An astonishing pension u-turn. Wednesday, November 12, 2008
Image via WikipediaThe current economic downturn is forcing business to look at all options for weathering the downturn, including corporate restructuring. However, many companies and potential acquirers of companies face the challenge of fully funding pension scheme liabilities under "Section 75" if they wish to enact changes that may imperil schems.
Introduced in 2004, it directly tackled a loophole highlighted by Maersk, the Danish shipping line, which tried to walk away from the pension liabilities of its UK subsidiary even though it remained solvent. The scenario at the time was one of plunging stock markets and falling bond yields unmasked which created huge pension deficits that were transparent to investors. Unsurprisingly, companies sought to restructure to avoid their pension responsibility and, at the time, it was estimated that about 125,000 UK pension scheme members had been affected by such moves.
Now in a bizarre about-turn by the UK Government, at a time when pension deficits are to balloon again after huge falls in stock markets, the Pensions Minister has announced a consultation process with a view to watering down the scheme. It apparently reflects concerns that Section 75 is impeding "necessary" restructuring.
For clarity, I do have considerable sympathy with companies who are impeded from introducing restructuring measures on the basis that they simply cannot fund deficits at this time - corporate borrowing is difficult enough right now, and so to be forced to use scarce funding for "non-business" purposes is a massive issue. Moreover, since Section 75 was introduced, there have been a number of examples of high profile takeovers that have fallen through because of the need to fund a pension deficit upfront e.g. Sainsbury's.
Similarly I recognise the difficult balance that exists between allowing companies to implement measures to keep a company afloat to the benefit of current stakeholders and the protection that needs to be afforded to current and future pensioners.
Worryingly, if measures did backfire and companies exploited any changes to the detriment of pensioners as is likely, it may actually lead to more Pension schemes having to turn for funding to the Pension Protection Fund, which is funded by pension schemes via a levy.