Pensions lens on the Corporate Insolvency and Governance Act 2020 (the 'Act')

Final amendments to the Corporate Insolvency and Governance Bill were approved by the House of Lords on 23 June 2020, and by the House of Commons on 25 June 2020. The Act came into force on 26 June 2020, however certain provisions have retrospective effect from 1 March 2020. It will have a significant impact on defined benefit pension schemes, and the ability of pension scheme trustees to take action if the scheme's employer is struggling. This legal update explores the Act's key provisions through a pensions lens.

The new law will provide a combination of temporary and permanent reforms to the UK's insolvency regime. Some provisions are new, whilst others relax or provide short-term breaks from elements of the existing corporate insolvency and governance statutory frameworks. The Act is predominantly pro-debtor and it contains mechanisms that will support businesses in their efforts to maintain solvency in view of the challenging market conditions caused by COVID-19.

The Act has attracted significant concern from the pensions industry. For businesses that sponsor a defined benefit ("DB") pension scheme, their scheme will be a key creditor, so the Act could scarcely be more pertinent to businesses, pension schemes and their trustees alike. On the one hand, the Act's key aim to assist businesses to maintain solvency is positive for DB pension schemes, as a solvent employer is key to a pension scheme's success. On the other hand, the Act arguably dilutes pension scheme trustees' powers potentially putting them in a weakened position when negotiating pension scheme funding.

Those that lobbied for the proposed legislation to be amended before it came into force, highlighted the need for a more nuanced approach to pensions law. The absence of any protections or rights in the new process for the lifeboat Pension Protection Fund ('PPF') or the Pensions Regulator ("TPR") caused concerns and in response to industry pressure, some amendments were made before the Act came into force. TPR and PPF will now receive notifications during moratoriums, and both bodies will be empowered to intervene with the conduct of company directors in certain circumstances, if necessary. New regulation-making powers will potentially also allow TPR and PPF increased creditor rights in future. However, concerns remain that the amendments did not go far enough in addressing industry concerns.

Winding-up petitions

Statutory demands ('SD') are a mechanism for applying pressure on a company (debtor) in respect of an unpaid debt. If a SD goes unsatisfied within the applicable timeframe, it provides a ground by which a creditor can lodge a petition for winding-up of the company. However, the Act temporarily changes this position. SDs issued between 1 March 2020 and 30 September 2020 will no longer be capable of being relied on as a ground for a winding-up petition.

Whilst turning to SDs would only be considered by scheme trustees in the gravest circumstances, it is an option that is available to them if an employer has failed to pay its requisite contributions to the scheme. This could leave schemes exposed, and without a remedy in respect of employers that may already have been in arrears with their contributions before COVID-19. There is a real risk that by losing key leverage in the short-term, scheme trustees' negotiating position may be negatively affected in the long-term with the security of members' benefits being weakened or the scheme falling into the PPF.

New moratorium

The Act introduces a new 'free-standing' moratorium, initially for 20 days, but with the possibility of extension by the court for up to a year. Applicable UK companies that are experiencing financial distress can utilise this moratorium to allow for them to attempt to rescue or restructure. Creditors (including scheme trustees) do not need to be consulted in advance of the company's application for the moratorium and will not be able to take any action during this time. The emphasis is on getting businesses back to a position of financial health, so moratoriums will not be appropriate for businesses with no prospect of surviving.

To allow for flexibility, there is no requirement for a detailed plan to be in place when the moratorium commences. The company's directors will maintain control of running the business, with an insolvency practitioner supervising. The moratorium is not classified as an 'insolvency event'.

During the moratorium, there will be certain expenses that continue to be mandatory for the company to pay. The Act brings occupational pension contributions within this mandatory ambit, but it does not specify whether it only applies to future contribution accrual. Whilst TPR has provided trustees and employers with guidance on deficit reduction contributions ("DRC") deferral requests (access more information on this in our blog here), the position remains to be confirmed if DRCs or other debts owed by the company to the scheme come within the ambit of occupational pension contributions that must continue to be paid during the moratorium for the purposes of the Act. It seems likely that the intention is for DRCs to be subject to a payment holiday rather than be classed as occupational pension contributions which must continue to be paid during the moratorium but hopefully the position will be clarified to provide much needed certainty.

