How CVAs are impacting pension schemes

Although pension schemes are not always the primary target of a CVA, the CVA will generally have some impact on the scheme.

Although the bar for successfully challenging a CVA is high and formal challenges to CVAs have been rare compared to the number of CVAs passed, in recent years there has been a spike in formal challenges. 

These have been led by increasingly frustrated landlords, who consider that other creditors and stakeholders should be sharing more of the burden of the restructuring compromises. 

The most recent high-profile challenge was the challenge to the Debenhams CVA, brought by a group of landlords funded by Mike Ashley’s Sports Direct group. 

On the facts of this case, the company proposing the CVA succeeded in defeating four of the five grounds of challenge and the CVA was amended to address the fifth. 

Impact of CVAs on DB schemes

Although pension schemes are not always the primary target of a CVA, the CVA will generally have some impact on the scheme.

The position of a pension scheme with a single employer is the most straightforward. When the CVA proposal is filed at court, this constitutes an insolvency event. 

If the scheme is underfunded, it will automatically trigger:

• a PPF assessment period; and
• a contingent employer debt (valued at the amount required to secure the benefits with an insurance company, i.e. the “buy out” deficit)

Where there is more than one employer in the pension scheme, a PPF assessment period may not arise unless all the scheme employers become subject to a qualifying insolvency event. 

Whether or not this happens will depend on the structure of the scheme.

Some schemes include a requirement to segregate the scheme into different sections (called a “partial wind-up” provision): one for the departing (insolvent) employer, and one for the remaining employer(s). 

If this is the case, the departing section will be treated in the same manner as for a single employer scheme, that is: 

• an assessment period is triggered in relation to that section; and
• a contingent buy-out debt arises in relation to that section. In this scenario the buy-out debt will generally be limited to the CVA company’s liability share.

If the scheme is a “last man standing” scheme, a PPF assessment period will begin only when the last remaining employer undergoes a qualifying insolvency event. 

It is not uncommon for the buy-out debt to be very large, as a result of the scale of the deficit in the pension scheme’s assets as compared to its liabilities. 

Exercising pension scheme vote 

A CVA proposal becomes binding on creditors only when the company’s creditors have approved the proposal.