Distressed pension schemes

A pension scheme or scheme sponsor in distress is a complex and difficult time for pension trustees. Specialist help is usually needed to find the solution that offers the best protection for member benefits.

A pension scheme facing an extreme funding deficit and/or sponsoring employer facing insolvency is serious. There is no simple solution to such complex situations - many approaches to restructure pension schemes can be considered. Employer insolvency and entry into the Pension Protection Fund (PPF) is not necessarily inevitable.

We have an extensive track record of acting as independent trustee for pension schemes in PPF assessment. However, our experience shows outcomes can be improved if we are appointed as professional trustee to a distressed pension scheme well ahead of PPF entry.

Follow the distressed case journey below by clicking the boxes to learn more about what pension trustees need to consider at each stage.


Trustees should obtain independent covenant advice. If the sponsor defaults on the Schedule of Contributions or it isn’t possible to agree a valuation within the statutory deadline, the Pensions Regulator must be informed. You may also need to tell members the position.

  • Could the scheme continue with reduced contributions and a longer recovery plan?
  • Should the amount of risk being taken in the investment strategy be reduced?
  • Should you increase the prudence loading in the funding assumptions to reflect the weak covenant?

These measures will in turn increase the deficit so it can seem like a vicious circle. The question will arise – can the deficit ever be paid off? If the scheme’s ultimate destination is the Pension Protection Fund (PPF), they often prefer a scheme to arrive at its door sooner rather than later. This is because, over time, more members move from deferred to pensioner at which point they become entitled to higher levels of PPF compensation (known as ‘PPF drift’).

If this isn’t a material issue and the dividend the scheme would receive from an insolvency is not eroded by the passage of time, two barriers to continuing the scheme are removed. If the scheme and sponsor can survive, they may benefit from more helpful financial conditions in the future. In the same way, the sponsor is given time to turn its business around.

Can the scheme continue in its present form?

Case study: UK manufacturing business

The issue

The 2016 actuarial valuation was overdue, resulting in Pensions Regulator (tPR) involvement. The employer was trading at a loss and its covenant was assessed as ‘tending to weak’. It was unable to underwrite the risk being taken by the scheme’s investment strategy, which was heavily weighted in favour of equities. The employer group proposed transferring the trade and assets to another group company in return for property assets with attaching rental income.

What we did

We assessed the proposed covenant as being unlikely to be able to support the scheme over the longer term unless financial conditions were especially favourable. Robust negotiation resulted in several different proposals from the employer group before we agreed the trade and assets would be retained in the sponsor together with the property and rental income from a connected tenant.

The result

A viable recovery plan was agreed and the 2016 valuation was completed on a basis acceptable to tPR.

Is there another way to save the sponsor?

Can the scheme continue in its present form?


Having assessed the situation, it becomes clear the sponsor cannot both support the pension scheme and continue trading. Insolvency is inevitable.

There are two sponsor-led options that could enable it to continue trading while the pension scheme enters the Pension Protection Fund (PPF) and its obligations to the scheme cease - a Regulated Apportionment Arrangement (RAA) and Company Voluntary Arrangement (CVA).

Both require conditions to be met and the support of the pension trustees and regulatory bodies in order to succeed. Neither are easy alternatives to supporting the pension scheme.

Company Voluntary Arrangements

A CVA is a qualifying insolvency event for Pension Protection Fund (PPF) assessment and the PPF will assume creditor’s rights on behalf of the pension scheme. If the CVA is successful, the scheme will pass to the PPF and the former sponsor can continue to trade.

The CVA process is likely to be cheaper and more straightforward than a Regulated Apportionment Arrangement (RAA) as Pensions Regulator clearance isn’t needed.

To approve the CVA, the PPF will require the following conditions to be met:

  • insolvency must be inevitable without the CVA
  • the proposed dividend return to the pension scheme from the CVA must represent a substantially better return than it would receive from a liquidation and must be a reasonable proportion of the scheme’s s75 deficit
  • the pension scheme must be treated fairly compared to other creditors
  • anti-embarrassment equity must be available and the continuing business must be viable - the PPF is unlikely to retain is stake over the longer term and will look to realise value as soon as practicable.

Regulated Apportionment Arrangements

RAAs must be cleared by the Pensions Regulator (TPR), which must be satisfied a better outcome could not be achieved for the pensions scheme by exercising its powers. TPR clearance will not be forthcoming without the support of both the pension trustees and the Pension Protection Fund (PPF) support. Having such support doesn’t make clearance inevitable, however.

The PPF will need:

  • a dividend materially better than would be achieved from a conventional insolvency
  • an anti-embarrassment stake in the continuing business of the former sponsor

Successful RAAs are rare as the costs of the process are considerable and must be borne by the sponsor.

