As Toys R Us seeks shelter in the Pension Protection Fund (PPF) for its deficit, following the dumping of pension scheme liabilities by Bernard Matthews (now under investigation by the Pensions Regulator), BHS and Carillion, *Professor Prem Sikka comments that too many companies are using a procedure known as “pre-pack administration” to sell-off a company’s assets for the benefit of shareholders, banks and private equity concerns, abandoning pension scheme deficits in the process.
There is a general concern that the pre-pack administrator, in agreeing to the pre-pack in consultation with the company’s management team (and usually its secured creditors), favours the interests of the managers and secured creditors ahead of those of the unsecured creditors. The speed and secrecy of the transaction often lead to a deal being executed, about which the unsecured creditors know nothing and offers them little or no return.
Bad management can plan for a prepack months in advance, line up an administrator – and then be back running the business immediately. It means when retailers fail they are often being kept with the same directors when it would be much healthier if new management arrived and with fresh money to invest (Nottingham Law School Journal, Peter Walton).
Last year, the FT reported that some 148 pension schemes with £3.8bn of liabilities have been offloaded into the Pension Protection Fund (PPF, header above) through pre-pack administrations and that directors, shareholders and bankers extracted an extra £3.8bn from companies by dishonouring the contracts with employees. Another 20 schemes were being assessed and the numbers are growing.
Some companies use pre-packs to extract high executive remuneration, returns for shareholders and dump the pension scheme liabilities with the knowledge that 90% of the pension deficit may be made good by the PPF. The PPF was established by the Pensions Act 2004 to rescue distressed pension schemes, but the amount of compensation received is less than a member would have been entitled to under the rules of their original pension scheme.
Professor Sikka advises that all companies with a pension scheme deficit be required to submit an annual plan to the Pension Regulator explaining how they seek to eliminate it and there should be a binding commitment to reduce the deficit. To this end:
- All share buybacks, dividends and other forms of returns should be conditional on a plan to eliminate the pension scheme deficit.
- This plan needs to be approved by the Pensions Regulator.
- Each year the company should explain whether the previous promises to reduce the deficit have been delivered.
- Whenever a company with a pension scheme deficit engages in a merger or takeover it should be required to seek approval from the Pensions Regulator.
And is the pensions regulator to blame for the Universities Superannuation Scheme crisis?
David Bailey, professor of industry at the Aston Business School in Birmingham and John Clancy, pensions analyst and former Leader of Birmingham City Council argue that the Pensions Regulator, not universities, is the driving force behind proposed cuts due to its nonsensical approach to discount rates.
Read their article in the Times Higher Education, which describes itself as the data provider underpinning university excellence in every continent across the world.
* Professor Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex