'Creative' restructuring of UK Coal avoids liabilities being foisted on the PPF, says expert.

Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that forcing a struggling company to increase its contributions to a pension scheme in order to fill that scheme's deficit was not always the best solution, and could in some circumstances result in that company's insolvency.

Tyler was responding to a report (5-page / 38KB PDF) in which the regulator revealed that it had rejected attempts by the company to transfer pension scheme liabilities to the PPF, which pays compensation to pension scheme members whose employers have become insolvent. Scheme trustees and UK Coal instead agreed to split the business into separate mining and property companies, with the pension schemes giving up any claim on the property division in return for a share of the business.

"When a scheme is in deficit and the company's business is performing badly, possible solutions may be thin on the ground," Tyler said. "Sometimes what is required is a creative solution that gives the company some breathing space to invest in its business, while keeping the pension scheme trustee on board. The Pensions Regulator finally agreed to just such a creative solution in this case."

"This solution places high demands on the trustees, with their 75% stake in UK Coal's property business and a specific monitoring plan, and carries huge risks. However, if the trustees manage to pull it off, it will have stopped a huge hole being blown in the funding of the PPF," he said.

The restructuring related to parts of two industry-wide pension schemes sponsored by UK Coal Mining Limited for its employees and former employees. The 'UK Coal Sections' of the Industry Wide Coal Staff Superannuation Scheme and the Industry Wide Mineworkers Pension Scheme have approximately 6,800 members. According to recent figures, the schemes held aggregate assets of £451 million against an aggregated deficit of £900m.

According to the report, the regulator prevented UK Coal from transferring responsibility for the schemes to the PPF under a regulated apportionment arrangement (RAA). This is a statutory mechanism which allows a company to free itself from its financial obligations to a pension scheme in order to avoid insolvency, provided that certain conditions are met and the RAA is approved by both the Pensions Regulator and the PPF.

As an alternative funding solution, the parties instead agreed to split the business into separate mining and property companies. The mining division remained a sponsoring employer while the schemes invested £30m in, and gave up any claim on, the property division in return for a 75.1% stake. The new arrangement has resulted in "substantially all of the economic interest in the group" transferring from shareholders to the pension scheme trustees, according to the regulator.

Stephen Soper, executive director for defined benefit regulation with the Pensions Regulator, said that restructuring the business in this way created the "best available opportunity" to maximise the value of the UK Coal Sections as it allowed the company to continue to trade. This improved the likelihood that benefits would be paid to scheme members, he said.

"The restructuring has improved the outlook for the business and will enable continued support to be provided to the UK Coal Sections from an ongoing sponsoring employer," he said. "Where support is dependent on the restructuring or reorganisation of a sponsoring business, we are prepared to work creatively with trustees and sponsoring employers to achieve the best possible outcome."

The Pensions Regulator will "continue to engage" with the trustees, who have agreed to monitor ongoing risks to members' pension benefits.