Employee Benefits Updates | New Pensions Minister | JLT

17 May 2015

Week ending 17 May: New Pensions Minister| EIOPA stress test| Scheme Funding Statistics| Victory for Nortel pensioners

New Pensions Minister

Pensions campaigner Ros Altmann has been appointed Minister of State for Pensions. She will be made a Conservative peer in order to take up the position.

Dr Altmann replaces Steve Webb, and previously worked as a director of Saga and was a “business champion” for older people for the Coalition government.

Iain Duncan Smith will continue in his role as Secretary of State for Work and Pensions.

For a list of ministerial appointments, click here (this link will take you to a UK Gov site)

The state opening of Parliament is on 27 May 2015. Whether there is a second Budget or not, we can expect a second Finance Bill.

EIOPA stress test

The European pensions regulator, EIOPA, has launched a stress test to look at the impact of a market crash or longevity shock on defined benefit and defined contribution pension schemes.

EIOPA, in cooperation with the ESRB, initiates and coordinates EU-wide stress tests to assess the resilience of financial institutions to adverse market developments. It plans to conduct a stress test this year for pension funds, formally called institutions for occupational retirement provision (IORPs). EIOPA requested the ESRB to provide adverse macro-financial scenarios for this stress test.

The document at the link below sets out the macro-financial scenarios for the EU-wide stress test for defined benefit pension funds. These scenarios include risks and vulnerabilities that have been identified, the underlying economic narrative and calibrated shocks to key financial market variables. These shocks should be interpreted as one-off, instantaneous and permanent shifts in asset prices relative to their end-2014 levels.

The scenarios are intended to inform the harmonised valuation of defined benefit pension funds under the so-called holistic balance sheet approach. Guidance on applying the stress test to defined benefit pension funds under national regulations or to defined contribution funds will be provided separately by EIOPA and is not part of this document.

For further details, click here (this link will take you to the ESRB website)

Scheme funding statistics

Defined benefit pension schemes are seeing little reduction in their size of deficit or length of recovery plan according to latest figures from The Pensions Regulator.

TPR’s latest statistics on funding levels cover schemes with effective triennial valuation dates in the year to 21 September 2013.

Key figures

  • 82.5%: average ratio of assets to TPs for schemes in deficit and surplus
  • 109.0%: average ratio of assets to TPs for schemes in surplus
  • 78.7%: average ratio of assets to TPs for schemes in deficit
  • 4.09%: average nominal single effective discount rate (SEDR) for schemes in deficit and surplus; with 50% of assumptions falling on or between 3.75% and 4.50%
  • 0.88%: average real SEDR for schemes in deficit only; with 50% of assumptions falling on or between 0.48% and 1.30%
  • 90.1 years: average life expectancy of a future male pensioner currently aged 45 for schemes in deficit and surplus
  • 8.5 years: average RP length for schemes in deficit

Victory for Nortel pensioners

Judges in the U.S. and Canada have issued a decision in favour of the members of the Nortel Networks UK Pension Plan and the UK Pension Protection Fund in the long-running "allocation" dispute. The decision means that, in essence, the UK pension plan and the other creditors of NNUK can share - on an equal footing with Nortel creditors worldwide - the US$7.3bn residual Nortel assets currently sitting in an escrow account in New York (known as the "Lockbox").

Judge Gross of the Delaware Bankruptcy Court and Justice Newbould of the Supreme Court of Ontario delivered their judgments on 12 May 2015 simultaneously. Both Judges adopted the argument made by the Trustee and the UK Pension Protection Fund (collectively known as the UK Pension Claimants) that the Lockbox assets should be divided on a pro rata basis based on creditor claims against the various insolvent companies.

The Judges held that the allocation methodology advocated by the UK Pension Claimants was correct, and that it should be adopted in preference to the various competing methods proposed by the other parties to the case. The UK Pension Claimants had argued throughout that, as a matter of fairness and given the highly integrated nature of the group and its assets, the proceeds of the joint asset sales should be shared among the insolvent entities on a pro rata basis, rather than companies in any one particular geography 'scooping the pool'.

Brief Background

At the outset of the Nortel bankruptcy, the Administrators of all the Nortel estates, recognising the hugely integrated nature of Nortel's business, and the difficulty of realising its assets on a country-by-country basis, worked together to sell the key assets and business units on a joint, global basis.

However, being unable to agree at that early stage how the resultant proceeds should be allocated among the insolvent entities, they agreed that the proceeds should be held in escrow in what became known as the "Lockbox" until agreement was reached. More than six years later, around US$7.3bn stood ready to be allocated. However, the question of allocation fell for judicial determination because the various stakeholders were unable to agree how the proceeds should be shared.

As previously reported, the trial of the Allocation Dispute was heard in May and June last year in Toronto and Delaware simultaneously. In an unprecedented act of cross-border insolvency co-operation, the Judges conducted that joint trial – connected by video-link, and broadcast across a private internet network to client parties worldwide – to determine how the principal assets realised from Nortel's global insolvency should be divided among the various insolvent companies. Last night we received their judgment.

The Decisions

Yesterday, both Judges agreed with a pro rata approach which had been advocated by the UK Pension Claimants.

In essence and subject to various conditions, this approach involves sharing the Lockbox proceeds among the various insolvent companies in proportion to the creditor claims which exist against each company. It is the fairest outcome for UK pensioners.

In reaching this view, both Judges paid close attention to our submissions on the integrated nature of Nortel's business and assets, and the manner in which it had operated prior to collapse. As Judge Gross commented in his judgment:

"The Court's adoption of pro rata allocation is the only outcome that reflects uncontroverted evidence and leads to a just result."

Both Judges rejected various alternative theories—some of them very extreme-- which had been advocated by other parties, including each of the separate groups of office-holders representing the European, U.S. and Canadian insolvent companies. In this regard, Judge Gross (of the US) observed in his judgment:

"The Courts also agree that the self-serving allocation positions of the Canadian Interests, the US Interests and the EMEA Debtors are not determinative or helpful."

Those representing the U.S. insolvent companies and the Canadian insolvent companies had advanced competing theories which would have seen the vast majority of the Lockbox funds go to the U.S. or Canada respectively, leaving much less for any other companies and their creditors. It is accordingly very much to be welcomed that those competing theories have been rejected.

Implications

As each judgment exceeds 100 pages in length and addresses highly complex issues, the UK Pension Claimants' legal advisers and financial advisers are still in the process of digesting the detail of the rulings, and the implications for the UK pension scheme. It is too early to assess how matters will develop from here, but the present decisions obviously represent a very positive result for members of the UK scheme.

The prospects of further hearings in respect of these matters, and of appeals by disappointed stakeholders, cannot be ruled out. However, with 6 years having passed since the insolvency began, the Trustee and the PPF both very much hope that this decision will lead to a positive conclusion rather than to more costly and time-consuming litigation.

Source:Nortel Pensions

Contact:

John W Wilson LLB(Hons) FPMI ACII, Head of Technical, JLT Benefit Solutions| Email: john_wilson@jltgroup.com