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The Actuary The magazine of the Institute & Faculty of Actuaries
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Reaching a compromise

The government has focused its attention on pensions in recent times, concerned no doubt by the long-term damage that failing defined benefit pension schemes can do to its popularity and to the public purse. Most of the attention has been to protect pension scheme members and to prevent employers walking away from their responsibilities. What the measures generally do not address, however, is what employers and scheme trustees are to do if the sponsoring business is viable, but at risk of being forced into liquidation by its long-term pension liabilities.
A solution for many companies and pension schemes is the Bradstock Agreement, a compromise agreement which is increasing in popularity and looks likely to remain a popular option even after the introduction of the Pension Protection Fund (PPF) in April 2005.

What is a Bradstock Agreement?
A Bradstock Agreement is a compromise, between a sponsoring employer and the trustees of a final salary occupational pension scheme, of a debt arising under section 75 of the Pensions Act 1995.
Such agreements are named after the case of Bradstock Group Pension Scheme Trustees Limited vs Bradstock Group plc (2002). This case concerned the ability of the Bradstock trustees to compromise a statutory minimum funding requirement debt. Calling in the projected £15.5m debt would have led to the company’s going into receivership, resulting in less money for members. The problem was solved by a compromise deal in full and final settlement between the Bradstock trustees and the company. The trustees in that case wanted comfort from the court that they could oust the jurisdiction of section 75 of the Pensions Act 1995 by accepting a lesser sum than the statutory amount due under section 75. The court held that this was possible where it was in the best interests of the beneficiaries. It would be in their best interests to receive more by way of a Bradstock Agreement than the trustees would receive as ordinary creditors on a liquidation of the company.

When is a Bradstock Agreement possible?
It can therefore be seen that the key to the viability of a Bradstock Agreement is the break-up value of the company, how much the trustees would receive on a liquidation as an ordinary creditor and whether the sum being offered under a Bradstock Agreement is more than the pension scheme pro rata share of the break-up value.
A Bradstock Agreement would normally comprise a lump sum being paid from the company at the outset to discharge all past, current, and future liabilities.
The trustees of a pension scheme have a duty to act in the best interests of the beneficiaries and obtain the best possible settlement, but they need to avoid putting the company into liquidation. The trustees can be held personally liable if there is no indemnity insurance in place so they need independent audit, actuarial, and legal advice.
It is interesting to note that Bradstock Agreements can have a significant effect on business sales and purchases. Purchasers, where they are buying a company with its own pension scheme, will want to insist that the employer reaches agreement with the trustees before the completion of the sale, whereby it is ensured that any full buy-out liability does not fall on the employer. Other considerations on business sales include what bulk transfer values will be made.

Changes in legislation
The government’s measures introduced on 11 June 2003 made matters worse for many companies struggling to cope with long-term pension liabilities. From that date, solvent employers must meet the full annuity buy-out costs of winding up a pension scheme, which therefore increases the section 75 debt considerably from the status quo before 11 June 2003.
As a result, trustees have gained the upper hand in negotiating a compromise since 11 June 2003. However, in one sense it is irrelevant whether the deficit is £10m or £30m if the company is worth a small fraction of this amount, has preferential creditors which already exceed the asset value of the company, and the trustees are merely ordinary creditors.
Under the Pensions Bill, currently working its way through parliament, a pension protection fund (PPF) is due to come into force from April 2005. It will broadly provide 100% compensation for pensioners and 90% compensation for all other members, subject to a compensation cap of £25,000. Sponsoring employers will pay an annual premium to the PPF, based on two components. The first charge will be a flat-rate levy based on the number of members in a scheme and the pensionable payroll; the second will be a risk-based levy depending on the scheme deficit.
The cost of PPF could be high for companies already struggling with the cost of their scheme. Indeed, the levy for a firm with, say, a £45m deficit could be around 1% of the deficit an additional bill of £450,000. We will need to wait and see to what extent the PPF will work or whether it will be bankrupt from the early days. As we draw nearer to April 2005, trustees will be more reluctant to enter into Bradstock Agreements, since if they can delay winding up to April 2005, they will at least have some protection under the PPF.

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