Managing Risk in the LGPS
Benefits of employer
covenant checks
•
Reduce the risk of pension liabilities falling on other fund
employers
•
Improves overall scheme governance & employer monitoring
•
Can use to adopt differing valuation strategies based on financial
strength of employer (including implementing security)
Benefits of employer
covenant checks
•
Likelihood of employer default remains high
•
Provides monitoring system to enable admission agreements to be
terminated.
•
Enables financial strength of guarantors to be assessed.
•
Protecting taxpayers
•
Believe employer covenant checks will become the norm in LGPS
funds over time.
Mitigating risk
•
Costs associated with monitoring covenant low compared to loss
to fund in the event of an insolvency
•
Recent conference at BDO highlighted that if you attempt to
address risk at a late stage unlikely to be successful
Sector wide covenant checks
•
Social Housing
•
Charities
•
Higher Education Sector
•
Further Education sector
•
Academies/Schools
Engagement with employers
•
Explaining benefit of covenant checks/reducing risk of cross
subsidy
•
Annual provision of information for covenant check
•
Developing dialogue so the pension fund are made aware of
material events affecting an employer
•
Ensuring employers understand key differences between
IAS19/ongoing & cessation valuations
Engagement with employers
•
Cessation valuations provided to all employers at each triennial
valuation
•
Annual cessation updates for employers at risk or with few active
members
•
Regularly monitor membership numbers
•
Understanding the use of external monitoring systems
•
Ensuring admission agreements remain valid
Internal monitoring and
processes
•
Engagement with Board/Pensions Committee
•
Clear process and procedures in place
•
Awareness of potential risk
•
Regular reporting and monitoring
•
Risk register in place
Valuation and inter-valuation
•
Funding Strategy Statement
• Clear process and procedures in place • Risk identified
•
Employer Categorisation
• Type of employer • Open/Closed • Recovery periods • AffordabilityThe Future
•
Guidance and Advice
• How can additional security be achieved? • Examples of best practice
• Consistent Approach
• Employers understand their responsibilities
•
Role of National Advisory Board
• Deficits Working Group
Managing employer risk in the LGPS
Part I – Types of security
Part II – Risks of invalid admission agreements
Part III – Rights in an insolvency event
Gary Delderfield and
Mandy Kaur-Sadler
Part I – Types of security:
•
What is security
•
Why take security
•
Different types of security that
What is security?
“Security is a right given to one party in the asset
of another party to secure payment or
performance by that other party or by a third
party”
What is security?
–
Different to ‘statutory’
Bond/Indemnity/Guarantee
–
These may be required under Regulations for
new agreements
Why take security?
–
Better contribution rates
–
Priority over other creditors
–
Avoid delays and potential uncertainties of
Payment Priorities
Fixed charge assets Preferential Creditors Prescribed Part Floating Charge Unsecured Creditors ShareholdersPension Fund Liability
Fees and expenses
The assets of the company
for
distribution
to
the
creditors do not include any
assets held by the company
on trust for a third party
.
Types of security – a simple
classification
Charge
•
Gives the Fund a
right
to appropriate an asset
to the satisfaction of a debt which will be
recognised in insolvency
•
Fund has ‘rights’ to the asset, not possession (cf
a mortgage)
•
Flexible – most assets present or future
•
Where other types of security may not be
Charges over Specific Assets
•
Land
•
Fixed Plant and Machinery
•
Intellectual Property
•
Cash/Bank Accounts
•
Book Debts
Fixed v Floating Charge
• Fixed charge
–
asset ascertained and definite
–
attaches immediately to charged asset
• Floating charge
–
can only be granted by a
company or an LLP
–
chargee’s rights attach to a shifting pool of
Other Forms of Security
•
Pledge
•
Mortgage
•
Assignment by way of security
What are the risks?
•
Administering authorities have a legal obligation
to administer the fund and ensure that bodies
have valid grounds of participation
•
Technically, the employees of that employer are
not entitled to participate in the LGPS
•
More importantly, does this offer any leeway for
a participating employer to evade its ‘liabilities’
in the fund
When should documentation be
revised?
