Pensions in Peril: Changes to insolvency laws could harm UK pensioners
July 2, 2020
2 min read
What's going on here?
The new Insolvency Bill aimed at supporting businesses hit by COVID-19 could put millions of pensions at risk.
What does this mean?
The UK government published its Corporate Insolvency and Governance Bill in May, which provides for a moratorium of up to 40 days for companies in financial distress due to COVID-19. The moratorium would give businesses “breathing space” from creditor action and afford firms time to explore restructuring and/or rescue plans.
The Bill, which is being fast-tracked through parliament, aims to help companies survive the pandemic, protect jobs and support the UK’s economic recovery. However, some of the changes that the Bill would make to insolvency law would be permanent and could weaken the standing of the Pension Protection Fund (PPF) and defined benefit (DB) pension schemes.
The PPF is a statutory fund which acts as a safety net to compensate employees whose company goes insolvent. If such companies have an underfunded defined benefit pension plan (in other words, the money needed to cover current and future retirements is not readily available) the PPF steps in.
What's the big picture effect?
When a company encounters financial difficulty, one option is to enter administration. Under statute, the company then benefits from a year-long statutory moratorium, a period of time in which their creditors cannot raise legal proceedings against them to recover monies owed. Similarly, this Bill permits a short moratorium for companies in difficulty because of the pandemic-induced downturn. Law firms stand to benefit in the role of advisers throughout this process.
The contentious detail of the Bill is an attempt to alter the ranking of creditors on insolvency should the moratorium prove unsuccessful. Originally, the Bill granted super-priority status to unsecured banking and finance debt, pushing pension schemes further down the creditor queue. The government has since agreed to remove this super-priority status, following pressure from the House of Lords. However, the government is still resisting pensioner-friendly amendments which would remove the priority for financial institution debt and allow the PPF powers of veto in restructuring arrangements.
The only silver lining for the PPF and DB schemes is that the new legislation seeks to support businesses in coping with insolvency. If companies can get back on their feet, the PPF could actually benefit from the moratorium, as there may no longer be a deficit they are responsible for.
The Bill is making its way through parliament and is currently at its report stage, so there is still scope for further amendments. In upcoming meetings, members are expected to discuss the implications on the PPF, giving hope to pensioners across the UK.
Report written by Mimosa Canneti
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