Regulated apportionment arrangements 'no magic bullet' for struggling schemes, says expert

Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Pensions Regulator revealed that it had only approved 24 such arrangements, almost eight years after the mechanism was set out in law. An RAA can be used to transfer an employer's pension liabilities to the Pension Protection Fund (PPF), but only in extremely limited circumstances.

"Some corporate advisers tout Regulated Apportionment Arrangements as a magic bullet for solvent restructurings – but employers and trustees need to be aware that getting one is like threading a needle, with very exacting requirements that need to be met," said Meeks, a pensions expert at Pinsent Masons.

"These arrangements attract disproportionate hype, perhaps because they have been used in some high profile cases - such as Kodak, Uniq and MBI - but the Regulator has now confirmed they are very rare. Struggling employers need to be wary wasting management time and money pursuing a goal with low prospects of success," he said.

A regulated apportionment arrangement 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. If an RAA is approved, the payment of the employer's scheme funding debt is deferred or apportioned among the other employers remaining in a multi-employer scheme.

An RAA will only be approved if employer insolvency is inevitable, and if the outcome under the arrangement is demonstrably better than insolvency without exposing the trustees or the PPF to undue risk. The scheme should be being assessed for entry to the PPF, or be likely to begin an assessment period within the next 12 months.

Normally only schemes with insolvent employers can qualify for entry to the PPF, which is the UK's 'lifeboat' fund for defined benefit (DB) pension schemes that are no longer able to pay the pensions they have promised. This makes RAAs appear extremely attractive to companies that would otherwise face a disruptive business insolvency. The procedure also means that the employer will not need to cover its full statutory employer debt, calculated by reference to the cost of buying out members' benefits with an insurer.

The Pensions Regulator's own guidance on RAAs and employer insolvency states that this is an "extremely uncommon" way of trying to resolve a scheme's funding problems. Pensions expert Alastair Meeks said that the figures, which were obtained from the regulator by Pinsent Masons, backed up this guidance.