The level of protection on employee pension benefits in the event of company insolvency would be reduced under the current draft of the U.K. Corporate Insolvency and Governance Bill, the Pensions and Lifetime Savings Association warned Monday.
The PLSA wrote to Paul Scully, parliamentary undersecretary of state for the Department of Business, Energy and Industrial Strategy and minister of state for London, warning that participants will come lower than banks and other lenders in the debt structure to recover cash from business insolvencies under the current draft of the bill.
The PLSA recommended that the U.K. Parliament amends the bill to limit banks' priority to recover cash that becomes due and payable during a period that allows up to 40 business days of protection — known as the moratorium — from legal processes against an insolvent company. The moratorium procedure was originally part of reforms set to be implemented by 2021, but has been fast-tracked to deal with the fallout from the coronavirus pandemic.
An assessment period by the £32 billion ($40.1 billion) Pension Protection Fund, London, should also be triggered when a company enters a moratorium process, the PLSA said. The PPF is the lifeboat fund for the defined benefit plans of insolvent companies.
"We and our members fully appreciate the need for emergency protective measures to help companies survive the unprecedented business disruptions from COVID-19. However, the new proposals will have unintended — but very serious — consequences for underfunded pension schemes where the employer becomes insolvent, as well as for the Pension Protection Fund," Nigel Peaple, director of policy and research at the PLSA, said in a news release.
"Overall, the proposals will have the effect of reducing the protection and rights of defined benefit schemes and the Pension Protection Fund where companies are in financial distress," he added.
The bill will be debated in the House of Lords on Tuesday.