News | May 28, 2019

Debenhams CVA to pull pension scheme out of PPF Assessment Period

Debenhams is the latest high street retailer to hit the headlines with financial struggles potentially affecting its pension scheme. At the time of writing, a CVA (creditors’ voluntary arrangement) has been approved which, if completed, should pull the pension scheme out of the PPF assessment period it is currently in.

Administrators were appointed to Debenhams on 9 April 2019, followed on 10 April 2019 by the de-listing of Debenhams’ ordinary shares from the London Stock Exchange. On 26 April 2019, the company proposed two CVAs (one relating to Debenhams Retail Limited, the main trading arm, and one relating to Debenhams Properties Limited). A Debenhams press release stated that “the CVA[s] [do] not seek to compromise claims of any creditors other than landlords, local authorities and inter-company liabilities. All trade suppliers and the entitlements of employees will continue to be paid in full…”

Terry Duddy, Executive Chairman of Debenhams, said “the issues facing the UK high street are very well known. Debenhams has a clear strategy and a bright future, but in order for the business to prosper, we need to restructure the group’s store portfolio and its balance sheet… Our priority is to save as many stores and as many jobs as we can, while making the business fit for the future.”

The Debenhams scheme entered a PPF assessment period when the CVA proposals were lodged. During an assessment period, the PPF determines whether the scheme has sufficient assets to meet its protected liabilities. If not, the scheme enters the PPF, meaning members face benefit caps and potential cuts to their pensions (i.e. PPF level benefits).

When a CVA proposal is lodged and a scheme enters a PPF assessment period, the PPF acquires the pension scheme’s voting right as a creditor of the employer. The PPF’s guidance on CVAs, published in June 2018, sets out its approach on exercising this voting right in situations where schemes are to be rescued and remain whole (as in the case of Debenhams):

  • The PPF consults with TPR in all cases. The PPF will normally vote in favour of or against a proposal rather than abstain from voting, but the PPF’s approach will depend on the purpose the CVA is trying to achieve.
  • Some of the persuasive factors encouraging the PPF to vote in favour of a CVA include that:
    • the proposal should provide a significantly better return than an administration or liquidation and be proportionate considering the section 75 debt that is being eliminated;
    • creditors are being treated equitably and the scheme is not being disadvantaged. In particular the PPF will look at connected and intra-group creditor positions; and
    • all costs incurred by the scheme will be paid by the company including legal and financial advisor fees.

The PPF guidance makes clear that although the PPF will liaise with TPR in all cases, PPF agreement to a CVA does not imply clearance from TPR. Unless TPR has actually given formal clearance following an application by the employer (increasingly rare – only 9 applications were made in 2015/2016 – but the number could rise with the introduction of the proposed strengthened voluntary clearance regime), then TPR’s Anti Avoidance powers remain available.

The Debenhams CVAs were approved on 9 May by a margin “significantly above” the 75% threshold of creditors’ votes needed for the arrangement to pass. The Debenhams scheme is now set to leave its PPF assessment period as long as the CVA is completed successfully. Debenhams have stated that pensions are expected to be paid as normal during the CVA process.