The Pensions and Lifetime Savings Association (PLSA) has urged the government to alter the upcoming Corporate Insolvency and Governance Bill to avoid “unintended negative consequences”.

The group warned that the bill “opens the door” for bank lenders to be higher in the “pecking order” than employees’ pensions when looking to recover cash from a company insolvency.

Indeed, in a recent pensions bulletin, Lane Clark and Peacock (LCP) highlighted that whilst Labour opposition had previously tabled an amendment that would have elevated pension debts to that of a priority creditor in the event of insolvency, this was never put to a decision and so remains “outside the bill”.

LCP also stressed that whether the "apparent super-priority issue is intended remains to be seen", adding that if it is, the law of unintended consequences could apply, with trustees being "more wary of offering flexibilities" to employers for fear that they will be "doubly disadvantaged" should the sponsor become insolvent. .

However, in a letter to the Business, Energy and Industrial Strategy (BEIS) Parliamentary Under Secretary of State, Paul Sculley, the PSLA has highlighted a number of “small but significant” amendments to the wording of the bill, which would rectify these issues without compromising on intention.

The suggestions include limiting the bank debts that gain super-priority to only those that become due and payable on a non-accelerated basis during the moratorium, as well as narrowing the definition of financial arrangements that gain super-priority, to only cover the bank debts and not extend to all financial arrangements and lending.

The group also suggested amending legislation to provide a Pension Protection Fund (PPF) assessment period be triggered when the company enters a moratorium, echoing the recent sentiment of Baroness Drake.

At the second reading of the Bill at House of Lords on 9 June, Baroness Drake stressed that “the bill weakens the position of defined benefit (DB) pension schemes and the PPF".

She stated: “Changes to the Bill are needed to ensure that the moratorium and restructuring plan discussions trigger a PPF assessment period or a passing of creditor rights to the PPF giving it a seat at the table and influence to address some of the implications of unsecured finance debt being granted super-priority over the pension scheme.

"In the helpful briefing session the other day, the Minister advised us that the department is having discussions with the Department for Work and Pensions (DWP) and the PPF.

"I hope they turn out to be positive, but in Committee appropriate amendments will need to be considered.”

LCP also highlighted that it seems as though these issues are being "teased out" by the Lords, with the PLSA having also briefed MPs and Peers on the issue ahead of the Bill’s second reading and the House of Commons Committee Stage, which has been scheduled for 16 June 2020.

PLSA director of policy and research, Nigel Peaple, added: “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 (PPF).

“Overall, the proposals will have the effect of reducing the protection and rights of DB schemes and the PPF where companies are in financial distress.”

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