Pension challenges in bankruptcy and restructuring processes



FW moderates a discussion on pension challenges in bankruptcy and restructuring processes between Gary P. Squires, a managing director at AlixPartners, Stephen E. Hessler, a partner at Kirkland & Ellis LLP, and Camilla Barry, a partner at Macfarlanes LLP.

FW: Reflecting on the last few years, how would you describe overall pension challenges arising for companies facing bankruptcy/insolvency and restructuring process? What major trends have defined this space?

Squires: Growing pension deficits have been an increasing strain on company cash flows and can block access to capital. A significant trend has been that, despite company contributions, pension deficits have continued to grow due to low gilt yields, driving low discount rates. Following Brexit, gilt yields have fallen further and, if we experience recession as expected, the Bank of England may embark on further QE, reducing yields still further and driving even bigger deficits. The UK Pensions Regulator requires trustees to reflect employer covenant – meaning long term credit risk – in fund valuations and funding decisions. Covenant is a relative measure, so as deficits grow compared to employers, covenant can weaken, leading to greater prudence in valuations, driving still larger deficits. Companies at the weaker end of the covenant scale can therefore find themselves in a downward spiral to insolvency unless covenant can be improved – for example, with guarantees or security.

Barry: The biggest trend is the ever-increasing value of defined benefit pension liabilities. Deficits keep growing, even when the plans are frozen and the businesses supporting them are shrinking.

The key challenge in the UK is the inability to do deals with the pension scheme trustees to reduce or manage the defined benefit pension liabilities so as to avoid an insolvency process. Any such deals now effectively require the approval of the Pensions Regulator and the Pension Protection Fund. For very sound policy reasons, the Pensions Regulator and the Pension Protection Fund have sought to discourage such deals and have set tough terms, generally requiring a material shareholder contribution to the pension plan in excess of the amount the pension plan would receive in an insolvency scenario. The upshot is that companies generally cannot reduce or terminate their pension liabilities without a formal insolvency process, which may destroy value in the business.

Hessler: Particularly in operational restructurings, union and pension issues are often paramount. In the US, significant legacy employee liabilities relate to defined benefit pension plans, which require that employees receive fixed benefits in the future, and an employer’s minimum contributions to such plans are calculated and periodically adjusted to ensure those benefits will be available. On the other hand, defined contribution plans – such as 401(k) accounts – which companies have significantly shifted toward in recent years, allow an employer and an employee to contribute to a plan, and provide for an eventual distribution at some later time. The Pension Benefit Guaranty Corp (PBGC) insures certain defined benefit plans but does not insure defined contribution plans. Addressing underfunded pension plans, and the role of the PBGC in that process, if any has been a key factor in the outcome of recent cases under Chapter 11 of the Bankruptcy Code, for corporations such as Hostess Brands, as well as Chapter 9 cases for municipalities, such as the city of Detroit.

The biggest trend is the ever-increasing value of defined benefit pension liabilities. Deficits keep growing, even when the plans are frozen and the businesses supporting them are shrinking.
— Camilla Barry

FW: Low interest rates are often blamed for today’s huge deficits – what do you think would be the implications of an increase in interest rates for companies currently struggling with a pension fund they can’t afford?

Hessler: Pension funding deficits are calculated using a discount rate to determine the present value of future obligations. The determination of the proper discount rate is tied to interest rates, which affect the returns that a pension plan expects to make on its investments. As interest rates fell over the past several years, so too did discount rates, which meant the underfunded portion of pension plans generally grew. If and when interest rates rise, the inverse will occur: the discount rate will also rise and the extent of underfundedness will fall. There may also be other, indirect consequences of rising interest rates. For example, it is possible that, as money becomes more expensive to borrow, companies may opt to contribute less cash on hand to fund their future pension obligations, especially if they are presently funding above minimum required levels.

Barry: It is tempting to believe in miracles. Unquestionably, today’s huge deficits are driven by the low interest rate environment. To explain, pension liabilities are future cash obligations. To assess a company’s pension liabilities or the sufficiency of pension plan assets, a present value is calculated using a discount rate. For various reasons, the discount rate used is often based on gilt yields or corporate bond yields. As the period to which it is applied is very long – the expected lives of the members and their dependants – even a small fall in gilt yields has a dramatic effect on the present value of the liabilities. The flipside is that a reversal could make deficits evaporate.