The potentially problematic 'super priority' concept that had originally been proposed in the Bill was removed following a late amendment. The concern had been that DRCs and other debts owed to the scheme may be within the category of debts that creditors that do nothave to pay during the moratorium, which then would be prejudicial if super priority was activated. The result could have been that the scheme ended up ranking below a creditor that, using an alternative regime, it would be equal to.

Restructuring plan ('RP')

The Act introduces a new court sanctioned RP method for ailing businesses to come to arrangements with their creditors. This could be used to compromise a company's pension scheme commitments. The RP is a flexible option for a company to compromise its obligations, akin to a company voluntary arrangement ("CVA") but with different voting requirements and the RP will not amount to an 'insolvency event' in the way CVAs do.

Courts may sanction the RP, despite dissenting parties (either shareholders or creditors), through a new power known as 'cross-class cram down'. The cram down can be used if the RP is approved by 75% of applicable parties within each class, and, the court is satisfied that dissenters wouldn't suffer greater detriment than if an alternative option to the RP was used. This provides the court powerful discretion in deciding whether to approve an RP. It could result in a scheme being "crammed down" into an RP despite trustees voting against it.

Role of PPF

Schemes can only enter the PPF assessment period if relevant conditions are met in accordance with the Pensions Act 2004. The relevant triggers are as follows: scheme commencing wind up; scheme employer insolvency; scheme cannot be rescued; scheme has insufficient assets to secure benefits on wind up to the level that would be provided by the PPF.

Since neither a moratorium, nor RP, will be classified as an insolvency event, questions will arise for pension scheme trustees in relation to their scheme's PPF coverage. A PPF assessment period would not be triggered when a RP is proposed or approved. Furthermore, trustees will be wary about prejudicing their scheme's PPF eligibility by making a reduction to the scheme's s75 debt. It remains to be seen whether the PPF entry rules will be amended to allow debts to be compromised under RPs without prejudicing a scheme's entry to the PPF.

In relation to the new RPs, the PPF will not have the involvement that it usually would when a scheme enters PPF assessment (due to a CVA, for example). This means that trustees will retain control, whereas under the previous regime, this would have transferred to the PPF. Late amendments to the Bill do now allow for the PPF to have a more "hands on" role, compared to the initial draft Bill. However, the level of intervention that can be expected remains unclear. Uncertainty about the leverage of trustees as opposed to the PPF arises.

TPR guidance is yet to be provided on the robust new criminal sanctions that are due to be brought into force by the delayed Pension Schemes Bill, although it is widely expected to be produced at some stage. You can read the teams latest article on the Pension Schemes Bill here, and more detail about the reforms proposed reforms in our previous legal update here. It is not clear how the new moratorium and RPs will link into potential regulatory activity by TPR, guidance on this and the Act's interaction with the Pension Schemes Bill would be very welcome, however, there has been no indication that any such guidance is in the pipeline.

What next?

The aim of the Act is to provide greater flexibility in the insolvency regime to make it easier for companies in distress to navigate through the rough waters COVID-19 has left many of them in. Many of the changes are temporary but they have the potential to have a lasting and negative impact on the rights of pension scheme trustees where the employer is struggling.

Whilst the legislation was amended somewhat on its journey as a Bill through Parliament, to elevate TPR and PPF, the amendments do not go far enough to allay the very real and pressing concerns of the pensions industry. The Act weakens the remedies available to trustees if sponsoring employers are unable to honour their financial commitments to their scheme.

It is more important now than ever for trustees to keep their seat at the negotiating table and for employers and trustees to keep talking. The situations covered by the Act inevitably involve quick decision-making by companies and stakeholders, but trustees should make sure their voices are heard and seek to ensure that their views taken on board.

Trustees should consider obtaining legal advice on their position and options as well as advice from their covenant advisors if a sponsoring employer utilises a moratorium or RP. Employers with DB schemes looking to utilise the provisions of the Act should ensure that trustees are kept informed and that a seat at the table is kept free for them.