The Pensions Regulator Sanctions Regulated Apportionment Arrangement

Wednesday, July 11, 2012

The Pensions Regulator has given clearance to the British Midland Airways pension scheme entering the Pension Protection Fund (“PPF”). The scheme, and therefore the PPF, will receive significantly more than it would on British Midland’s insolvency. At the same time, British Midland’s owners, Lufthansa, will pay a voluntary contribution of £84 million for additional member benefits to mitigate the impact of the benefit reductions when the scheme enters the PPF.

The pension scheme has an estimated funding deficit of approximately £450 million on a buy out basis. The Regulator originally declined to give clearance to a proposal whereby the scheme’s liabilities were all transferred to a shell company, and Lufthansa, which had no statutory obligation to fund the scheme, had committed to provide conditional support over a 25 year recovery plan. The Regulator believed this plan, which was almost wholly reliant on investment outperformance, posed unacceptable risks to members and PPF levy payers.

The Regulator considered that it could not use its own moral hazard powers to issue financial support directions or contributions notices in this case, as not all of the legal tests were met. A key factor was the significant funding that Lufthansa had provided to British Midland which enabled it to continue as a going concern and pay scheme contributions.

The Regulator was only able to approve this regulated apportionment arrangement because it believed that its own moral hazard powers were unavailable and no better outcome for the scheme, or the PPF, could be found. The additional voluntary contribution made for members outside the PPF did not apparently form part of the Regulator’s consideration as to whether to approve the regulated apportionment arrangement. However, Lufthansa’s willingness to support the loss making British Midland meant that it would not have been reasonable for the Regulator to use its anti-avoidance powers. 

Current News

Cohabitee wins right to pension

The Supreme Court has ruled that a nomination requirement relating to the payment of a survivor’s pension under a public sector pension scheme discriminated against cohabiting unmarried couples and should be disapplied.


Reversing Trustee Decisions

Trustees have on occasion relied on the “Hastings Bass” rule to unwind decisions that subsequently transpire to have unintended consequences. The scope to do so has been narrowed by the recent Supreme Court judgments in the jointly heard cases of Futter and another v HMRC and Pitt and another v HMRC.


EU Solvency Rules dropped

The European Commission has announced that it is dropping its plans for a new funding regime for pension schemes.


Pensions for Mortgages

Nick Clegg announces a new government idea to allow parents to use their pensions to help children onto the property ladder.