Squires: An increase in interest rates would have mixed blessings. On one hand, it would likely reduce pension deficits due to higher discount rates decreasing the present value of pension liabilities. On the other hand, finance costs would increase for sponsors with debt, which would put pressure on cash flows and may impact their ability to raise further capital or refinance. The severity of this depends on levels of gearing, which due to companies taking advantage of historically low debt costs, has resulted in similar leverage today to that existing prior to the ‘credit crunch’ of 2007/08.

FW: In your opinion, how should debtors go about resolving their pension liabilities during bankruptcy proceedings? Furthermore, what strategies can be deployed so that any legacy pension liabilities form part of the restructuring process?

Barry: In the UK, an insolvency process will trigger a statutory debt and transfer the pension liabilities to the Pension Protection Fund, with a haircut to benefits. It may be tempting to create an insolvency process in order to shed pension liabilities, as the statutory debt will be dealt with in the insolvency process. The Pension Protection Fund and the Pensions Regulator are willing to take any steps to challenge any liability avoidance, if their powers enable them to do so, including challenging pre-pack administrations and imposing liabilities on associated parties. To avoid a formal insolvency, pension liabilities can be included in a restructuring but only with the approval of the trustees, the Pensions Regulator and the Pension Protection Fund. The latter will insist on fair treatment relative to other creditors, a material contribution and a stake in the business and will only agree if there is no basis for using anti-avoidance powers.

Squires: Defined benefit pension fund restructuring may expose connected parties to regulatory risk, so careful planning is required. Consensual restructuring requires the agreement of the trustees of the plan, the UK Pension Protection Fund and the Pensions Regulator, so early stakeholder engagement and management is also necessary. For policy reasons, the Pension Protection Fund and the Pensions Regulator have fairly rigid requirements for agreeing to proposals that involve the Pension Protection Fund taking over plans as the statutory lifeboat. For this to happen, insolvency must be ‘inevitable’ within the next year, members will need to be ‘significantly better off’ than they would be if the sponsor actually commenced formal insolvency proceedings, and the Pension Protection Fund may also require an ‘anti-embarrassment’ equity stake in the restructured company. It can be challenging to persuade the authorities of ‘inevitability’, particularly when the wider group is not in a restructuring process itself. It is important to plan for these considerations at an early stage.

Hessler: Bankruptcy may be an effective forum for a company to facilitate compromise on difficult issues with its stakeholders – including pension plan administrators and beneficiaries – though doing so may be costly and difficult on many fronts. In the US in 2005, to shore up the PBGC’s finances, Congress passed legislation requiring employers that terminate qualified pension plans to pay certain termination premiums, which can be significant. In 2009, the influential Second Circuit Court of Appeals determined those termination premiums are not dischargeable in bankruptcy and must be paid upon emergence. As a result, there have been fewer companies seeking to terminate pension plans in bankruptcy. Nonetheless, there are still restructuring strategies that may be deployed to address legacy pension liabilities, such as a debtor’s ability to sell assets free and clear of claims and liabilities pursuant to section 363 of the Bankruptcy Code.

FW: Have any recent, high-profile bankruptcy restructuring processes with pension obligations caught your attention? What lessons can parties involved in such proceedings learn from the outcome of such cases?

Squires: The obvious recent example in the UK that has attracted significant scrutiny is the collapse of BHS, with its 20,000 pension scheme members and £571m deficit. Though inquiries are ongoing, some inferences may be drawn. The Pensions Regulator has tended to focus its resources on larger funds where its influence can make a difference at a systemic level, encouraging sponsors to fund schemes when they can afford to. Historically, they seem to have taken the view that their options are limited with weak employers and they do not want to be seen to be pushing companies ‘over the edge’. The Pensions Regulator’s focus may now shift toward greater scrutiny of plans with weak employers, which could require it to reprioritise its often conflicting objectives of protecting the Pension Protection Fund, members, employment and sustainable growth.

