The Pensions Regulator (TPR) has decided not to take any action against Bernard Matthews after the food products business used a pre-pack administration to offload its pension scheme in 2016.
In its section 89 regulatory intervention report, published this month, the watchdog said it had determined that there were "no reasonable grounds" to use its anti-avoidance powers after finding "no evidence" to suggest that the pre-pack was carried out inappropriately.
Furthermore, it found that a £25m high-risk investment by private equity fund Rutland Partners was not "materially detrimental" to the scheme, despite pushing it into a third ranking charge in the event of insolvency. It also noted that the business' decline was not "attributable to Rutland's performance" but wider market conditions.
Overall, TPR said it found "no evidence of unreasonable conduct on Rutland's part" at any stage of its involvement with Bernard Matthews, the scheme, or during the insolvency process.
Bernard Matthews had experienced financial difficulties since 2013 leading to Rutland's investment, which was provided in return for a 20% per year "payment in kind". While the investment was considered high risk - and gave Rutland a controlling stake in parent company Bernard Matthews Holdings - it was agreed as the alternative to an insolvency event.
While no clearance was sought from TPR, the trustees' agreement was required due to the change in its security, while Rutland did not assume any formal responsibility to the scheme.
Nevertheless, attempts to turn the business around were undermined by a decline in poultry prices and a further £10m of bank financing was agreed, with half being guaranteed by Rutland. Conditions worsened further and in 2016 Rutland began seeking a buyer and considering restructuring options.
Two credible offers were received, including from Boparan Private Office (BPO), but both were initially rejected due to the potential losses Rutland would experience. A higher offer of £87.5m was later submitted by BPO and, after appropriate advice was taken, a pre-pack administration was agreed, occurring in September 2016, with TPR having been involved for several weeks.
Lincoln Pensions director Luke Hartley said: "A theme is emerging with pre-packs. Provided that you think about the pension scheme, you take account of it, you talk to the pension scheme, engage in discussions in good faith with the trustees and TPR, you come up with a restructuring plan and a clear process to show how your thinking has developed, then that can show you've acted in a way that is reasonable and has taken into account the pension scheme."
While Rutland made a £13.9m profit, the pension scheme received nothing due to its place on the insolvency ladder. TPR said: "Rutland's profit was a legitimate consequence of the terms of its high-risk investment."
Hartley said this showed that private equity firms can seek to maximise the return on their investment so long as they act reasonable and can document that they've acted in an appropriate way, considering the impact on the pension scheme and other creditors.
Nevertheless, the case does show the need for pension schemes to truly understand their place on the insolvency ladder, Hartley said, especially in the context of Covid-19: "As a subordinated creditor, ultimately the trustees couldn't do anything. That's relevant for other trustee boards when considering contingency planning ahead of what is likely to be a hugely severe recession.
"Many trustees can take in faith getting returns on second-ranking or third-ranking security but, when it all goes wrong, that potentially gives them very little say in restructuring procedures outside regulatory involvement."
Trustees need to know to what extent their contingent assets - such as securities or guarantees - give them a "genuine seat at the negotiating table" and what is the reasonable expectation for the returns in an insolvency event.
Despite deciding not to take action, TPR said it would continue to "thoroughly investigate pre-pack insolvencies to establish whether the use of our powers can and should be used".
Hartley said pre-packs have proven to be "eye-catching", particularly where they involve household names, and therefore it is "important" TPR investigated them, even where it decides not to take action.
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