The Burges Salmon Pensions Pod: Contingency Planning - Preparing for if things go wrong transcript

Speaker

Transcript

Chris Brown, Director, Burges Salmon

Hello and welcome to episode one of the Burges Salmon pensions pod, a new fortnightly podcast on pensions news, with insights from our practice and tips and tricks for trustees and employers.

I'm Chris Brown a Director in the pensions team. I advise trustees and companies on all pensions legal issues. The smallest scheme I'm involved with has about six million assets and the largest, over a billion so I do hope this podcast has something for everyone.

Helen Cracknell, Solicitor, Burges Salmon

And I'm Helen Cracknell, a Solicitor in the pensions team, advising pension scheme trustees and companies on a broad range of legal issues.

In today's podcast we'll be discussing contingency planning for if things go wrong including the tricky question of when it might be right for trustees to take action against the employer.

Chris

So here we are at the end of October 2021 and probably the biggest news this month has been on the 1st of the month the new regulatory powers and criminal sanctions came into force.

That got Helen and I thinking, so to date the regulatory powers have mostly been used in insolvency scenarios where things have gone wrong and that got us thinking with the new regulatory powers what can trustees and employers do in the good times to prepare for if things do go downhill with their employer.

So I want to introduce our first guest Mike Dando, a Senior Associate in the pensions team who specialises in advising on corporate restructuring and scheme funding negotiations involving the pensions regulator.

Hi Mike, thank you for joining us today.

Mike Dando, Senior Associate, Burges Salmon

Hi Chris, thanks for having me on the podcast.

Helen

So Mike have you seen many clients being interested in the new regulatory framework? I guess it's quite easy to focus on all the headlines about criminal offences but what kind of steps can trustees really be thinking about at this stage?

Mike

I think that's right, there's obviously been lots in the press recently about the new pension schemes act and the the new powers and sanctions regime to protect pension savers, and of course that's been driven, or certainly in part,

by the high-profile business failures such as BHS and Carilion that we've all read about, which put significant numbers of pension benefits at risk.

And it goes without saying that from the trustee perspective additional statutory safeguards for member benefits are of course welcome but but whilst there's been a lot of noise about the pension schemes act, I think it remains as important or perhaps even more important than ever for trustees to continue to think about the steps that they could themselves take to help safeguard benefits, should the need arise.

Chris

So what sort of steps are you thinking about Mike?

Mike

Well that really leads me on to what I would recommend probably the key takeaway for the trustees on this, and that is to know and understand your scheme rules and the powers that you have under them. So for example do you have the right to trigger the wind up of the scheme either as a general power on the occurrence of a particular event? So for example the non-payment of contributions. Most trustees won't have these powers but some will.

Chris

I think you're right Mike, trustees should understand their powers before they ever need to seek to use them. I suppose it's a similar point to looking at the legal covenant and that's a straightforward and trite point, not a new point, but a question for trustees is do they really know who is the legal statutory employer and what obligations are there, if any, on entities in the wider group?

Mike

Absolutely and we often get asked to advise trustees on an urgent basis on the powers under their rules and any options available when there are time critical concerns around the solvency of an employer or its proposed actions.

But in those situations trustees could have been in a position to act more quickly if they had considered their powers as part of the more business as usual matters for the scheme.

That's particularly the case if there's any ambiguity in the drafting the rules which will take time to consider and interpret.

So I think it's essentially a recommendation to get prepared and fix the roof while the sun shines.

Helen

I think you're so right Mike and also another practical step is that trustees could consider training including training up their own employer.

It'd be useful to tell the employer to involve the trustees if they have any business worries and this could help spot notifiable events including the new ones to be introduced by the Pension Schemes Act 2021 and also help to consider when activity may have an impact on the pension scheme itself.

Mike

Yeah I totally agree with that and another practical step in being prepared is for trustees to consider their governance procedures and make sure that these are as streamlined and as effective as possible when it comes to decision making.

Chris

Yeah I'd certainly echo that actually. I've had experience in the last year of having to agree deeds quickly with an employer.