Scenario 1
•
Admission agreement A provides for execution
as a deed by admission body (a company).
•
Admission agreement B provides for execution
as a deed by a governing body of a voluntary
aided school.
•
Agreement A is signed by one director.
•
Agreement B is signed by two governors of the
school.
Scenario 2
•
Admission Agreement in name of “AB Limited”
•
Certificate of incorporation of change of name to
“AC Limited”
Scenario 3
•
Admission Agreement for “AB” in place
•
AB is unincorporated institution
•
AB incorporates as a company limited by
guarantee
Scenario 4
•
AB is an admission body.
•
AB ceases to have any active members – only
liabilities are deferred and pensioners.
Scenario 5
•
AB is a housing association.
•
AB amalgamates with CD, also an admission
body.
•
Are AB and CD’s admission agreements still
Part III – Rights in an insolvency
event
What are the rights of an administering authority
as a creditor in an insolvency event?
Employer Risk
•
A company can be placed into a formal insolvency procedures by
its directors, shareholders, creditors or the court.
•
The main UK corporate insolvency procedures, each run under
the control of an appointed insolvency practitioner, are:
Administration
Company Voluntary Arrangement
Liquidation
Administration
• A procedure where a company may be rescued or reorganised or where its assets may be realised under the protection of a statutory
moratorium.
• Statutory defined purpose(s) – a sliding scale:
– To rescue company as a going concern;
– To achieve a better result, for creditors as a whole, than on a winding up; and
– To realise property to make a distribution to one or more secured or preferential creditors.
• Administrator appointed to take custody and control of the company’s business and assets. Appointment automatically ends after one year.
• Administrator carries out his functions in the interests of creditors as a whole.
• Initial creditors’ meeting to vote on administrator’s proposals.
• Creditors vote – one vote per £1 of unsecured debt.
• Proposals may be approved with or without modifications or otherwise rejected.
• Proposals approved if >50% (in value) of all creditors vote in favour but invalid if >50% (in value) of unconnected creditors vote against.
• If approved, the proposals will set out how the administrator intends to manage the affairs of the company and his entitlement to draw fees and expenses.
• Creditors then receive updates by way of biannual progress reports.
• Influencing the administrator’s actions
• Taking action against the administrator
Administration
• A procedure where the company and its creditors come to an agreement which is implemented and supervised by an insolvency practitioner.
• Purpose – to allow the company to settle its debts by only paying a proportion of the debts due.
• Requires creditor approval of 75% (in value).
• Once approved binds all creditors who were entitled to receive notice of the proposal – whether known or unknown and even those who voted against the proposal.
• Not binding on secured or preferential creditors.
• No statutory moratorium.
Company Voluntary Arrangements
•
Depending on the value of a creditor’s debt they may have an
influencing or blocking vote (if they hold more than 25% (in
value) of the debt) affecting whether the proposals are passed.
•
A CVA can be challenged in court on the grounds of unfair
prejudice or material irregularity.
CVAs
• An alternative to rescue mechanisms.
• Purpose – to realise assets and distribute to creditors.
• A terminal process – the liquidator takes control of the company’s assets and all employees are automatically dismissed.
• Either compulsory (via a winding-up petition) or voluntary (creditors voluntary liquidation if company insolvent or members voluntary liquidation if solvent).
• Liquidator appointed to collect in assets and distribute them in a prescribed order.
Liquidation
• CVL - both the creditors and the members can nominate a person to be liquidator at their respective meetings. Creditors’ choice prevails.
• CVL – creditors may raise questions of the directors and the proposed liquidator at the creditors meeting.
• Compulsory liquidation - Official Receiver (the “OR”) acts as the liquidator in the first instance. Creditors can influence the appointment and identity of an external liquidator to replace the OR.
• Request the liquidator to summon further meetings at which they could (with a 50% majority):
– remove the liquidator from office; and/or
– form a liquidation committee.
• Challenge a liquidator’s excessive remuneration.
• Apply to court if they suspect there has been a breach by the liquidator of his duties.
