The Pensions Regulator Sanctions Regulated Apportionment ArrangementWednesday, 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.