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Cardano: British Steel deal underscores need for new rules

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The UK should consider introducing a form of Chapter 11 bankruptcy for pension funds to allow more companies to restructure their obligations, according to Cardano’s Kerrin Rosenberg.

The consultancy firm’s chief executive was responding to today’s announcement of a restructuring of the British Steel Pension Scheme (BSPS).

The Pensions Regulator has granted “initial approval” for a regulated apportionment agreement (RAA), involving a £550m cash injection and BSPS taking a 33% stake in Tata Steel UK, its sponsoring employer.

A new scheme with “modified” benefits will be set up to replace the current BSPS and minimise the impact on the Pension Protection Fund (PPF).

Rosenberg said the BSPS case had “made it clear that the normal PPF route won’t always lead to the best outcome for trustees and pension scheme members”.

While TPR emphasised that RAAs remained a rare tool that it did not often approve, Rosenberg said recent cases involving Halcrow and BHS indicated that it was a solution for “significant” schemes.

“What has historically been an exception to the rule is now becoming more common than the rule itself,” Rosenberg said. “Surely that is a clear sign that the rules need to change. Pension funds that are very unlikely to meet their promises need another option beyond insolvency.”

He continued: “A more robust system would allow stressed pension funds to restructure and separate from sponsors who are unable to afford their costs any longer. What this delivers is a more realistic promise to scheme members, without the destruction of value that comes with the current PPF route.”

Currently, pension scheme members who transfer to the PPF before their retirement date have their benefits capped at 90% of what they were initially promised. The PPF does not grant inflation-linked benefits.

“If stressed pension funds were allowed to restructure in a more transparent way, a pension fund equivalent of Chapter 11, risk could be better shared between the company, the members and the PPF,” Rosenberg said. “Companies could be freed from pension obligations they simply cannot afford and members could get a better deal than entering the PPF.”

In February the UK government launched a formal discussion paper regarding reforms to rules for defined benefit pension schemes – including potentially streamlining the RAA process.

TPR has also floated the idea of allowing stressed pension schemes to be separated from the employer on the basis of scheme viability rather than the risk of employer insolvency.

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