UK - The National Association of Pension Funds (NAPF) has called on The UK Pensions Regulator to clarify its reasons for not approving the Readers Digest UK pension deal, as the body believes this would help improve employers’ understanding at other defined benefit (DB) schemes.

In a statement yesterday, the American parent of Reader’s Digest UK said failure to resolve the £125m (€144m) pension deficit in the UK company - after TPR was unwilling to support a deal agreed between RDA, the trustees and the Pension Protection Fund (PPF) - meant the subsidiary was “unable to sustain its operations” and had filed for insolvency. (See earlier IPE article: Pension deficit forces Reader’s Digest UK into administration)

Following this development, Joanne Segars, chief executive of the NAPF, said: “Pension schemes and employers are still developing their understanding of how TPR will treat cases of this kind. There is a need for TPR, at the first appropriate opportunity, to clarify its reasoning for turning down the deal offered, to ensure there is clarity and understanding for all employers running DB pension schemes.”

The deal apparently rejected by TPR involved a cash contribution of £10.9m into the pension fund and a transfer of a one-third equity stake in the UK arm of Reader’s Digest, before the scheme was transferred to the PPF.

Segars added: “For some time now, one of the options available for a company in serious financial difficulties was to strike a deal with the PPF.  It would take on the DB pension scheme without the company becoming insolvent if the terms of the deal made financial sense to the PPF.”

However, Punter Southall Transaction Services (PSTS) suggested the well-defined terms on which PPF supports “rescue” deals seem to have been “called into question” by the Reader’s Digest case.

Richard Jones, principal at PSTS, said: “On the face of things, the terms proposed by Reader’s Digest do look in line with the previously understood requirements - they are existing investors and thus offered one-third of the equity and they propose a cash payment of £10.9m - which compares against the net assets of the UK business last reported as at 30 June 2007 at £9.2m.”

The question is therefore why TPR would object to such a deal, Jones suggested.

“The most obvious comment would be that this is just a negotiating stance and TPR does not find the suggestion of the US parent otherwise withdrawing support credible and thus requires more cash to be paid before approving the transaction,” said Jones.

He suggested TPR may have taken the view that more than £10.9m could be received by the scheme through an insolvency process so a higher one-off contribution would need to be made to make the deal acceptable. In addition, if TPR provided clearance for the deal this would mean it could not exercise its “moral hazard” to go after the US parent for further money.

Jones said this shows a potential gap between the position of the trustees and PPF and the regulator. “The PPF and the Trustees are being offered a good deal on the basis of the resources of the UK business and thus are required to accept. TPR may be thinking that the interactions with the US parent are part of the cause of the potential UK insolvency and thus is looking at a bigger picture,” he said.

“The accounts of the UK company, albeit considerably out of date, do show a large inter-company balance which might suggest that an argument could be created that there is an unhealthy relationship between the UK and US companies such that it would be reasonable to use the “moral hazard” powers.”

That said, despite the TPR veto in this case, PSTS does not think this is the end of PPF rescue deals because either the deal was not resulting in enough cash going to the scheme, making it a price negotiation not a conceptual discussion, or TPR is refusing clearance on the basis of a potential exercise of his “moral hazard” powers. 

Bob Scott, partner at Lane Clark & Peacock (LCP), argued that although the Reader’s Digest is based on specific circumstances, it does highlight “the importance of having a robust plan for meeting pensions deficits and for keeping TPR on side”.

“We await with interest developments in relation to other high-profile cases that the Regulator may be considering in the coming months.  These could include BT, which has recently announced that it has reached agreement with its trustees over funding a deficit of £9bn; and BA, which is reported to be looking to reduce pension benefits and save costs in an attempt to avoid a battle with the Regulator,” he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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