"Innovative" arrangement allows struggling company to shed pension liabilities before sale

The regulator said the case was "unusual" in a report (4-page / 96KB PDF) setting out the insurance arrangement that allowed members of the Uniq plc Pension Scheme to receive compensation above that which would have been provided under the Pension Protection Fund (PPF). The pension scheme's claim on the company's finances was stronger than that of any other creditor, it said.

However Stephen Soper, an executive director with the regulator, said that the Uniq case showed that the Pensions Regulator "stands ready to work with all parties" in cases where a scheme's sponsoring employer was too financially weak to meet its liabilities without an inappropriate investment risk being taken.

"The Uniq case is a good example of what close and positive cooperation between the pension trustee, sponsoring employer, regulator and PPF can achieve. The funding challenges had appeared intractable and threatened the solvency of the business. No recovery plan was possible without taking inappropriate investment risk," he said.

The scheme's position of dominant creditor "paved the way for an innovative solution that enabled the scheme to maximise the value of its interest in the employer and for the company to be sold as a going concern - achieving benefit levels at least equal to PPF compensation and protecting PPF levy payers," he said.

After a six month assessment period the 20,000 members of Uniq's defined benefit occupational pension scheme will receive "more than the PPF levels of compensation", according to the report. However, they will still receive less than what their benefits would have been under the scheme.

A defined benefit scheme is a scheme that promises a set level of pension once an employee reaches retirement age no matter what happens to the value of the pension investment. Members of such schemes whose employers can no longer afford to pay the pensions they have promised can claim compensation from the PPF, which is funded by contributions from eligible schemes.

In its report, the Pensions Regulator said that the company's ability to support any conventional rescue plan for the pension scheme was dependent on its ability to raise fresh capital. It calculated that, by preventing Uniq from going into insolvency both the scheme members and the PPF would be "significantly better off" as they would gain "a sufficient stake in the surviving business to ensure no exploitation of them post-restructuring".

Pensions law expert Carolyn Saunders with Pinsent Masons, the law firm behind Out-Law.com, explained that in taking the decision, the regulator was acting within its statutory duty to protect the PPF.

"It is only really in extreme circumstances that the Pensions Regulator is able to allow an employer to escape its liabilities. Here, the solution reached was consistent with the regulator's statutory duty because the Uniq scheme will not now fall into the PPF," she said.

"In the event of insolvency, any shareholder value would be wiped out due to the size of the debt owed to the Scheme. As a consequence, the economic reality was that the Scheme effectively owned the Group. The threat that the pension deficit posed to the Group's solvency made it too difficult to find suitable terms for raising fresh capital," the report said.

"The Group's view was that, without the Scheme to support, it would have a reasonable prospect of future growth, thereby maintaining employment and generating value which would be lost in insolvency," it said.

The scheme was able to sell its stake in Uniq to Glencore Foods for £113 million in July 2011, the report said.