UK Pension Regulator Taking Equity Stake in Faltering Companies

>David Norgrove, the Pensions Regulator, told the National Association of Pension Funds that the month-old Pensions Protection Fund (PPF) was already swapping pension obligations for shares, according to a report from business.telegraph Web site.

“We have already faced cases where an operation would go under if it could not leave its pension plan   behind, allowing it to fall into the PPF,” Norgrove explained, according to the Web site report. “We have agreed in those cases that a new company, without the pension plan, should be created in order to preserve employment. But this has been on the condition that the pension plan, and therefore the PPF, should benefit from any recovery by taking a stake.”

>The UK regulator is able to take straight equity, a prescribed percentage of profits, or priority on the equity return if the company is sold. “I do not think we have any policy intention of becoming an investment fund,” asserted Lawrence Churchill, PPF chairman, according to the Web report. “I am not familiar with the companies the regulator is referring to, or whether it is a realistic or hypothetical prospect.”

>However, he said the idea was that “if a company had prospects for future growth, the pension plan could benefit.”

>In its guidance notes, the pension regulator admitted that “equity return is something funds have traditionally avoided because of the legal restrictions,” but added: “Creditors are often forced to negotiate for equity. Pension creditors should be no exception.”

>A spokesman for the regulator said the details of the transfers were confidential. Pension experts said the government was able to take up to a third of the equity, which contradicts the current law that pension funds should not hold more than 10% of the shares of their parent companies.

>The PBGC insures US private-sector defined benefit pension plans.