Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020.

My Lords, I am pleased to introduce a statutory instrument laid before the House on 6 July. These regulations form part of the corporate insolvency and restructuring regime introduced in the Corporate Insolvency and Governance Act. I am satisfied that the regulations are compatible with the European Convention on Human Rights.

The Corporate Insolvency and Governance Act introduced corporate restructuring tools which include a moratorium and a restructuring plan which offer breathing space and flexibility to keep companies going. These regulations provide the board of the Pension Protection Fund, the statutory compensation scheme, with creditors’ rights in certain specified circumstances when a company, a limited liability partnership or a certain charitable incorporated organisation obtains a moratorium from creditor action or proposes to restructure their business, as applicable, under the new processes available in the Corporate Insolvency and Governance Act.

I had expected also to introduce another set of related regulations for debate. However, we are working with the relevant government department to resolve a technical legal issue. We intend to re-make and lay those regulations with a debate scheduled for a later date.

The regulations we are debating provide the board of the Pension Protection Fund, the statutory compensation scheme, with creditors’ rights in certain specified circumstances. They include when a company, a limited liability partnership or a certain charitable incorporated organisation obtains a moratorium from creditor action or proposes to restructure its business, as applicable. The pension scheme is eligible for the Pension Protection Fund and is directly affected. A moratorium gives companies an opportunity to explore rescue and restructuring options free from creditor action. A restructuring plan will enable struggling companies to negotiate restructuring arrangements to give them the best possible chance of continuing as a going concern.

Under existing pensions legislation, similar corporate rescue processes are treated as insolvency events. This triggers a number of safeguards. When such an event occurs in relation to an employer with an eligible occupational pension scheme, the Pension Protection Fund assesses the scheme and, among other things, takes over the scheme trustees’ or managers’ role as a creditor of the sponsoring employer. Neither moratoriums nor restructuring plans are listed as insolvency events in the relevant pensions legislation as this would undermine the overarching intention to maximise the company’s chance of survival. Therefore, the normal safeguards within the legislation are not engaged.

During the passage of the Bill, there was significant stakeholder and parliamentary pressure to provide specific protections in the new moratorium and restructuring plan procedures in respect of the impact on pension schemes. The concern is that these procedures could result in the pension scheme, as an unsecured creditor of the company, being disadvantaged. The Pension Protection Fund could face a greater loss if the company subsequently fails and the scheme falls into the fund with a larger deficit than it originally had, so there is a need to build in some specific protections by ensuring that the Pension Protection Fund has a seat at the table in any relevant restructuring proposal.

My Lords, I welcome these urgently needed regulations so that the PPF can exercise creditor rights as the trustee of a defined benefit pension scheme in the event of a moratorium or restructuring proposal. The regulations allow the PPF involvement in discussions, processes and court access with significant implications not only for the members of a particular scheme but for all existing and potential members of the PPF lifeboat and employer levy payers.

The exercising of creditor rights by the PPF in consultation with trustees reflects what happens now in other relevant insolvency and restructuring events. They evolved from the Pensions Act 2004, and the Government have rightly recognised the moral hazard in leaving powers to exercise creditor rights wholly with the trustees. The trustees may not have the resources and power that the PPF can bring to bear. The PPF considers the interests of a scheme and the wider interests of all DB scheme members. There will be anxious pension scheme members at this very moment who are taking comfort from the PPF’s very existence. The trustees could, for example, sign up for a high-risk deal on the basis that if it failed the PPF would ensure a minimum level of protection for scheme members and leave the lifeboat to inherit a greater deficit. Giving these powers to the PPF allows it to balance all interests—a good outcome for scheme members, mitigating subsequent large claims on the PPF or perverse attempts to dump pension liabilities.

I refer again to the Arcadia case. The original CVA proposed to cut deficit reduction contributions by half. The PPF, exercising creditor rights, influenced a better outcome, including security over group assets, £100 million in cash and increases in deficit contributions after three years. While welcoming these regulations, they do not close off all concerns proposed by the new moratorium arrangements, such as the incidence of gaming by current or future lenders wanting access to super-priority status; avoidance of pension liabilities and incentivising insolvency over rescue for certain creditors; the non-triggering of a scheme Section 75 debt impacting its creditors’ standing and voting rights; and the imposition of a payment holiday on a scheme’s deficit contributions but exempting finance debt payments from that holiday.

