PPF: entry solution for overseas employers

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

The Olympic Airlines case highlighted a major problem in accessing the Pensions Protection Fund (PPF) for schemes with an employer based in the EU. The DWP has at last addressed this issue and is consulting on draft regulations that are intended to solve the problem.

One of the requirements for entry to the PPF is for all relevant employers to have suffered an "insolvency event". It is, in theory, possible, where an employer has suffered an insolvency event in another EU country, for secondary insolvency proceedings to be commenced in the UK, thus triggering PPF entry. However, in Olympic Airlines, secondary insolvency proceedings were refused because the company did not have an "establishment" in the UK. This requires the business to be continuing on a commercial basis, not merely maintaining an office for the purposes of winding up the operation (which will often be the case when the main insolvency proceedings have already been commenced in the home country).

This leaves schemes with EU-based employers in an invidious position. They are technically eligible for the PPF and so have to pay the annual levy, but in reality are unlikely to be able to enter because of the difficulties in triggering an insolvency event in the UK.

There is an alternative route into the PPF which requires the scheme trustees to be of the opinion that the employer is “unlikely to continue as a going concern”. This only applies to types of employers listed in regulations, including public bodies, charities, trade unions, credit unions and building societies. This allows schemes that have employers who cannot suffer an insolvency event to enter the PPF.

In response to the problem identified in Olympic Airlines the DWP now proposes to amend the regulations to broaden the range of employers covered. Essentially the new regulation will apply to employers that cannot suffer insolvency proceedings or that are governed by the insolvency legislation but “circumstances arise so that an insolvency event cannot occur” (as happened in Olympic Airlines when the employer ceased to have an establishment in the UK). The intention appears to be that where an EU employer has an establishment in the UK it should be subject to secondary insolvency proceedings and enter the PPF via the normal route. It would only be once the employer ceased to have an establishment in the UK that the alternative route could be used.

The detail is set out in a consultation document and draft regulations which were issued last month. These also include minor changes to PPF compensation to bring it in line with some of the April 2015 flexibilities.