Pensions Regulator cleans up Hoover’s pension mess

26 / 06 / 2017

A restructuring proposal by Hoover Limited in relation to its largest defined benefit pension scheme, The Hoover (1987) Pension Scheme (the 1987 Scheme), was approved by the Pensions Regulator (tPR) earlier this month. The proposal will see the 1987 Scheme enter the Pension Protection Fund (the PPF) and according to tPR “will achieve the best possible outcome for members in challenging circumstances, and help safeguard jobs at the company’s UK sites.”

The 1987 Scheme

The 1987 Scheme has approximately 7,500 members and is by far the largest of the four defined benefit schemes operated by Hoover. As at 31 March 2016, the 1987 Scheme had a deficit on a buy-out basis of approximately £500m and a PPF deficit of approximately £300m.

Financial troubles

At the time of the 1987 Scheme’s 2013 actuarial valuation, Hoover was having severe financial difficulties. The inability of the 1987 Scheme trustees and the employer to agree their 2013 valuation by the statutory deadline of June 2014 lead to the employer approaching both tPR and the PPF with several proposals which would allow Hoover to continue to trade free of the shackles of the 1987 Scheme. Unfortunately none of these proposals were successfully implemented and despite extensive negotiations, the trustee and the employer could not agree the level of future deficit repair contributions.

Regulated Apportionment Agreement

In early 2017, Hoover made another restructuring proposal involving a regulated apportionment arrangement proposal (RAA). An RAA is a mechanism which allows a distressed employer to separate itself from its defined benefit pension scheme liabilities if insolvency is otherwise inevitable, provided that an RAA would lead to the scheme being better funded than otherwise following insolvency. The criteria for an RAA are very strict (this is designed to stop employers abusing the mechanism) – included is a requirement that the insolvency of the scheme employer is inevitable within the coming 12 month period.

Skilled Person’s report

In this particular case, tPR took the decision to appoint a Skilled Person (under s.71 of the Pensions Act 2004) to report on the level of deficit repair contributions the employer could afford to pay into the 1987 Scheme. This was the first time tPR had exercised this power, which is a regulatory function reserved for the Determinations Panel. Both the employer and the trustee of the 1987 Scheme were supportive of this course of action, which removed the need for an oral hearing in front of the Determinations Panel.

The Skilled Person’s report found that the employer’s financial position had deteriorated and it could not afford to pay appropriate levels of deficit repair contributions. In fact, it was clear that the scheme could not be properly funded without support from Candy Group and its shareholders[1]. Candy Group – which had no legal obligation to provide support to the employer or the 1987 Scheme – declined to provide further financial support.

The employer’s business continued to deteriorate and markedly declined as a result of the weakening of the pound. Forecasts showed that insolvency would occur within 12 months, even without taking into account any additional payments to fund the 1987 Scheme to an adequate level.

Outcome

The Skilled Person’s report broke the deadlock between the employer and the trustee. As a result of the RAA, the 1987 Scheme is expected to transfer into the PPF at the end of the assessment period and will receive:

  • a cash lump sum of £60m from the employer (materially more than was expected on insolvency);
  • the trustee’s expenses in relation to the RAA; and
  • ordinary shares representing a 33% stake in the employer.

Comment

This is the first RAA of 2017 and only the second in the last two years. This type of restructuring is rare and tPR does not approach such proposals lightly. In this case, the appointment of a Skilled Person eventually broke the deadlock and provided tPR with clear and extensive evidence to allow all parties to reach a satisfactory conclusion. Interestingly the cost of the report was split equally between the employer and the trustee.

This year’s pensions Green Paper contained amongst other things, suggestions relating to the simplification of the process by which stressed employers can separate themselves from the burden of defined benefit pension liabilities. If these proposals were ever realised, deals such as this may become more commonplace. However, in the meantime the options for employers and schemes facing similar circumstances are extremely limited.

For further information, please contact Justin McGilloway at jmcgilloway@wedlakebell.com


[1] Candy Group acquired Hoover Limited (the employer) in 1995