My Lords, I thank my noble friend the Minister for laying these amendments and for the excellent way in which she introduced them. I also support the amendments and believe that many of the points made by the noble Baroness, Lady Drake, are particularly relevant. It is clearly important that the Pension Protection Fund has some recognition—or as much as possible, if you like—in the new environment that has created the moratorium and various super-priorities. It is important that the Pension Protection Fund retains creditor rights where it can to avoid gaming of the fund, which otherwise could be overwhelmed with extra liabilities that are picked up by other pension schemes.

I agree with my noble friend that it is important to ensure that these regulations are able to act in the interests of the Pension Protection Fund and to balance that against the need to preserve functioning and ongoing sponsors during the current emergency. Can my noble friend help the Committee understand what powers this grants to the Pension Protection Fund? I recognise, and we discussed through the passage of the Corporate Insolvency and Governance Act, that there is a limit on the power of the Pension Protection Fund. I appreciate the Government’s amendments, which have introduced some representation, but, for example, if trustees, as was suggested by the noble Baroness, Lady Drake, prefer to approve a high-risk restructuring strategy but the board of the Pension Protection Fund believes the risk is too high and would result in higher costs to it when the company fails—as the board believes would be most likely given the balance of risks that that restructuring would entail—would it have the power to override the trustees and to refuse to agree the proposed course of action and, ultimately, ensure that the company fails sooner rather than later, or would that not be within its powers under the new system?

Equally, if the management of the company wishes to try to sell assets that have already been pledged to the pension scheme and apply to a court to permit this—I understand the corporate insolvency Act permits the authorisation of the sale of such assets and the PPF must be informed or consulted—does the PPF have powers to protect itself against such a transaction on which the funding of that defined benefit scheme had previously been based? What representations might it be able to make in the court environment? Does it have the power to demand detailed information or to conduct its own investigations into the financial position of the company when it is aiming to restructure or undertake some asset sales? Does the Pension Protection Fund have the power to investigate the impact of any loans or other restructuring agreed in a moratorium that might be beneficial to favoured lenders or, ultimately, to the owners of the company, who might end up taking over a restructured operation, having jettisoned the pension fund to the detriment of the funding of the pension scheme when it goes into the PPF?

My Lords, there is a five-minute limit.

I apologise.

My Lords, I thank the Minister for providing a detailed explanation of this statutory instrument, the details of which I welcome because they will act as a measure of protection for members who work for companies in financial difficulty which face restructuring.

It is important to remember that companies and those who work for them are not working in normal times. There is the Covid pandemic and the uncertainty around a possible no-deal Brexit, the news last week of a run on the pound and the potential impact of the United Kingdom Internal Market Bill on markets and businesses. References to the Chancellor’s potential raid on the coffers and reserves of businesses that pay for Covid financial measures can also precipitate further anxiety in the marketplace. Many companies have been the bulwark of our economy, as well as their employees, in both the public and the private sector.

As the Minister has explained, and was also explained by the noble Baroness, Lady Drake, these regulations will enable the Pension Protection Fund to participate in key decisions in the process by enabling it to exercise creditor rights that would otherwise be exercisable by the scheme trustees or managers. It provides compensation for eligible pension scheme members whose employer has become insolvent and cannot meet the scheme’s liabilities. I understand that it will be funded mainly by a levy collected from pension schemes.

In considering the impact and legislative effect of these regulations under the Corporate Insolvency and Governance Act, I have some questions for the Minister. Does she think that there will be sufficient money within those pension schemes to pay for a scheme’s liabilities? When the compensation is in payment, could it increase in such insolvency circumstances? If I am an employee, what happens if my scheme is potentially eligible for that but is facing all these difficulties as a result of insolvency? Will it be possible, in such circumstances, for the employee to contribute during the assessment period? Does the assessment period operate in such different circumstances? Is it possible to define the potential costs of such schemes? Will they reduce, bearing in mind that many people have left defined pension schemes? Will that categorisation apply in circumstances to do with restructuring and insolvency? What impact will that have on the Pension Protection Fund in its work with companies? Finally, what other benefits, including social security, are those pension scheme members eligible for if their employers have become insolvent and cannot meet the scheme’s liabilities other than those that may be provided for under the Pension Protection Fund?

The Pension Protection Fund provides compensation and reconstruction arrangements for businesses in financial difficulties. The PPF can also provide compensation to members whose employers are in difficulties. These regulations allow the PPF to intervene to protect its interests where businesses are in a moratorium introduced by the Corporate Insolvency and Governance Act 2020.

