A regulated apportionment arrangement (RAA) has been granted as part of the Halcrow rescue plan.
An RAA sees the sponsoring employer being severed from the pension scheme with members going into the Pension Protection Fund (PPF). After this, the departing sponsor's share of employer debt is apportioned between one or more of the remaining participating employers.
Only 25 such deals have been agreed for schemes in the past eight years. They include high profile cases like BMI, Kodak and Uniq. However, the Pensions Regulator (TPR) section 89 regulatory intervention report published on July 11 reveals Halcrow Pension Scheme (HPS) met the criteria for an RAA to be implemented.
This criteria included availability of vital documentation about the defined benefit (DB) scheme's finances and provision of a credible rescue plan provided by Halcrow's parent company CH2M. This rescue plan included fresh funding from CH2M aimed at keeping the scheme members out of the PPF and preventing the scheme's sponsoring employer Halcrow Group Ltd (HGL), from going insolvent. CH2M has provided funding in the region of £110m to HGL since 2011.
The scheme matched other conditions for an RAA being granted including whether HGL would inevitably become insolvent. Independent financial advice sought by the scheme trustees in 2015 found HGL could not fund members' benefits without the support of CH2M and would inevitably become insolvent.
The timing of the RAA is also important given HPS is in a PPF assessment period with £633m of liabilities at 19 February 2016. PPF assessment had to be the case for an RAA to be granted.
Another condition for RAA eligibility was whether HPS 3,204 members would receive more funding from the scheme going insolvent than they would if they remained in the scheme. This condition was met after CH2M agreed to provide financial support for those transferring out of HPS. This included an £80m cash lump sum as well as a further one-off £50m company guarantee.
The £80m would be invested in a new DB scheme called Halcrow Pension Scheme No 2 (HPS2). This was set up by CH2M, the regulator, PPF and trustees.
HPS2 has identical benefits to the original scheme apart from the pension increase in payment and deferment which will be reduced to statutory levels and depended on when members left HPS. HGL would become the sponsoring employer of HPS2, remain answerable to the regulator and eligible for PPF protection if necessary.
Members are presently being consulted on whether they wish to be transferred into HPS2 or go into the PPF along with HPS and receive benefits at PPF levels. They have until August 6th to make their decision.
The PPF and HPS2 would also hold an equity stake in Halcrow of between 25% and 45%. This is dependent on the number of members who choose to transfer to HPS2.
HPS trustees remain responsible for the investment strategy of HPS2. However, PPF will be responsible for the investment strategy of HPS.
The RAA needed to be approved by TPR, and the PPF needed to confirm it did not object to the RAA.
TPR, CH2M and the PPF discussed the proposed RAA with trustees during January 2016 and April 2016. On 28 April the regulator issued warning notices to the directly affected parties.
An RAA was also proposed in the rescue plan for the beleaguered BHS pension scheme. However, a TPR spokesman said Halcrow was more viable for an RAA given it had a credible recovery proposal and all the necessary scheme documentation so that the suitability of an RAA could be measured and justified.
TPR chief executive Lesley Titcomb said the regulator was satisfied the RAA agreement was the best available outcome in challenging circumstances.
"This type of pension restructuring case clearly demonstrates when we [TPR] receive the information we require from co-operative employers and scheme trustees, we can use the tools available to us as part of the regulatory framework to agree innovative restructuring solutions," she added.
A PPF spokesperson said: "The PPF has been working with Halcrow and TPR to come to an agreement which best serves the interests of members and levy payers. We've agreed that any Halcrow members who don't wish to join the new scheme will become PPF members and receive PPF levels of compensation. The PPF will take an equity stake in the company, the size of which will depend on how many members PPF takes on."
Halcrow Pension Scheme Timeline
April 2010: TPR reviews HGL 2008 valuation, including a 16 year recovery plan with payments to the scheme of approximately £13m per year from HGL.
October 2011: TPR considers impact of the proposed Halcrow takeover by CH2M and then closed in May 2012.
November 2011: CH2M acquired Halcrow for £124m plus the settlement of £47m of bank debt.
December 2012: TPR investigates Halcrow due to a failure of the trustees and HGL to agree the 2011 valuation.
August 2015 and October 2015: Pollock vs. Reed High Court hearings on future of HPS.
November 2015: Trustees write to CH2M expressing support for exploring alternative options for providing members with benefits that are better than PPF compensation.
December 2015: High Court hands decision that transferring members to HPS2 without their consent is not legally possible.
January 2016 to April 2016: Proposal, including RAA, negotiated.
28 April 2016: CH2M submits final clearance application. Warning Notices are sent to the directly affected parties (DAPs) giving notice of our intention to grant clearance and approve the RAA.
28 May 2016: RAA approval notice issued following 28 day statutory referral period to Upper Tribunal.
31 May 2016: Employer and trustees issue letters to members explaining their options.
May 2016 to August 2016: Period for members to make their decision.
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