News that CH2M has been able to book a £37 million tax credit as a result of the pensions deal undertaken last summer will be a surprise to its employees and former employees who were members of the Halcrow Pension Scheme (HPS). As part of that deal, members were given the choice of either joining a new defined benefit pension scheme providing a reduced level of benefits compared to the HPS or moving to the Pension Protection Fund (our briefing on the deal can be found here).
The deal, a regulated apportionment arrangement, was only able to go ahead because the Trustees, the Pensions Regulator and the Pension Protection Fund were of the view that the insolvency of Halcrow Group Limited (HGL), the Sponsor of HPS, was imminent (would occur within 12 months) if the US parent, CH2M, withdrew its support to HGL. This was to be challenged by the Halcrow Pensioners Association (HPA). However, the costs associated with this challenge were too great for the HPA to get this through the courts and the deal agreed cannot be unwound even if the performance of HGL improves considerably. The new scheme and the Pension Protection Fund hold an equity stake in HGL (of between 25% and 45%) so that they benefit from any such improvement in performance. However, the former members of HPS have no direct claim on these funds and whilst it may be possible in theory to use any additional funds arising from the strong performance of HGL to augment benefits they could also be used to support a lower level of contributions from the sponsor going forwards.
Whilst the release of the deferred tax asset valuation allowance associated with HGL as a result of the deal (meaning that its deferred tax assets are now more likely to be realised than not) might be seen by some as a fortunate twist of the accounting rules we expect that questions will be asked as to the reach of the Pensions Regulator’s “moral hazard” powers in this case and whether it could have required the US parent to provide a greater degree of support to the UK pension scheme before agreeing to the regulated apportionment arrangement, as it has done in other cases.
It is also interesting that Tata is currently considering a similar arrangement with respect to the British Steel Pension Scheme (BSPS) with members expected to vote to close the BSPS to future accrual today. However, persuading them to accept a deal similar to the Halcrow arrangement may have just become even more difficult.