Is there another way to save the sponsor?

RAA case study

The scheme

A defined benefit (DB) scheme, closed to accrual some years before we were appointed as independent trustee. The 2017 scheme funding update showed a buy out basis deficit of £18.8m and funding level of 33%.

The issue

This was a complex case where the sponsor was in financial distress and the identity of the statutory employer was unclear. Read the full case study to learn how issues were resolved and the regulated apportionment arrangement (RAA) was achieved.

CVA case study: Allied Healthcare

Allied Healthcare is the UK’s largest homecare provider, delivering care to 13,500 people, working with 150 local authorities and 90 clinical commissioning groups. It was sponsor to 2 defined benefit (DB) pension schemes.

The issue

The employer became distressed after facing additional unexpected liabilities, some backdated 6 years. It couldn’t continue to trade and support the DB scheme, putting thousands of jobs and the provision of care to vulnerable people at risk.

What we did

By liaising with the overseas private equity owner, employer group and Pension Protection Fund (PPF), we agreed a CVA. The pension schemes entered PPF assessment in return for an enhanced dividend and 40% shareholding in the continuing former sponsor.

The result

The former sponsor was able to continue trading, safeguarding jobs and future care provision. We arranged a buyout of benefits in excess of PPF compensation levels for one of the DB scheme and the other entered the PPF.

Ensure PPF entry rules are met

Is there another way to save the sponsor?


RAAs are rare and CVAs - although apparently becoming more prevalent (see House of Fraser and Mothercare) - still require stringent conditions to be met and often this is not possible. In these cases, where the sponsor cannot continue, it will fall into administration. This is the most common qualifying insolvency event for Pension Protection Fund (PPF) assessment and it is vital to ensure PPF Entry Rules are met.

  • Are you sure all your pension scheme members were employed by companies that have had (or are capable of having) qualifying insolvency events?
  • Are there any historical unpaid debts lurking in relation to former sponsors that have ceased to participate in your pension scheme?

If you are unsure, investigative work should start straight away to tie up loose ends. The last thing a pension trustee wants is to have members who cannot find a home in the PPF.

Ensure PPF entry rules are met

Case study: pottery manufacturer

We needed to manage this large pension scheme through the PPF (Pension Protection Fund) assessment process after a well-known pottery group’s insolvency

What we did

We conducted a comprehensive assessment of the pension scheme, which had over £200 million in assets and 7,000 members. This included:

  • data and benefit audits
  • GMP (Guaranteed Minimum Pension) reconciliation of over 10,500 records
  • discharge and wind up of a large defined contribution (DC) section

The result

Happily, our work enabled entry requirements to be met and the pension scheme was successfully transferred to the PPF.

PPF+ buy out

Ensure PPF entry rules are met


If your pension scheme’s funding position is above PPF compensation levels at the assessment date, a better outcome for members is for the pension trustees to try and secure benefits with an insurer (known as a PPF + buy out).

Additional assets may be available to your pension scheme in the form of a dividend or realisation of a shareholding. If this is the case, you need to secure an early ‘buy in’ with an insurer to fix a price above PPF benefits with the option to enhance the policy when the additional assets become available.

PPF+ buy out

Case study: SR Technics

The issue

This airline supplier had a £200m defined benefit (DB) scheme. The UK business had suffered significant losses over several years and wasn’t able to financially support the pension scheme on an ongoing basis.

What we did

The overseas parent group didn’t have legal liability for the UK pension scheme but had made repeated extraordinary payments over many years. Following detailed and robust negotiations with the Swiss parent, we agreed a debt compromise with clearance provided by the Pensions Regulator.

The result

  • A lump sum payment was paid into the pension scheme, following which the UK business had no ongoing liability to it.
  • The pension scheme entered Pension Protection Fund (PPF) assessment. As it was funded above PPF benefits, a ‘light touch’ assessment process was agreed.
  • A £200m buyout at c120% of PPF benefits was then completed with Pensions Insurance Corporation (PIC).

If your pension scheme is in distress or the scheme sponsor is at risk of insolvency, we can help find the optimum outcome. Contact us to find out more.

Speak direct to our specialist in this area

Picture of Alex Davies Director at PSGS

Alex Davies


Or call us on:

0118 207 2900

Read more

Dealing with distress – part one: keep calm & carry on

Dealing with distress - part two: radical surgery

Dealing with distress - part three: PPF assessment & PPF+ buy out

Read the blogs

Wind up/buy out

Are you really sure…? Learning lessons from PPF cases

PSGS case study

Regulated apportionment arrangement (RAA)

Exit management & de-risking

Achieving financial certainty in closing pension schemes

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