Select 2016 Demystifying the BHS pension issues Claire Southern, Partner Faye Jarvis, Partner. 13 October 2016

Transcription

1 Select 2016 Demystifying the BHS pension issues Claire Southern, Partner Faye Jarvis, Partner 13 October 2016

2 Overview The current regulatory regime The real story behind BHS The Select Committee What are the lessons to be learned? What's next? Hogan Lovells 2

3 Current regulatory regime

4 Overview & context (1) Looking only at DB schemes "Principal Employer" where PE goes, scheme goes "Participating Employer" can join or leave the scheme "statutory employer" liable under legislation for pension debts Valuation bases: Accounting (FRS17/IAS19) PPF "Ongoing"/ Technical Provisions ("prudent" triennial valuations) Buy-out / discontinuance Hogan Lovells 4

5 Overview & context (2) Employer's contribution obligations: under legislation (on-going deficit repair contributions & s.75/buy-out) special powers of trustees under rules (contractual liability) "s.75 debt" employer's share of buy-out deficit. Payable on: employer insolvency (or solvent wind-up) pension scheme winds-up "employment-cessation event". Multi-employer schemes only and when one employer stops employing active members when scheme continues to have active members Employer "covenant" who has legal liability to contribute? what are their resources? Hogan Lovells 5

6 Moral hazard powers Pension Regulator's "moral hazard" powers Contribution Notice (CN) issued against "connected/associated" principally 1/3 rd ownership but can include employees & directors must be "act/failure to act" purpose/effect to reduce s.75 debt or has materially detrimental effect must be "reasonable": (i) control of target over employer; (ii) connection between target and scheme; (iii) financial circumstances of target; (iv) "benefit" target has derived 6 year look-back Financial Support Direction (FSD) same "associated/connected" but can't be issued against individuals unless shareholders "employer poor" & "target rich" ("insufficiently resourced" test) must be "reasonable" same considerations as CNs 2 year look-back for connected/associated & IR test BUT "reasonableness" factors can relate to events before then. Hogan Lovells 6

7 Real life example - CN Carrington Wire (Severstal) Parent company guarantee ceased on sale Severstal sold CW to newco for 1 Newco sole shareholder took 380K working capital adjustment Regulator believed acts materially detrimental to scheme CNs sought 17.7mil against Severstal (s.75 debt) 380K against individual shareholder Outcome? Severstal settled for 8.5m (concerns re enforcement in Russia) CN issued for 380K against individual shareholder didn't care if this made him bankrupt 7

8 Real life example - FSD Nortel group insolvency in 2009 UK employer liable for 2bil deficit FSDs granted against c.25 companies in group Reasonable? pooled resources inter-company loans & transactions Outcome? FSDs in Canada & US not recognised in bankruptcy (other claims were) FSDs in EMEA still outstanding 8

9 "Type A" events "Type A" events: Is there a "relevant deficit"? Usually not measured on buy-out basis Has an "event" occurred which is "materially detrimental" to the ability of the employer(s) to support the scheme? Examples include: return of capital (buy-backs, dividends etc) change in creditor priority change of control granting/repayment of intercompany loans business/asset sales at under fair value Hogan Lovells 9

10 Clearance regime Voluntary regime Clearance binding on the Regulator Applies if employer concerned about "Type A" event Obtaining clearance need to think about timing Regulator will expect Trustee support mitigation expected for any detriment Declining in popularity? Hogan Lovells 10

11 Scenario 1 acquisition of employer with DB scheme

12 Covenant concerns secured debt & subordination Equity Client Ltd Client Ltd funds Scheme Client Ltd's Scheme Client Hold-Co Secured Debt Target Ltd funds Scheme Bank plc Remainder of Client's Group Target Ltd Target Ltd's Scheme Hogan Lovells 12

13 Acquisition of employer with DB scheme Client Ltd wishes to acquire Target Ltd. Client Ltd and Target Ltd each have DB schemes Issues for Client Ltd: Will become connected/associated with Target Ltd How is acquisition to be funded and what is impact upon employer covenant re Client Ltd's scheme? Where will Target Ltd sit in the group? Where will any debt sit within the group? Subordination issues? Issues for Target Limited's Trustees: Any impact upon Target Ltd's covenant (eg secured debt?) Will new ownership signal change in Target's business operations/approach/funding of Target Scheme? But no s.75 debts due/triggered Hogan Lovells 13

14 Scenario 2 acquisition of employer participating in a scheme

15 Owner Ltd Employ active members in the Scheme Owner Ltd's Scheme Client Ltd Target Ltd Target Ltd Triggers s.75 debt Hogan Lovells 15

