Pension scams

[Stephen Brichieri-Colombi]

This topic is intended to highlight similar cases where employers seek to dump or reduce their pension liabilities. The term scam is used in its wider sense to cover cases which are either fraudulent or at the very limits of legality. The Trustees have refused our request for a sight of the RAA for the HPS, which, for the moment, inhibits our ability to assess in which category it should be placed.
In their 7-days roundup of legal issues, Sackers have kindly drawn our attention to the Milking and Dumping report below. I have written to the Pensions Institute to suggest they extend their research to include the application of RAA to HPS. If they do so, it will be interesting to see in which category researchers will place the current proposals.
Pensions Institute report on exploitation of pension schemes
On 3 August 2016, the Pensions Institute at Cass Business School published a report issuing a “stark warning” against the “ingenuity of businesses and advisers to milk and dump their pension schemes”. The research identified various ways in which scheme surpluses have been exploited, and deficits shed or sidestepped.
 The report calls on the Government to establish an effective Early Warning Programme (similar to that operating in the Pension Benefit Guaranty Corporation (the US equivalent of the PPF) in which TPR would actively seek out and start negotiations directly with weak employers, enabling it to pick up early signs of practices of the kind identified in the report.
www.[/size]pensions[/color][/size]-[/color][/size]institute[/color][/size].org/[/color][/size]reports[/color][/size]/MilkingAndDumping.pdf[/color]

[John Drake]

You'll be aware of this already Steve, but I'm putting it up for others who may be interested.

I googled Project Magnolia Ltd (see Newsletter 21) which took me straight to Companies House. The company was incorporated on 5 May 2016 with capital of £1 and Nature of Business "To be provided on next annual return". The Director is Richard Favier.

RF was also Director of STONEHOUSE SOUTH EAST LIMITED, incorporated on 19 September 2014 and dissolved on 30 June 2015 with debts of £583.7 million. The 31 Mar 2015 Return of final meeting contains this statement:

" The Company was incorporated in September 2014 to facilitate a Pension Protection Fund ("PPF") compromise for Monarch Airlines Limited ("MAL"). The Company received a defined benefit pension scheme ("the Scheme") from MAL (with a £584 million buy-out deficit) via a Regulated Apportionment Arrangement and subsequently entered into liquidation in order to trigger a PPF assessment period.

" The Company did not trade and has no assets other than a debtor of £1 due from the shareholder. This debt was not realised as it was not deemed commercial to pursue."

Grim reading - it all looks frighteningly easy.

[Richard Handy]

Try googling Richard Favier and more is revealed. E.g.:-

"Mr. Favier served as Head of Restructuring and Insolvency at the Pension Protection Fund (PPF) from 2005 to July 2013. Prior to that, he, advised government ministers on United Kingdom, European and international insolvency policy working. Previous roles have also included running the insolvency and recovery ..."

  "Awarded an OBE in 2011 for Services to Business, he was at the heart of all restructuring projects involving the PPF."

There is much more including information on Favier Ltd.

[Tim SMITH]

Winding up of Project Magnolia Limited

Winding up is under way. Please see the attachments.

[Stephen Brichieri-Colombi]

The link below from Reuters re Tata Steel is of interest.
The reduction in estimated liabilities shows that the Trustees were poorly advised by BDO that HPS was unsustainable. It looked that way in 2015, but any professional financial advisor should have been aware that financial and economic conditions can change over the 16 year lifespan of a recovery plan and not declare in court that a scheme is unsustainable.
The Trustees themselves should also have raised questions about the predictability of the future.
Does anyone know who are the actuarial advisors to Tata Steel?


http://uk.reuters.com/article/uk-tata-steel-pension-idUKKCN12O2FX

[finneyb]

We should not forget the back story that is driving CH2 to get rid of the HPS. Basically, CH2 need to raise $ 5 billion to cover employee shareholder payouts due to retirements in the next 5? years. To do this they need external finance of some form, which is to be decided - external finance will not like the uncontrolled risk of a defined benefit pension scheme and to make CH2 more attractive to investors it is controlling those risks. I understand they have also made significant savings in admin charges across CH2.  In short it looks to me has if they have had sloppy management of late and need to tighten up to become attractive to external investors.

[John Ratsey]

We should not forget the back story that is driving CH2 to get rid of the HPS. Basically, CH2 need to raise $ 5 billion to cover employee shareholder payouts due to retirements in the next 5? years.

In reality, are those shares worth the money they would like people to believe? The CH2M method for share price determination (I recall someone once finding a link to this on the www) is little more transparent than the Halcrow method. Open market share valuation punishes careless management in a way that internal share price valuation fails to do. One has to wonder whether the reluctance of other employees to mop up any shares for sale might be driven by a gut feeling that they are over-priced rather than people not having the money to pay for them.

[sreevesjc]

Ken Mair's 4-page magnum opus from May 2009 extols the virtues of share ownership; '...not intended to be construed as financial advice...' but that's exactly its purpose  - to bring free money into the company. Nowhere does it state what happens when you want to sell!

As the price goes up, sellers exceed buyers (who would want to buy when the price is high?), and the company has to buy the shares back at a grossly inflated price. 'Free' money suddenly becomes 'expensive' money as profits get thrown away to repurchase shares. At least Halcrow paid a dividend, CH2M doesn't pay dividends, you can only get a return by selling. CH2M has unwittingly created a Ponzi scheme with shares that are now unsellable.

The last trade was suspended due to '...potential accounting errors may have occurred with respect to the timing and amount of the recognition of cost overruns...' Oh yes? I still have a few SIPS shares that matured last week. Their value could be a round number.

[finneyb]

Its like all shares, including those publically quoted, if there is a market things are good - if no one wants to buy then the price drops  eg  RBS.

[John Ratsey]

However, internal share markets are more vulnerable to manipulation than publically traded shares as the process of share valuation can be opaque and tends to be controlled by those who are pumping up the share price before they sell. If no wants to buy shares then it's an indication that potential purchasers consider the shares to be over-priced based on the current trading conditions.

The document prepared by Ken Mair (probably leaned on by the main board but he possibly believed that Halcrow was healthy) was, I would assume, an effort to create buyers for those shares which others wanted to sell. Otherwise, the company needed to buy the shares back with cash that it didn't have. With hindsight, the Halcrow share price should have dropped when all the other shares dropped in 2008 to reflect the likely more difficult trading conditions whereupon all the Halcrow shareholders (like everyone else) would take the hit and accept it as being part of the global problem. They didn't, and the company accounts continued to suggest a much healthier performance than the reality up to the sale in 2011.

Those who hung onto their Halcrow shares then benefited from CH2M paying more than a fair price. Unfortunately, those who opted to convert to CH2M shares have now discovered than they can be a hassle to dispose of (but they will have increased by about 15% in £ terms since the Brexit vote).