British pensions at mercy of foreign owners

Published on Saturday 20 February 2010 14:04

THE collapse of the Reader's Digest pension fund with a £125 million black hole will have re-ignited fears about the safety of their pensions for hundreds of thousands of employees relying on schemes with big deficits, particularly those working for overseas employers.

The recession has taken its toll on pensions. An astonishing 200,000 people are waiting to hear what will happen to their pension pots as a record 357 schemes queue up for assessment for entry into the Pension Protection Fund (PPF), which compensates members of bankrupt schemes. This compares with 34,286 members of 1,427 schemes accepted into the safety net since it was set up five years ago.

Those waiting for support include staff who worked for Allied Carpets, Royal Doulton, Woolworths, Singer & Friedlander and the Dunfermline Building Society, as well as some charities and football clubs.

The 1,600 members of the Reader's Digest UK pension scheme are the latest to apply for support, after the firm filed for administration following a breakdown in talks with the regulator about resolving the pension fund black hole.

All UK companies are by law responsible for paying employees' promised pensions and making good any funding shortfalls.

In some cases a turnaround in business fortunes may mean a particular employer is unable to meet his obligations. Where a company goes bust, trustees of its pension fund can apply for PPF support.

If you have passed the normal scheme retirement age, then your pension will be paid in full up to a cap of 31,936 at 65. If you have yet to reach retirement age, you will only receive 90 per cent of the pension due, up to 28,742 at 65, and diminishing on a sliding scale according to age. At 55, for example, the cap falls to 24,121.

However, there are cases where, subject to approval by the UK Pensions Regulator, the PPF will accept applications for membership from trustees of schemes where the company has not yet imploded. In these situations the PPF takes over responsibility for paying pensions in return for the assets of the scheme, plus an additional injection of cash or other investments.

This should safeguard the pensions at risk and allows the company to stay in business, protecting jobs.

But before the regulator will agree to any such deal it has to be convinced the company genuinely doesn't have the money to meet its liabilities. Essentially this implies its assets, profits and cash are less than half the outstanding debt on the fund.

It is believed Reader's Digest had offered to pay 10.9m cash into the scheme with some additional equity to stave off administration, but this was insufficient to gain approval from the regulator.

A statement from the watchdog said: "The regulator is sorry to learn that the directors of Reader's Digest have sought the appointment of administrators. We had hoped that an alternative solution could be found for the pension fund but this was not possible. The regulator is now considering its next steps, including use of its powers."

The parent company of Reader's Digest UK is the Reader's Digest Association in the US. The regulator can require overseas parents to make good any shortfalls in UK pension funds. But this entire area is fraught with difficulties, and is sensitive if not a little murky.

The sensitivity arises because a huge chunk of British industry is now foreign-owned, with potentially millions of employees relying on overseas parents to pay their pensions. It is murky because there is very little the regulator can do to force such firms to honour their commitments.

Punter Southall's Danny Vassiliades says: "The UK regulator doesn't have any jurisdiction overseas, so employees should be aware that they can only rely on the UK operation to pay their pensions.

"If the UK firm gets into difficulties, they can't rely on being part of a big global group to bail them out. It's not a question of what is right or what is wrong. Big companies based overseas will have to ask themselves: is there a case to direct significant capital to the UK to pay into a pension fund, or should they divert that money somewhere else around the globe where it can be invested more profitably?"

The Reader's Digest case is further complicated because the American parent is itself subject to US Chapter 11 bankruptcy proceedings, whereby a court oversees attempts by a company to rearrange its debts and potentially offload others, so it can emerge intact to trade solvently again.

However, its plans to emerge from Chapter 11 have been temporarily scuppered by the refusal of the UK Pensions Regulator to accept its offer of a settlement for the UK pension fund.

Vassiliades believes that the regulator rejected the offer either because it believed it could get more, or from fears that allowing the US company off the hook would set a dangerous precedent which might encourage other overseas firms to attempt to remove themselves from the burden of pensions liabilities. The US is of particular concern, since Chapter 11 bankruptcy proceedings are not infrequently used there.

Yet the regulator recently won a fight with US transport group Sea Containers, which operated the failed GNER rail company in the UK. It finally bowed to pressure to settle a $270m (138m) deficit on two pension schemes it operated in the UK before it filed for Chapter 11 protection.

However, the bottom line for UK pension savers is that public pressure is the primary weapon the regulator has at its disposal to persuade foreign companies into meeting their obligations, where there are no sufficient assets in the UK which could be seized and liquidated.

Taking account of risks

IF YOUR firm or pension scheme collapses, you should be rescued by the Pension Protection Fund (PPF). However, you may not receive all the pension you were entitled to, as payments from the scheme are capped depending on your age and whether or not you are retired, writes Teresa Hunter.

Annual increases are likely to be lower, so your pension will erode further over time. Widows' pensions will also be scaled back, pro rata with their spouses.

Finally, there are no guarantees. If the scheme comes under too much pressure, the PPF could cut back what it is paying further.

If you are worried about the security of your pension, then you could transfer your benefits out of the scheme as you approach retirement. However, this is a drastic step, as the amount you are allowed to transfer out will be lower than the value of the benefits if you stay in the scheme.

However, if you are on target for a pension of more than 28,000 then it may pay you to at least consider your options.

The first important consideration is the willingness and ability of your employer to make sure the pension is paid. Here you need to consider the size of any black hole in the context of the value of the company. If the deficit looks easily affordable, then you have little to worry about. But if the ratios are all wrong, then you should seek further assurances.

Who owns the company and where the headquarters are situated are key questions. If your ultimate employer is a foreign firm, as with so much of British industry, the takeover of Cadbury being the latest example, then you should be aware there are risks here. The pensions regulator has no legal jurisdiction outside the UK.

Is the UK business sound and does it have a future? Companies and, indeed, industries, do not necessarily last forever. If you work for an old heavy industry, then there are further risks to factor in.