Pension trustees force companies to brink

Finance directors have been warned they can expect more companies to be
forced into receivership by pension trustees, after manufacturing company
Armstrong Group was driven into administration last week.

Armstrong Group, a subsidiary of engineering company Caparo with a turnover
of £30m and 450 employees, was pushed into administration when the trustees of
its pension scheme sought to take advantage of the government’s financial
assistance scheme (FAS).

The company has a pension deficit of £36m and has been in negotiation with
its trustees for over two years. Armstrong Group offered the scheme a share of
its cash flow, and Caparo later offered to put cash into the scheme, but the
trustees rejected both proposals in favour of using the FAS parachute.

Under the FAS, the trustees could claim extra benefits of £12,000 for each of
the 120 members in the scheme. The decision by the trustees of Armstrong Group’s
pension scheme to push the company into receivership shows the growing influence
pension schemes now have over how businesses are run.

Before the developments at Armstrong Group, company directors were already in
a position where they had to consult trustees on any potential acquisitions or
takeovers, and obtain their approval before proceeding with any transactions.

This provides trustees with the opportunity to leverage a stronger agreement
for the pension fund, and introduces a set of interests that must be
accommodated in the deal process.

Nick Wood, corporate recovery partner at Grant Thornton, said the influence
of trustees over mergers and acquisitions were well documented. He said that new
examples of companies going into administration because of pension deficits were
‘happening all the time’, and warned that more companies could find themselves
in such a situation.

‘Over the next two to three years we are certainly going to see more of this.
Trustees are in a difficult position. They have to decide what is in the best
interests of the pension scheme, and sometimes that involves putting a company
into insolvency,’ Wood said. But although pushing a company into insolvency may
appear to favour pension scheme members, the benefits are not always clear cut.

According to law firm Addleshaw Goddard, only a percentage of the Armstrong
scheme’s members will benefit. ‘Under the rules of FAS, only 4% of employees
will benefit from this insolvency approach because they were above or within
three years of their scheme’s normal pensions age,’ said an Addleshaw Goddard

Related reading