Pensions Regulator support for pension schemes in trouble

12 November 2014

The Pensions Regulator has explained how it helped to facilitate an innovative rescue plan for Kodak’s UK pension scheme and the restructuring of UK Coal’s operations, following a major fire.

We are grateful to the Regulator for this commentary on the two reports .

 

In January 2012, the Kodak group’s US parent, Eastman Kodak Company, entered Chapter 11 bankruptcy proceedings. This meant that the Kodak Pension Plan was at risk of losing both existing support from the wider Kodak group and ongoing contributions from its sponsoring employer.

In order to maximise the value available to the Kodak Pension Plan, a deal was agreed under which the trustees acquired Kodak’s cash generative ‘personalised imaging’ and ‘document imaging’ businesses. In exchange, the Kodak group was released from its liabilities to the Kodak Pension Plan.

Despite the acquisition, there remained serious doubts as to whether the assets could provide adequate support for the scheme’s existing liabilities. Therefore members were given the option to transfer to a new scheme which would offer benefits better than the Pension Protection Fund, but lower than in the Kodak Pension Plan. Members representing in excess of 94% of liabilities have decided to transfer.

The regulator and the trustees have agreed a governance framework to limit risks to member benefits and the PPF, including monitoring the performance of the acquired businesses and imposing restrictions on discretionary pension benefit awards and investments.

The regulator’s Interim Chief Executive Stephen Soper said:

“We are prepared to work constructively with employers in a distressed state, in conjunction with the pension trustees, to explore the merits of the available options. In these situations, the chances of a successful outcome are greatly improved when we are in dialogue with all parties at an early stage. The continuation of a scheme without a material sponsoring employer covenant will be extremely rare. However, in the Kodak case, the voluntary transfer of members to a new scheme offering lower benefits resulted in a reduced level of risk, improving the balance between the interests of members and the PPF.

“We recognise that the continuation of the new scheme leaves the PPF exposed to risk. Therefore the regulator and trustees have agreed a number of mechanisms to protect the PPF and we’ll continue to monitor the situation closely. Although the reduction of member benefits was considered appropriate in this case, it is a step that trustees should approach with utmost caution and care.”

The regulator has also today issued a report explaining its role in facilitating the July 2013 restructuring of UK Coal’s operations, following a major fire which resulted in the closure of the company’s Daw Mill mine.

This follows the regulator’s report published in January 2013 which detailed its activities in relation to the restructuring of the group in 2012. The report published today sets out the events occurring following that restructure, the impact of the fire at Daw Mill and the rationale for the regulator’s subsequent decisions.

Stephen Soper said:

“Sadly, the initial opportunity to survive and rebuild its fortunes - gained through the initial restructuring of UK Coal - was taken away by a catastrophic fire in the group’s main Daw Mill mine in early 2013. Our role in this new situation was to work with the parties concerned to reach the best available outcome for pension scheme members and the PPF. With greatly increased business challenges and risks, the regulator’s view was that balancing the needs of the company and the scheme was no longer possible."

The regulator notes that subsequent to the completion of the 2013 restructuring, UK Coal has been obliged to participate in a further restructuring, which is expected to result in a managed closure of the business. In July 2014 the PPF took on the assets and liabilities of the UKCOL Sections of the Industry Wide Coal Staff Superannuation Scheme and the Industry Wide Mineworkers’ Pension Scheme, and will provide compensation for their 7,000 members.