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Legal loophole threat to pension safety
Nicholas Timmins ,
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
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.
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.
"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
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
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.