UK - Pension funds with large shortfalls need to look at new ways of meeting their funding requirements, says Tim Cox, a partner at law firm Linklaters. He was speaking in response to a move by a small UK telecoms equipment maker to grant its pension fund trustees a charge of the assets of its US subsidiary in the event of being unable to meet its additional payments.
Satellite communications equipment maker Intelek said yesterday that it faces a pension fund deficit of eight million pounds (12.6 million euros). It replaced its final salary scheme with a money purchase scheme as at the beginning of October. In order to meet the net deficit of 5.6 million pounds (8.8 million euros), the group has agreed to a schedule of contributions over the next nine years, and to further secure the scheme’s interest in part, a charge has been granted to the trustees over 2.4 million pounds (3.8 million euros) of the assets of Intelek’s US operating company, Paradise Datacom.
Although uncommon, the move is entirely legal. Says Cox: “Minimum funding requirement regulations lay out various possibilities to ensure that schemes can make good of shortfalls – providing letters of credit, setting aside assets, providing a charge. Injecting cash is still preferred, but is not ideal for funds short of money.
“Ensuring more money will be available to employees if the firm was to go into liquidation is surely a good thing. With equity markets having fallen, and more pension funds finding themselves with serious shortfalls, we might see more schemes looking at new means of meeting requirements.”
Consultants have expressed their concern with the concept of providing a charge.
Matthew Demwell, European partner at Mercer Human Resource Consulting points out: “What if the company securing the fund goes bust? Where do employees come in order of priority if the sponsor goes bust? How do other creditors feel about this? Indeed, funds will look at innovative ways of fulfilling their requirements, but there are concerns. Providing a charge is a possible solution but far from being a panacea. Insurance-based solutions could also be considered.”
Another point of concern expressed by one consultant is the question of self-investment, which is considered “bad practice”. In the case of Intelek, there is a degree of inter-relationship involved between the sponsor and the assets over which the trustees have a charge. James Dixon, president of Paradise Datacom, was appointed to the Intelek board on October 9 this year. The question raised is what if Paradise Datacom is sold off?
Pete Murray of Multiplex Pension Trustees Ltd, adviser to the Intelek pension fund disagreed that the companies’ co-dependence was an issue. He said it was coincidence and quite normal that Dixon should be appointed to the board. “This is a way of protecting the employees and the pension fund, “ he said.