Hessler: A US court recently found an equity sponsor to be part of its portfolio company’s ‘controlled group’ and, therefore, jointly and severally liable for withdrawal liability under the Employee Retirement Income Security Act (ERISA) with respect to the company’s multiemployer pension plan. Although the sponsor utilised separate funds for its ownership interests, none of which individually held 80 percent of the company, which is the requisite threshold to have controlled group liability under ERISA, the court concluded they were a federal common law partnership in fact. Equity sponsors should be mindful that courts may employ a ‘substance over form’ analysis in determining whether different parties are part of the same controlled group.

Barry: BHS is a good example of how not to do it. Passing on a shaky business with unaffordable pension liabilities and hoping to get far enough away before it blows is not a good strategy. A negotiated strategy is better. For Monarch Airlines, terms were agreed to sever the pension liabilities without an insolvency process, which would have been catastrophic given the nature of the business. In the recent Halcrow case, the members of the pension plan were given an option to transfer to a new plan with reduced benefits or transfer to the Pension Protection Fund. New funding has been provided by the shareholder. A similar structure was considered for BHS but then abandoned without agreement.

Equity sponsors should be mindful that courts may employ a ‘substance over form’ analysis in determining whether different parties are part of the same controlled group.
— Stephen E. Hessler

FW: To what extent can bankruptcy/insolvency proceedings involving subsidiary companies impact on the parent company or broader group? How can the potential exposure be managed and mitigated in cross-border bankruptcy scenarios?

Hessler: In the US, a company and its ‘controlled group’ – which generally includes all affiliates, including parent companies and equity sponsors, that are collectively engaged in a trade or business with at least 80 percent common ownership – are jointly and severally liable for many of the company’s pension plan obligations. Controlled group liability thus can have a significant impact on determining how to structure acquisitions, as well as determining, in the event of insolvency, which affiliates may need to file jointly administered bankruptcy proceedings. Controlled group liability may also extend to a debtor’s foreign affiliates, although the PBGC has had limited success in enforcing such liability to date. These efforts, however, have sometimes resulted in privately negotiated settlements between the PBGC and the relevant controlled group.

Barry: For groups that have pension liabilities in the UK, there is a special exposure. If the entity that sponsors the pension plan enters insolvency proceedings, there will be two issues. First, a statutory debt will be triggered. This may be a very large debt which will dilute recoveries for other unsecured creditors and may have knock-on effects for the group. Secondly, the Pensions Regulator may impose liability on other group entities using its anti-avoidance powers. The conditions for such an intervention are complex and defending such a process can be onerous. If the trustees of the pension plan are promoting the case, the group is likely to be meeting the costs on both sides. The ability to demonstrate fair treatment of the pension plan will assist in managing both liability and reputational risks. Cross-border bankruptcy and enforcement issues depend on the particular jurisdictions.

Squires: The UK Pensions Regulator has ‘moral hazard’ powers to ‘pierce the corporate veil’ and attach liabilities to parties connected or associated with fund sponsors. These include ‘financial support directions’, which oblige parties to propose support mechanisms for funds, and ‘contribution notices’, which require a specific monetary sum to be paid. To establish the conditions for these there are various requirements, including that they should be ‘reasonable’.

The Pensions Regulator has historically tended to use the powers only following insolvency proceedings and there are some notable cases in which the Pensions Regulator has sought to use them, including Sea Containers, Bonas, Nortel and Lehman. These powers can make it challenging for groups to separate themselves from pension obligations. In any group where there is a UK defined benefit plan, care should be taken in assessing the regulatory risks associated with restructuring or M&A activity and in planning to deal with them.

FW: Could you highlight the main pensions-related legal and regulatory developments to have impinged upon the restructuring space in recent months? How would you characterise the power that pension regulators now hold as far as bankruptcy proceedings are concerned?

Barry: There is still a great deal of uncertainty over the scope of the UK Pensions Regulator’s anti-avoidance powers. The Pensions Regulator is canny about exploiting uncertainty and makes the most of the leverage these powers provide, but they are also quite unwieldy. The BHS case may lead to further enhancement of its powers. The scope for restructuring pension liabilities may also change as the UK government has been keen to find solutions for the British Steel Pension Scheme. The Pensions Regulator’s powers are a bit like a nuclear deterrent, although not quite so unusable.

