Sharp practise by businessmen to avoid a company’s pension liabilities when a firm goes bust are under scrutiny.
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Pre-pack deals which are arrangements directors have made to sell and carry on trading with a company that has gone to the wall, are leaving retirement savers high and dry, claims the government.
Typically, a business will go bust and a white knight investor steps in after administrators have been appointed.
The new investor buys the business and carries on trading but the government’s pensions rescue service, the Pension Protection Fund, has taken on responsibility for any pension scheme.
Reduced pension payments
But the PPF pays out reduced benefits to pension savers, who can expect to receive 10% less from their pension than if the scheme stayed outside the PPF.
High earners will also have their pension capped rather than paid at the full amount. For example, a worker aged 65 receives a maximum £35,105 a year calculated at 90% benefit. Some workers with more than 21 years’ service may have their payments uprated even though they are in the PPF.
Following the take-over of struggling department store chain House of Fraser by Sports Direct under a pre-pack deal that saw 5,000 pensions picked up by the PPF, the government has revealed directors who dissolve their businesses to avoid paying pensions could face disqualification and fines.
The new proposals from Prime Minister Theresa May signal new powers for the Investment Association which will demand companies show shareholders are given an annual vote on dividend levels along with an explanation of how the company can afford to pay them.
Investor concern
The association’s chief executive Chris Cummings said: “There is a concern among investors that some companies are utilising interim dividend payments to avoid shareholder approval.
“This removes the ability of shareholders to properly scrutinise the payment of dividends and risks undermining the strength of the UK’s corporate governance framework, which has long been a model respected around the world.”
The PPF looks after 5,588 pension schemes for 235,835 workers and former workers of companies that have gone bust.
Almost 133,000 are receiving pension payments averaging £4,479 a year.
Since April 2005, the PPF has paid out £3.6 billion in retirement benefits.
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