our personal experience is that once directors are aware that the process is voluntary, there is little appetite to embrace it. On three occasions we have traded the business for around 2 weeks whilst marketing the business for sale, and on all three occasions management were successful in the bidding process as the only bidders, mainly because without them there was no business. In truth, the success or not of the PPP process will be difficult to gauge other than if directors do not utilise it in the majority of cases.
Whilst at KRE we will continue to recommend that directors embrace the process, our general opinion is that the process cannot be voluntary, the applicant should be the proposed Administrator, and the PPP needs to be transparent and answerable for its opinions. It is accepted that this will add cost (but not necessary delay) to the process. The fundamental problem is that Administrators have a duty to maximise relations, and in many cases management, if they are key to the business, will make the highest, and sometimes only bid. In contrast regardless of the transparency of the process, creditors and competitors will feel aggrieved when management buy back a business and leave creditors behind.
2012 October 31 by Sarah Moppett
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