An urgent procedure is justified as there is an ongoing risk that a business could obtain a moratorium from its creditors or otherwise exclude the PPF. Under the Insolvency Act 1986 and the Companies Act 2006, the PPF has powers to exercise its right as a creditor during an assessment period following an insolvency event. These terms are defined by the Pensions Act 2004. The moratoriums and restructuring plan introduced by CIGA are, however, not qualifying insolvency events under the 2004 Act. As a result, the PPF lacks the necessary negotiating powers. The regulations are designed to remedy this so that the PPF can exercise creditor rights in a CIGA moratorium or restructuring plan.

The House of Lords Secondary Legislation Scrutiny Committee and the Joint Committee on Statutory Instruments have both considered the new regulations and did not raise any concerns. The House of Commons debated the instrument on 7 September, when Guy Opperman said that the regulations were vital for the continuance of the new insolvency regime. I understand that the Labour Party supported the measures, and on 8 September the instrument was approved by the House of Commons without further debate.

The Government introduced the amendments to the PPF on 21 July; they are subject to the “made affirmative” procedure and came into force on 23 July. The amendments are concerned with bringing co-operatives, community benefit societies and credit unions into the scope of the regulations. The PPF regulations need amending so that the PPF can intervene in such organisations. The amending instrument has not yet been considered by the Joint Committee on Statutory Instruments or the House of Commons. The approval period ends on 1 October.

The widening of the scope for the PPF to be involved in sorting out insolvencies makes sense as it has the expertise so to do. I simply raise a modest flag about the cost of levies where there are already criticisms and it is not reasonable to impose charges of increasing size on pension funds that have no problems to solve.

My Lords, I call the next speaker, the noble Baroness, Lady Wheatcroft. Baroness Wheatcroft? We will come back if we have to. I call the noble Lord, Lord Bourne of Aberystwyth.

My Lords, it is a great pleasure to follow my noble friend Lord Flight. I thank the Minister for setting out the regulations so clearly. I support the regulations; there is clearly a necessity for them and I am pleased that they seem to command support from around the Committee.

The Corporate Insolvency and Governance Act 2020 introduced new and updated restructuring procedures—it was the first significant alteration of these since the 1980s. It included the new moratorium procedure and restructuring plan for companies, limited liability partnerships and charitable incorporated organisations. This procedure had been waiting in the wings for some time—it was nothing particularly to do with the Covid outbreak, although the Corporate Insolvency and Governance Act was concerned with measures that were needed because of the outbreak. In consequence of this new process, these regulations are needed to make provision for the new regimes for pension funds and, specifically, the Pension Protection Fund so that it is able to exercise creditor rights.

I have several questions for the Minister. Is there a particular issue in relation to the time lag? The Explanatory Memorandum refers to a danger of something effectively falling through the cracks. There is reference to the need for the regulations to come into force as soon as possible after Royal Assent to minimise the gap in the application of the regime. Indeed, the Minister referred to the need to do so. What is the significance of this gap? Could the Minister clarify that? Does it apply to the other regulations the Minister referred to which are being delayed? I do not know how long the delay is and whether there is a greater danger to do with the gap referred to. Perhaps the Minister can also advise us about that.

My second point relates to publicity for these measures to ensure that pension funds are aware of these provisions and their impact. What is being done about publicity for the regulations?

My Lords, I thank the Minister for the way in which she introduced the regulations and for the time she made available to talk to those of us who were interested. She is always keen to be helpful and it is much appreciated.

Obviously, these regulations are needed, and as quickly as possible, but there are issues. I associate myself with the questions raised, particularly by the noble Baronesses, Lady Drake and Lady Altmann. All were interesting questions that deserve answer. I will then specifically query the possibility of companies going through a moratorium and restructuring being obliged to continue paying into deficit reduction funds. My understanding is that, during a moratorium or reconstruction, the obligation to pay staff remains and therefore the obligation to continue paying their pension contributions remains. However, there seems to be a question mark over payments into deficit reduction. I would be grateful if the Minister could give some clarity on that.

Secondly, can the Minister give clarity on the issue that was certainly highlighted during the Bernard Matthews fiasco a couple of years ago? During the course of a reconstruction, what must be termed quite risky—and extremely expensive—lending was taken on to preserve the company, and the result was certainly to disadvantage the pension fund. Will that still be possible under these regulations? In addition, when a company is going through a reconstruction, what is the significance of a floating charge to the pension fund? Does that floating charge continue to take priority?

More generally, since we are heading into a period where corporate collapses could, sadly, happen at far greater a rate than that to which we are used, as other noble Lords have pointed out, does the PPF have the manpower to monitor the situations in so many companies and to keep on top of the situation?