When it took its as-yet unexplained decision to push the UK branch of Reader’s Digest into administration in February, despite an agreement the company had reached with its trustees and the Pension Protection Fund (PPF), the Pensions Regulator crossed a very public line.
Under the original agreement, Reader’s Digest UK agreed to make a £10.9m contribution to the company pension fund and to transfer 33 percent of the equity in the UK business to the Fund. This means that if the company had then failed anyway, the PPF would be better off by both the cash sum and the one-third equity stake, which would, of course, have a value even with the company in administration. With the regulator vetoing the deal, the PPF, assuming it accepts the fund, will have only whatever the fund’s position was before the deal. The reason this looks so strange is that the regulator has a duty to protect the PPF and its judgement here is likely to wind up depriving the fund of a significant amount of value.
As Gary Cullen, pensions partner at Maclay Murray & Spens notes, this is the first time since inception five years ago that the regulator appears, in the eyes of the entire business and advisory community, to have got a decision wildly wrong.
Of concern is not so much that a well-loved, if rather quaint, institution has been cut off at the knees; the problem is that FDs from a raft of other companies grappling with outsized pension deficits who find themselves in a similar position to Reader’s Digest, and who have struck deals with their trustees and the PPF, will now have some anxiety about the possibility that the regulator could come after the fact and undo those deals for reasons known only to itself.
“In a very real sense, what this decision highlights is that there is no one regulating the regulator,” says Mike Smedley, a partner at KPMG. “Clearly, the regulator had some motive for rejecting the Reader’s Digest deal, but it has not given any reason. It would be very helpful for the rest of the business world to know what the logic was that drove its decision. Otherwise, how does any company know where it stands and what it can do when it negotiates a deal with its creditors?”
In the past, it has been criticised for a lack of transparency in its judgements, not least in the last report on its activities published by the National Audit Office. However, the regulator’s judgements have largely been either technical in nature or out of the public gaze and, as such, have not stirred up anything like the sense of astonishment and concern that has followed the Reader’s Digest decision.
One explanation for the regulator’s decision – and it can only be a speculative explanation given its silence on the matter – is that it simply misjudged the seriousness of the company’s situation.
“It may be that the regulator’s accountants came to a different and more optimistic view of Reader’s Digest UK’s financial position than the company was alleging,” says Maclay Murray & Spens’s Cullen. “If this had happened, the regulator would be likely to feel that the deal was unnecessary and so would not approve it. So it seems that it just got this one completely wrong.”
The regulator, of course, has every right to have its own accounting experts scrutinise a company’s books before accepting any deal. But it is not clear if this was the case with Reader’s Digest. If it did and the accountants view was that the company was not in as bad a position as it was making out, the subsequent collapse into administration does not exactly validate that view.
Smedley points out that the regulator has two duties: to protect scheme members and to protect the PPF from companies offloading their pension burden unnecessarily into the fund. It does not have a duty to protect jobs in any company. He adds that what we now have with Reader’s Digest is a much worse pos ition than that which was being proposed.
“The administrator is now controlling the UK business of Reader’s Digest, whereas before a much more orderly process had been agreed that would allow the company to continue trading under its own steam,” he says. “What the PPF has now is whatever assets were in the scheme when it collapsed. Let’s not forget that the reason for its troubles were precisely a large (£125m) deficit in its fund.”
Smedley says he is concerned a small group of people with a great deal of power is behaving in a way that seems opaque to the rest of the world. “Other regulators are obliged to issue statements about what they are doing, but one gets a sense that there is a lot happening behind closed doors [at the Pensions Regulator],” he says.
He adds that the regulator would argue that its Determinations Panel, mandated to “determine whether to exercise certain regulatory functions of the regulator and, if so determined, to exercise them”, acts as an oversight mechanism for its activity, but that much of what it does is more about inactivity – a non-action, such as failing to approve a deal – than a proactive exercise of its powers, such as issuing a contribution notice. “It is no good if a regulator just says, ‘we don’t like this’,” he says. “You have to know why it doesn’t like it and what it would like instead, or you cannot manage your affairs.”
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