16 Acquisition of an employer participating in a scheme Target Ltd participates in Owner Ltd's Scheme (with active members) Target Ltd's withdrawal will trigger s.75 debt Issues: s.75 debt: to be paid in full by Target (purchase-price adjustment) or by Owner Ltd? Target's liabilities to Owner's Scheme to be apportioned to Owner Ltd, so no debt due? If Target pays debt before completion (or apportionment executed before completion), Client will not be connected/associated with Seller's scheme so no moral hazard liability Target will retain its connected/associated status for a 2 & 6 year period Moral hazard risks for Target? Indemnity from Owner. Will want deed of discharge to release Target from any liability under the rules/contractual liability Similar issues for Client's Scheme around funding for the transaction & covenant Variant if no active members will want to trigger s.75 debt artificially Hogan Lovells 16

17 The real story behind BHS

18 BHS: the early years Green acquired BHS in 2002 for 200 million 2002 to 2004 BHS paid 423m dividends to Green family Pension scheme in surplus on MFR basis (old funding basis) No such thing as "moral hazard" Green could have wound up the pension scheme and had no further obligations to it Hogan Lovells 18

19 BHS: the downward trend... In 2009 BHS starts loss making streak that it never recovers from Buy-out deficit 354m 452m Recovery Plan contributions 4.9m increasing to 21m for 13 years 9.5m for 23 years "Moral hazard" on the books S75 debt regime means that if Green wound up the scheme BHS would be liable for 452m Hogan Lovells 19

20 BHS: proposed restructuring in 2014 Members with small entitlements offered a lump sum or the transfer to a new scheme with less generous future pension Reduced the deficit to 80m Cash injection from shareholders HOWEVER clearance from the Pensions Regulator was not forthcoming document disclosure.. Hogan Lovells 20

21 BHS: bright horizons 2015 BHS sold for 1 216m debt due to Arcadia written off 40m secured debt retained by Arcadia Hogan Lovells 21

22 BHS: the end of the road 2016 CVA s75 debt estimate of nearly 600m CVA fails and BHS enters Administration The scheme enters PPF assessment period Pensions Regulator launches "investigation"... Hogan Lovells 22

23 BHS: what was the "wrong-doing"? Dividends in the early years? Pension deficit? Unsuccessful restructuring of the pension scheme? Sale of BHS for 1 to DC? Hogan Lovells 23

24 The Select Committee

25 Select Committee focus Were there any failings on the part of Philip Green? dividends in the early years refusing to contribute to the scheme aborting the pension restructuring because of Regulator queries sale of BHS to unsuitable owner being rich... Were there any failings on the part of Dominic Chappell? mismanagement of business taking money out of the business (family flights)... Hogan Lovells 25

26 Select Committee recommendations Financial Reporting Council, Pensions Regulator Insolvency Service Serious Fraud Office Hogan Lovells 26

27 Lessons learned

28 Lessons learned Corporate Perspective No easy solutions when business on a losing streak and there's a large pension deficit Dowry sales don't necessarily provide "blue water" Limited liability concept under real pressure in pensions political if not legal Clean hands active and positive engagement co-operating with the Regulator no yachts! PPF plus solutions Trustee Perspective Decisions need to be justified how would they be explained to the Select Committee Hogan Lovells 28

29 What's next

30 Possible changes to the legal/regulatory regime Strengthening the Regulator's information gathering powers "more flexible" provision of information & compel parties to "submit to an interview" Mandatory clearance in all cases? or only where scheme significantly underfunded/security of scheme at risk? Restrictions on dividends? Valuations/Funding more "on-going supervisory" role for the Regulatorre "approval of and setting limits to recovery plans" and ensure scheme is "treated fairly" Power to reduce pension increases permit switch from RPI to CPI or wider power to reduce/suspend increases in certain circumstances Hogan Lovells 30

31 Speaker Claire Southern Partner, London People are often surprised to find out that Claire's a pensions lawyer. She's learned to take that as a compliment. She enjoys working closely with clients to find solutions to their problems and believes that pensions law is much improved by some straight talking and a sense of humour. Claire likes variety and this is reflected in the wide range of clients and matters that she works on. She has developed specialist practices in trustee friendly derivative instruments and the VAT recoverability of pension scheme expenses. She enjoys guiding trustee boards through complex and challenging issues. The key to doing this well is understanding that 99% of trustee decisions are not complicated once the 'white noise' of jargon and technical detail has been filtered out. Focus on what's important to members. Be confident you could look them in the eye and said you did the best you could for them. T Claire.southern@hoganlovells.com Areas of Focus: Pensions Hogan Lovells 31

32 Speaker Faye Jarvis Partner, London Faye Jarvis prides herself on building strong working relationships with her clients, ensuring her advice is always tailored to their needs. Faye has extensive experience advising both employers and trustees on complex scheme mergers, funding arrangements, liability management exercises and the pensions aspects of corporate transactions. She has a particular focus on investment issues advising trustees and fund managers on investment management agreements, investment in pooled funds and the legal aspects of LDI programmes. Faye also advises product providers on the establishment of their pension products. Faye regularly works with her trustee clients to resolve member queries and is experienced in dealing with Ombudsman's cases. Faye is a member of the Society of Pension Professionals' Financial Services Sub-committee. T Faye.jarvis@hoganlovells.com Areas of Focus: Pensions Hogan Lovells 32

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