The best protection for any Defined Benefit pension scheme is a strong sponsoring employer. However, in some extreme circumstances, where an organisation faces a serious risk of insolvency, this support may no longer be available.

In these instances it is currently possible to separate a pension scheme from its sponsoring employer, if in doing so the company can avoid becoming insolvent. The statutory mechanism for this is called a Regulated Apportionment Arrangement (RAA), and requires approval from both The Pensions Regulator (TPR) and the Pension Protection Fund (PPF), who will only approve the deal if strict criteria are met.

Following a number of high profile cases (Tata Steel, Hoover, Halcrow and Monarch), RAAs have become an increasingly prominent issue in today’s pension landscape. However, despite their growing media presence, RAAs are actually still incredibly rare, and the only RAAs completed since 2014 have been those listed examples.

The infrequency of these deals is testament to how much consideration is given to such cases, as well as the scrutiny and examination each deal requires. It is not uncommon for an organisation to attempt a financial restructure that fails to meet the requirements of an RAA. For example, we have seen a number of attempts that do not demonstrate that insolvency is inevitable within the next 12 months fail to meet criteria for an arrangement, and rightly so; RAAs should not be used by companies simply seeking to avoid an expensive pension commitment.

The Halcrow case is an excellent example of how an RAA can be successfully implemented, and is indicative of how this process can provide a positive and sustainable outcome for all parties involved. Halcrow was acquired by CH2M in 2011, along with its five DB schemes – the biggest of which had a buyout deficit of around £400m.

The scheme was unaffordable to the employer, which was relying on funding from its parent company to maintain its contributions to the scheme. In June 2015, the employer unilaterally attempted to reduce the level of annual increases without consultation with the members. This was then challenged in Court and found to be unacceptable. Without the issue being resolved, the threat of insolvency was very real.

The employer and its parent wished to honour the pension commitment as far as possible but could not afford the scheme as constituted. TPR and the PPF were satisfied that the insolvency tests were met, and so a settlement was reached whereby members were offered a new scheme that has less generous inflation increases but provided benefits higher than those offered by the PPF. The new scheme is eligible for PPF entry, but the chances of this happening have been significantly reduced by a number of factors that have greatly increased the strength of the scheme. This mitigation provided a much better return to the PPF than impending insolvency would have done, and ultimately shielded the company from going bust.

Ultimately our focus is on protecting the 11 million members of DB schemes and minimising the levy burden on employers. Accordingly the PPF will become involved in restructurings where there is an opportunity to reduce the call on its resources, always provided that a real solution is presented, rather than postponing a problem to a later date with the risk of a more significant claim in the future.

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