The Corporate Insolvency and Governance Act 2020 should provide some welcome relief to businesses given recent events. Paul Brice explains how it will affect defined benefit (DB) pension schemes, in particular.
On 26 June 2020, the new Corporate Insolvency and Governance Act came into force, providing relief to corporates faced with exceptional circumstances due to COVID-19. Key stakeholders, including DB pension schemes, will need to get up to speed quickly to understand how they could be impacted.
We've co-authored an article with Pinsent Masons LLP considering the key implications for DB pension schemes in detail.
The Corporate Insolvency and Governance Act 2020 combines a temporary relaxation of some insolvency laws to provide companies with breathing space during lockdown, with the introduction of new restructuring tools to help companies to restructure and avoid insolvency.
The temporary changes provide for the suspension of wrongful trading and the use, by creditors, of statutory demands and winding-up petitions against coronavirus-affected companies, from the beginning of March to 30 September 2020.
The permanent changes see the introduction of a 'debtor-in-possession' moratorium, where directors remain in place with limited supervision by an insolvency practitioner as monitor, and a new restructuring plan, intended to make it easier to deliver restructuring plans and more difficult for hold-out classes of creditors to block such plans. These permanent changes have been mooted for a while, as the government has sought to improve the rescue culture in the UK with a move toward a more debtor-friendly, Chapter 11-style regime.
Impact of the Corporate Insolvency and Governance Act 2020 on DB pension schemes
DB pension schemes are often a significant, if not the largest, single creditor in a restructuring. As such, trustees should be prepared for the changes brought by the Corporate Insolvency and Governance Act 2020. There is likely to be uncertainty around the rights of the pension scheme under the proposed moratorium, restructuring plan, or related restructuring process.
Trustees may have a number of questions about how their scheme will be impacted, for example:
What happens to ongoing scheme funding and associated obligations during a moratorium?
Are trustee governance powers that could be used to increase liabilities restricted during a moratorium?
Does a moratorium or restructuring plan trigger a Pension Protection Fund (PPF) assessment period?
What class of creditor would a scheme form part of for voting and other purposes?
How would any compromise or 'cram-down' arrangements affect the scheme?
What will the role of trustees, the PPF and The Pensions Regulator (TPR) be at various points in the process?
Will this legislation override the existing and proposed moral hazard protections?
The full article considers these questions in detail, alongside commentary to help understand them and, where possible provide answers.
Particular issues for trustees include the potential impact of the Corporate Insolvency and Governance Act 2020 on any security arrangements and the possibility that a restructuring may not properly take account of a DB pension scheme. By undertaking the following, the trustees can attempt to mitigate exposure to these, and any other risks, introduced by the Corporate Insolvency and Governance Act 2020:
Understand the changes brought in by the Corporate Insolvency and Governance Act 2020 and stay up to date with the development and use of these changes
Review scheme rules and any existing security arrangements to understand the potential impact of the suspension, during moratorium, of deficit repair contributions and the impact of a restructuring
Ensure that they are kept up to date with information about the company's financial performance
Get the company to agree, where possible, to consult the trustees at an early stage in relation to any moratorium or restructuring plans or proposals
Seek timely advice from legal and covenant advisers
Engage with the PPF and TPR at an early stage
The anticipated wave of restructurings and insolvencies following lockdown, in combination with the proposed new legislation to tackle them, mean that trustees should be alert and make appropriate preparations. While many unanswered questions on the impact of the new legislation remain, this is likely to evolve rapidly.
For a more in-depth review of the new legislation, read the full article, or contact Paul Brice to discuss the issues directly.