Thought / 07 Mar 2018

Pension Priorities?

Pension debt has become a headline-grabbing issue in recent times with the failure of some large companies leaving massive shortfalls in the pension plans. Pension liabilities are a fair way down the priority list when companies collapse (unsecured creditors) and one key question is whether the deferred pay of former employees should have a higher priority.

Often there is little (if anything) left once the other “higher ranked” creditors (secured or preferential) have been paid. In practice, there is unlikely to be enough to secure all the promised benefits which means that pensions will need to be reduced – although the Pension Protection Fund will limit the amount of cut-back that is applied.

Moving the pension liability further up the priority order may appear sensible and provide better protection but its impact on other creditors would be significant. The pension debt can be so large that the security enjoyed by these creditors would be severely diluted or possibly wiped out completely. They would need to renegotiate their positions which may mean that obtaining future funds (lending) for business investment could be badly affected.

Some Trustees have already taken steps to improve their position obtaining preferential rights over certain assets in an insolvency scenario or Guarantees from associated parties but this rarely covers the full amount of the pension debt on insolvency.

Trustees should possibly consider further steps to try any build up or increase their preferential rights, or at least make sure they do not slip further down the list by allowing the Sponsor to provide better security for other creditors – whether they are existing creditors or new creditors.

John Herbert

Chief Actuary