This was to allow for deferral of deficit recovery contributions and trustee governance on one particular scheme was, for historical reasons, not quite as agile as would have been ideal and we're now looking to introduce more flexibility to decision-making processes so that the trustees can respond more swiftly if they have to again in the future.

Mike

That's interesting and sometimes I think it is only through those type of experiences that these issues do crop up, hence trying to highlight the benefits of taking those proactive steps to try and avoid last-minute issues.

But of course it does remain possible that trustees will still find themselves in a in a situation where enforcement is the appropriate step. And just to step back, when we talk about enforcing liabilities this could range from a debt due to the scheme as a result of unpaid contributions through to a full section 75 debt which I'm sure most of us listening to the Pensions Podcast will know, is the cost of securing member benefits in full by purchasing annuities with a with an insurer.

 So I think really against that backdrop it's clear that circumstances where trustees will need or want to take steps to enforce a debt are likely to be limited but they are situations that we do see arise.

Helen

Thanks Mike. So I now want to introduce our second guest, Amy McVey, a Director based in our Edinburgh Banking and Finance team who has particular expertise in distressed debt and financing arrangements.

Amy, if trustees do need to go about enforcing a debt, how would they go about it?

Amy McVey, Director, Burges Salmon

Thanks Helen.

So the trustee's position will differ depending on whether the date is secured or unsecured. There are exceptions and we have seen some of those and in the vast majority of cases debts due to the scheme will be unsecured and so the process will be one of date recovery rather than enforcement of security. And one point I just wanted to make really quickly here is that any discussions and those negotiations around dates that have not been paid to the scheme and trustees should expressly reserve their legal rights in relation to that debt.

Chris

Right so that's interesting. So if trustees are having funding discussions with the employer and are asking the employer to make good, say contributions due or something, so do you mean that the trustee should use particular legal wording in the correspondence to the employers when they're asking for payment?

Amy

Yes, so something as simple as you know this correspondence is without prejudice to our rights in relation to the debt this due. Something as simple and straightforward as that but I suppose tonally, in keeping with the correspondence just to make sure that, again there's no suggestion at a later date that's the nature or the timing or the amount of what is due.

Chris

Yeah okay, fab, that makes sense.

Sorry Amy I interrupted you there, so what if those discussions don't get anywhere, how do you then go about um looking to enforce?

Amy

So if that consensual solution really isn't possible and again, that's when you get to full exhaustion of correspondence, then the first formal step is for the trustees to issue a short demand for the sums that are due.

Helen

Amy, just for the benefit of our listeners and myself included, is this a statutory demand that you're referring to here?

Amy

Here, what I'm more referring to is a simple short form demand which really signals to the employer that change in emphasis you know that that period of negotiation has concluded and has been exhausted and actually the discussions really need to be more focused if they are able to continue.

So if the employer doesn't make payment following the demand and it's in the interest of the scheme to do so, and then the trustees can really seek to establish the debt due to them and by going down the statutory demand route.

 So again it's there is a bit of replication here or repetition in terms of the content. So you're taking what you've already sent and you're putting onto a much more formal footing and issuing it again.

But as I said, the difference in that is that the statutory demand can then find further formal process and I suppose from a from a relationship perspective, because we can't entirely lose sight of the fact that there has or there will have been a longer-term relationship between the parties here and it again emphasises that there's been a tonal change in discussions so from something very short firm that maybe comes on heavy paper to something that's a longer form more formal document and again needs to be really taken seriously by the employer on receipt.

So I've referenced the further formal process and issuing the statutory demand in that regard.

So the issuing of the stat demand is one of the options for an employer constituting a legal and as a technical legal definition of the employer's inability to pay its debts and that's really important for a third and final step if payment is still not received on the back of that.

Now the statutory demand is only one option and the other option is to go down the court route and that applies in Scotland, England and Wales, and establish the debt that's due to the scheme by way of a court action but in either case, if at the end of the court action when a degree of judgment is passed in favour of the scheme or following service of the stat demand if payment is still not made then the trustees can choose to proceed to the third step and petition for the liquidation or winding up of the employer.

