Companies use ‘pre-packs’ to dump £3.8bn of pension liabilities
FT investigation raises fears that ‘lifeboat’ fund is being abused
Companies in the UK have used a controversial insolvency procedure to offload £3.8bn of pension liabilities, often as part of a sale to existing directors or owners, a Financial Times investigation has found.
Roughly 17 per cent of the 868 schemes managed by the Pension Protection Fund, a “lifeboat” of last resort for the retirement plans of failed companies, have been injected as a result of so-called “pre-pack” administrations. These often secretive transactions allow struggling businesses to be sold even as they are declared insolvent.
The FT investigation found that two in three pre-pack schemes entering the PPF involved sales to existing owners or directors.
A string of prominent cases that used pre-pack arrangements, but where companies are still trading, include the turkey producer Bernard Matthews, the bed company Silentnight and the textile group Bonas.
The results of the FT investigation raise questions over whether existing laws go far enough to tackle abuse of the PPF, which is funded by a levy on all private-sector defined-benefit pension plans.
The growing weight of pre-pack schemes in the lifeboat, affecting the retirement benefits of some 53,000 workers, has sparked calls for a revision of insolvency laws.
Alan Rubenstein, chief executive of the PPF, said in a letter to a parliamentary select committee that “as insolvency law is currently configured, they [pre-packs] can be used inappropriately to dump the company’s liabilities, including the pension scheme, through dropping a company into administration with a sale prearranged”.
Prem Sikka, a professor of Accounting at Essex university, added: “Company directors can walk away from legal obligations to fund pension schemes with the full knowledge that Pension Protection Fund (PPF) will step in. Pre-pack insolvencies are harming pension schemes and are ripe for major reforms.”
Last year, the parliamentary work and pensions committee warned that pre-packs, a device akin to Chapter 11 in the US, were a new way of “ripping off pensioners”. If a pension scheme enters the PPF, workers can have their pension payments capped at a significantly lower level than their original promised retirement benefits.
Frank Field MP, chair of the committee, said that the FT’s research raised “real concerns about whether adequate protections are in place to prevent schemes being dumped on the PPF, at cost to pensioners and levy-payers”.
“We intend to pursue these issues further as part of our ongoing work on DB pensions,” he said.
Clive Pugh, a former senior lawyer with the Pensions Regulator and now partner at Burges Salmon, said the rules as they were currently structured were not tight enough to prevent companies from gaming the system. He added that “there is a case for new penalties” to stop abuse.
The PPF disputed that there was a serious problem, saying it had reduced the inappropriate use of pre-pack administrations affecting pensions in recent years.
It also questioned the inclusion of three big pension schemes in the FT’s list — including AEA Technology, at £478m, and printing company Polestar at £529m — saying that the deals had been part of restructuring arrangements agreed by the Pensions Regulator.
“We have strong controls in place to take action if a scheme comes to the PPF through a pre-pack insolvency without prior engagement or where we have concerns,” Malcolm Weir, head of restructuring with the PPF, said. “While some cases have caused us concern, we do not believe there is an issue of widespread abuse of this mechanism.”
The FT’s investigation also uncovered that the regulator had spent £1.4m pursuing anti-avoidance action against Silentnight, which was involved in a pre-pack insolvency in 2011.
Over the past 10 years, 148 pension schemes have been offloaded into the PPF through pre-pack administrations. A further 20 schemes, with liabilities of hundreds of millions of pounds are in the assessment period for PPF entry, following pre-packs.
The Bernard Matthews case illustrates how the procedure has been used. When the private equity firm Rutland Partners wanted to sell out of the lossmaking turkey producer, it faced the obstacle of a £20m deficit in the company pension fund.
By placing Bernard Matthews into a pre-pack, Rutland sold the assets of the business — the farms, land and buildings — as a going concern for £87.5m, while shedding the liability of the pension fund.
Rutland received £39m while two creditors, Wells Fargo Capital Finance and PNC Financial Services, received £46.4m. However, the pension scheme was forced into the PPF, though it is unlikely to receive any money as it is last in the order of secured creditors.
“The deal seemed to happen so quickly,” said Malcolm Carr, Bernard Matthews’ former IT director. It was presented to him and other members of the pension scheme, he added, as a “fait accompli”.
“I am likely to lose tens of thousands of pounds of retirement income as a result of the deal. There is certainly scope for the law to be amended to provide more protection to pensioners and creditors because they are the groups that always lose out.”
Yet there was no need to shed the pension liabilities, said a spokesman for Ranjit Singh Boparan, the food magnate known as the “Chicken King”, who bought Bernard Matthews. “We would welcome any review of this transaction,” the company said at the time. “Boparan offered the seller a deal which would have included all assets and liabilities, including the pension liability. Unfortunately, this offer was rejected.”
The initial offer from Mr Boparan was enough to pay off the banks, which had first call on repayment, but Rutland would not have received full repayment on the loans it had made to Bernard Matthews, or the interest on those loans.
The Pensions Regulator is now investigating the funding of the Bernard Matthews pension scheme, whose full “buy out” liability was estimated by the PPF at £75m.
Critics said the fact that pre-packs accounted for 17 per cent of all pensions dumped into the PPF since 2006 — but only make up 3 per cent of all insolvencies over the same period — was a warning signal.
The fact that two-thirds of schemes entering the PPF via pre-packs involved sales to existing owners and directors raises the prospect that “phoenix companies” can exploit the process to shed pension and other unsecured creditor liabilities, such as tax debts, and then continue trading.
The PPF caps payments to pension scheme members depending on their age and size of pension so is likely to pay out £1.3bn of the £3.8bn that would be the cost of paying the retirement benefits in full, as originally promised to members.
Andrew Tate, president of R3, a trade body for insolvency professionals, defended pre-pack administrations as “an important business rescue tool” but acknowledged that selling companies to the same owners and managers was a sore point when employees lose valuable pensions entitlements. “There is always more that can be done to improve transparency around pre-packs. Let’s have that debate,” he said.
The issue of pensioners suffering from questionable bankruptcies has become a significant policy question since the department store chain BHS collapsed after its owner, Sir Philip Green, sold the group to an ex-bankrupt for £1.
After that scandal, a government options paper recommended that the Pensions Regulator play a decision-making role in the approval of acquisitions of troubled companies that have large pension obligations. This has prompted fears that pre-packs may become the norm as owners seek to avoid such scrutiny.
Successive governments have tried to deal with the problem, and a review in 2013 led to the creation of a body of independent professionals who could be consulted on proposed sales to “connected parties”, such as existing management.
The Pensions Regulator said: “While pre-pack administrations can be a useful tool for realising best value from failing businesses, we are alive to the risk of misuse, particularly when they involve sales of businesses to connected parties. Where we suspect that they have been misused, to the detriment of the pension scheme, we have strong anti avoidance powers which we can and will use.”