Trade Association Says UK COVID Bill Could Hurt Pension Industry

The PLSA warns of ‘unintended negative consequences’ for pensions of insolvent firms.

UK trade association the Pensions and Lifetime Savings Association (PLSA) said it is concerned that a bill intended to improve the ability of companies to restructure efficiently and provide COVID-19 relief will have “unintended negative consequences” for the pension industry.

The PLSA said the Corporate Insolvency and Governance Bill allows for the possibility of bank lenders to be “higher up the pecking order” than employees’ pensions when it comes to recovering cash from a company that becomes insolvent.

The bill, which was introduced in May, would implement landmark measures to improve the ability of companies to be efficiently restructured, reinvigorate UK rescue culture, and support the UK’s economic recovery. It also includes temporary measures to ease pressure caused by the COVID-19 pandemic.

The PLSA said it has written to Paul Scully, the Business, Energy, and Industrial Strategy (BEIS) Parliamentary undersecretary of state, saying it believes some small, but significant, amendments to the wording of the bill could rectify the problem without compromising the intentions of the bill.

Under current rules, debts owed to a defined benefit pension plan, as unsecured creditors, are paid out after secured creditors in an insolvency situation, unless the plan has a form of contingent security. When a plan sponsor becomes insolvent, the majority of the deficit will often remain unpaid, and the UK’s Pension Protection Fund (PPF) will take responsibility for paying out plan members’ compensation.

However, the PLSA said the bill’s proposal for a new company moratorium that allows up to 40 business days of protection from legal processes against a company will make recovering unpaid pension contributions even more difficult than it already is.

“We and our members fully appreciate the need for emergency protective measures to help companies survive the unprecedented business disruptions from COVID-19,” Nigel Peaple, PLSA’s director of policy and research, said in a statement. “However, the new proposals will have unintended—but very serious—consequences for underfunded pension schemes where the employer becomes insolvent, as well as for the Pension Protection Fund.”

The changes that the PLSA says should be made to the bill include:

  • Limiting the bank debts that gain “super priority” to those that become due and payable on a non-accelerated basis during the moratorium;

  • Narrowing the definition of financial arrangements that gain super priority so that it only covers the bank debts and does not extend to all financial arrangements and lending; and

  • Amending legislation to provide for a Pension Protection Fund assessment period to be triggered when a company enters a moratorium.

Peaple said that if the bill isn’t amended, it “will have the effect of reducing the protection and rights of defined benefit schemes and the Pension Protection Fund where companies are in financial distress.”

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