UK: Legal loophole threat to pension safety

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UK: Legal loophole threat to pension safety

By Nicholas Timmins, Financial Times

June 16, 2003

UK - Promised pension safeguards for members of final salary schemes could prove illusory because of a loophole in the draft law, a lawyer warned yesterday.

At the same time the government-funded Occupational Pensions Advisory Service said it feared members might not receive the protection promised.

Ian Gault, pensions' partner with the lawyers Herbert Smith, said the draft regulations that the government laid this week, requiring solvent employers to pay pension entitlements in full if a scheme is wound up, had potential weakness.

He said a company could restructure its assets and liabilities into other companies in the group then wind up the subsidiary, leaving employees short.

The problem arose, Mr Gault said, because the government was attempting to ensure that solvent employers met the full cost of pension entitlements, but was allowing trustees to agree a lower sum if meeting the entitlements in full would put the business at risk.

"Insolvent in the draft regulations merely means a company has entered into liquidation," he said. But that could include a voluntary liquidation where the company need not be insolvent at all.

The government "appears to have underestimated the risk of companies moving liabilities around and winding up subsidiaries".

He said: "We have already come across this in practice, and once the size of such debts has been vastly increased by insisting there has to be a full buyout, it is likely to be strongly in the interests of shareholders to take such steps."

If such companies also qualified for the new insurance scheme on grounds of technical insolvency, the incentive for them to pursue such a route would be stronger still.

Mr Gault's concerns were in part echoed by Malcolm McLean of Opas. Allowing trustees to agree a lower settlement if the full value would put the company at risk carried risks for employees, he said. In some schemes "it is difficult to distinguish in reality between the trustees and the employer - so there is a great potential for a carve up". That could leave members worse off than if the company went bankrupt and an insurance scheme was in place.