When the National Coal Board was privatised in 1994 to become UK Coal Plc, the government must have thought that was the end of its involvement in the business and, as a consequence, its expensive defined benefit pension scheme. One wonders, therefore, what rumblings in the Houses of Parliament have resulted from the recent restructuring of UK Coal, which has meant that the expensive pension scheme has been taken back into the public fold by transfer into the Pension Protection Fund (the PPF).
It is not that long ago that the Pensions Regulator, established by the Pensions Act 2004, was pushing firmly against what is known as "scheme abandonment", that is, a restructuring of a business extracting the pension scheme from the ongoing enterprise. At first glance, the restructuring of UK Coal may look like a reversal of that approach, but the detail of the restructuring suggests otherwise.
The UK Coal scheme is unique in many respects in that it is protected by legislation (the Coal Industry (Protected Persons) Pensions Regulators 1994) and comes with a lot of baggage. The desire to protect beneficiaries of the scheme must have been high on the agenda during the regulator's review of the proposal, together with the objective of saving jobs for the 2000 employees of UK Coal.
The restructuring proposal involved the transfer of the business into two new companies: one to hold the mining element of the business and the other to hold the brownfield development side. UK Coal's initial proposal involved all contributions ceasing once the scheme had gone into the PPF, with the scheme taking an equity stake in the brownfield development side of the business. This would have resulted in the effective dumping of all accrued and future liabilities of the scheme on the public purse with UK Coal continuing to trade, deficit free. It will come as no surprise that this proposal was rejected by the regulator.
UK Coal pleaded that the size of the scheme deficit (£900m on a buy-out basis) meant that if the PPF did not take the scheme in full, it would be forced to enter into an insolvency procedure, putting 2000 jobs at risk.
However, it appears from the regulator's report under s89 Pensions Act 2004 that during discussions, a potential creative solution was developed that improved the insolvency analysis and which meant that UK Coal would avoid an insolvency process and continue to fund the scheme through the PPF, thus improving the position for scheme members.
The end result has not let UK Coal off the hook and should not be seen in any way as a precedent, as the solution reached was very specific to the circumstances at hand and the fact that the regulator and the PPF were involved from the start. No dividends from the mining company to its shareholders until the scheme is fully funded and the scheme having a 75.1% equity stake in the brownfield development company means that the scheme controls the lion's share of the economic interest in the whole business.
This is certainly not a scheme abandonment and will be welcomed by all stakeholders in the UK Coal scheme. Although unusual for the PPF to take on a scheme when the business is continuing to be profitable, it should be encouraging to other businesses which may need to look for flexible ways to deal with a scheme deficit. And, of course, the beneficiaries of those schemes who can perhaps be more confident that the PPF will not simply give in to companies threatening insolvency if the PPF does not take on their pension liabilities.
Jessica Walker is a senior associate in the Restructuring, Bankruptcy & Insolvency group at Mayer Brown.
This piece first appeared on economia