What I would say in that, and again I'm repeating myself slightly, is that that's a very, very serious step and this third step involves the appointment of an insolvency practitioner as liquidator and the corporate death of the employer entity it really is end game and I think that the trustees need to be aware I need to be very cognizant of the interests in the scheme I'm here and whether it is in everyone's interests I'm including the schemes to go to proceed to that third step.

Mike

Amy, it is probably worth adding there from the pensions perspective that insolvency would then be the statutory trigger for a section 75 debt on the employer immediately becoming due, so trustees will want to have considered whether forcing an insolvency is likely to be in members best interests when compared to allowing the employer to continue and reaching that conclusion case law is clear that the trustees shouldn't take into account the compensation provided by the ppf pension lifeboat.

Helen

Amy, just to lean on your expertise, are there any differences in how you'd go about enforcing a debt in Scotland when compared to England?

Amy

That's a good question Helen. In Scotland it's necessary for a qualified insolvency practitioner to be appointed as liquidator. A couple of other differences to flag the fees involved in formal process north and south of the border will be different there are some differences some technical differences around about the timing of service and advertisement if a winding up petition has been filed and the requirement for hearing actually and so in England and Wales get hearing regardless of whether or not the petition is opposed and in Scotland if the employer doesn't lodge any defences then no hearing will be required so actually and potentially a bit more work on at the earlier stage in order to track down an insolvency practitioner but also potentially a bit less process later on depending on the response to the petition itself.

Chris

Okay, brill, thanks Amy. Helen I know we had one other question for Amy.

Helen

Yes, a slightly different tangent Amy but we know that you're based in Burges Salmon's Edinburgh office which has just celebrated its second anniversary I visited it once actually while attending the Edinburgh APL conference so I know what it looks like but can you tell us what it's actually like to work there?

Amy

Great question, thank you. We're so pleased and proud of the office. We're so happy with how ambitious and how collaborative it is and really how well we in Edinburgh have integrated with our colleagues in Bristol and London and actually as much as there has not been a an ability to travel between the offices obviously over the last wee while and technology has been has been a great help in all of that and actually I think we've all worked together very, very well over the period and over Teams and other platforms.

We have a really great team in situ and we're continually growing in headcount and we have expertise spanning a range of sectors including financial services, energy and real estate so it's a really exciting place to be we're absolutely thrilled with how the last two, two and a half years now, and has gone and we're really looking forward to the years to come.

Chris

Super, thanks Amy and yeah on the collaboration I mean you and I have been working together very closely looking at enforcement options for a particular trustee client recently and so I can attest to that and I'd add that I've been learning a whole new language with the Scot’s law terms for various bits of the courts process that are that are totally new to me as an England and Wales qualified lawyer.

So Mike and Amy, if we are to leave our listeners with just a few takeaways, what would they be?

Mike over to you first I think.

Mike

I think from me and to distil it down Chris,

it's really a message of get prepared. So the points we discussed, so know your scheme rules and any specific or unusual powers under them that could allow trustees to trigger a debt or help persuade corporate behaviour in negotiations, and also check if there's any ambiguity in the drafting of those relevant rules that that may take some time to resolve.

If you can, streamline your governance procedures as far as possible, so that you're in a position to act quickly if needed and I think just don't leave it until you're facing an urgent issue to think about these things.

Chris

Yeah absolutely I'd echo that.

And Amy?

Amy

For me it is I think be aware that when we get into enforcement it's it's serious territory and I know that sounds like a bit of a silly point here but potentially the ramifications of following through the steps that we talked about here are catastrophic for the employer. We are talking about end game and we are talking about corporate death and that's your ultimate point.

Chris

Yeah absolutely Amy and I would certainly echo that from my experience of us working together on a matter where all of this is relevant for trustees at the moment.

So thank you Mike and Amy for joining us today, it's been a really interesting discussion.

Helen

Thank you for listening to the Burgess Salmon Pensions pod. If you'd like to know more about our Pensions team and how our experts can work with you, you can contact myself, Chris or any of our team via our website. If you enjoyed this podcast you may also enjoy listening to our next episode which will cover the Pension Schemes Act 2021 and what trustees and employers need to know about approaching corporate transactions.

This will be available on Apple, Spotify or wherever you listen to your podcasts.

Don't forget to subscribe and thanks for listening.