The UK pensions industry has warned that emergency measures aimed at helping struggling businesses during the coronavirus pandemic could leave millions of pensioners worse off.
In recent weeks the Pensions Regulator, the Pension Protection Fund and trade bodies representing retirement schemes have raised concerns with the government that the Corporate and Governance Insolvency Bill could have serious unintended consequences for retirement plans and their members.
The legislation, which is being fast-tracked through parliament, aims to ease the burden on businesses hit by the Covid-19 crisis by giving them breathing space of up to 40 days to pursue a rescue plan. During this period they are shielded from legal action and paying debts, including those pursued by the Pensions Regulator for unpaid contributions.
However the pension industry fears that, in its current form, the bill hands too much power to creditors like banks at the expense of pensioners, in the event that a company goes bust with a big pension deficit.
“This new moratorium will make recovering unpaid pension contributions even more difficult than the current situation,” said the Pensions and Lifetime Savings Association, the trade body which represents more than 1,300 workplace pension schemes.
“By the time action can be taken, it may be too late for a DB scheme or the PPF to recover anything.” The PPF is a statutory lifeboat scheme that is intended to protect members if an employer sponsoring a defined benefits pension plan becomes insolvent.
With the new legislation, a concern for the pension industry is that the proposed moratorium risks blowing out an existing pension funding hole, with trustees in a weaker position to recover unpaid contributions.
Currently, if a business goes bust with an underfunded defined benefit pension plan, the scheme has a right to seek funds from the insolvent company with the pension debt ranking alongside other unsecured creditors such as bank loans.
But the draft bill would “dramatically alter” this by giving lending debts that fell due during the moratorium period “super priority”, according to the Society of Pension Professionals, a trade body — effectively pushing pension schemes further down the creditor queue.
“The result is that on a restructuring or insolvency, other unsecured creditors, including defined benefit pension schemes, may suffer materially worse recoveries,” the SPP said in a letter sent to the government this week.
“This outcome will inevitably lead to more pensioners not receiving their benefits in full and greater strain on the Pension Protection Fund.”
The trade body said the new measures raised the “serious risk of systemic dumping” of DB pension schemes by financially distressed companies because the proposals weakened the influence of both trustees and the PPF during restructuring talks.
“Currently, trustees and the PPF are able to get a seat at the table during restructuring talks, but it is more difficult for them to do so under the new rules,” said Tiffany Tsang, senior policy lead on DB schemes at the PLSA.
Since 2005, the PPF has recovered more than £3bn from failed businesses. This cash has been used to help fund compensation payments to hundreds of thousands of members transferred to the pensions lifeboat, which is mostly funded by a levy on solvent schemes.
A PPF spokesperson said: “We’re working closely with [the] government to address the concerns that have been raised about specific provisions in the bill, and to make sure pension schemes and the PPF aren’t disadvantaged.“
A spokesperson for the Pensions Regulator said: “We can confirm we are working closely with the government and the Department for Business, Energy and Industrial Strategy and we are very mindful of the concerns the industry have expressed around the Corporate Insolvency and Governance Bill.”
The government said: “This legislation, widely supported by business groups, will help companies through the Covid-19 emergency by giving firms essential breathing space to seek a rescue – ultimately, preserving jobs and livelihoods.
“We are working to ensure that pension schemes are not disadvantaged by these important measures.”