Squires: In the UK, the Pensions Regulator has held its ‘moral hazard’ powers since 2004, although they have been used sparingly. The threat of their use has been exercised more often behind the scenes, out of the public domain, so there is not much in the way of precedent to inform how they will use them in any given situation. The powers can be characterised as discretionary and they may be exercised with the benefit of hindsight, so it can be important for stakeholders to seek experienced professionals to assess and advise on mitigating the risk.

Hessler: The US PBGC is a government-owned corporation that insures certain defined benefit pension plans, and seeks to ensure they are properly funded. The PBGC likely will be a debtor’s main adversary if it seeks to terminate pension obligations in Chapter 11, and therefore has an active and significant role in such cases. If a pension plan is validly terminated, the PBGC becomes the statutory trustee of the plan and administers it for the benefit of plan participants. Additionally, the PBGC guarantees certain levels of minimum pension benefits if there are insufficient assets in the plan trust to satisfy all accrued pension benefits. The PBGC can also bring causes of action for unfunded benefit liabilities, unpaid minimum funding contributions, and for termination premiums.

FW: What general piece of advice would you offer to distressed debtors on how to overcome the pension challenges they face during a restructuring process? How important is it for companies to manage reputational risks at this stage of proceedings?

Squires: My advice is to undertake robust analysis, taking into account the funding and structural position of the fund and engage early with expert support in order to ensure that restructuring proposals take into account the likely requirements of the Pensions Regulator and the Pension Protection Fund. These include wider policy considerations, which may restrict what can be achieved. If proposals are developed without an understanding of these requirements, expectations may be set that cannot be delivered, which can be fatal to consensual restructuring. Also, pension trustees, the Pensions Regulator and the Pension Protection Fund generally require their own expert advice and analysis and may move more slowly than commercial stakeholders, so it is important to engage early. Sponsors can be reluctant to engage with trustees in case there are breaches of confidentiality and consequently reputational damage, but this risk can be managed with careful planning, the help of professional independent trustees, sub committees and confidentiality undertakings.

Hessler: A company’s employees are almost always its most valuable asset. The importance of maintaining robust and transparent communications with employees and their representatives – including unions, the PBGC, multiemployer pension boards, and retiree committees – while restructuring pension and other legacy liabilities cannot be overstated. More specifically, companies must remain cognisant of and sensitive to employees’ expectations and views in that process. If mishandled, there may be material damage not only to the company’s reputation with its pensioners, but its credibility with all stakeholders – and the bankruptcy court – could suffer as well.

Barry: There is no one solution that is right for every group. Groups need to be clear about their priorities and risks, including market confidence and reputation. Exposure to the pension plan will depend on the history of the group and the level of integration of its businesses. Not every group values reputation in the same way. Pension plan failure creates reputational risks beyond the ordinary impact of a restructuring process – employees will be losing benefits, any regulatory investigation will be negative, the spotlight may be turned on historic transactions, as has been seen in the BHS case. In some cases, severance can be achieved with limited splash-back.

There are certain restructuring options specific to defined benefit pensions, which can result in members’ interests being compromised in order to save the sponsor and preserve value for the benefit of all stakeholders.
— Gary P. Squires

FW: Looking ahead, how do you expect pension obligations to influence bankruptcy/insolvency and restructuring processes in the years to come? What developments are likely to unfold?

Hessler: In light of recent developments in the US, equity sponsors likely will give even greater attention to structuring considerations when acquiring companies with underfunded pension plans. Additionally, the PBGC may increase its efforts to assert liability against, and obtain settlements from, domestic and foreign members of a debtor’s controlled group. Accordingly, there may be an increase in negotiated resolutions of pension-related issues as companies, employees and their representatives, and the PBGC try to minimise uncertainty of outcomes. Finally, underfunded state and municipal pension plans will need to be addressed in the coming years. Many state constitutions currently limit any alteration of rights or obligations with respect to that state’s pension plans, and while Chapter 9 of the Bankruptcy Code is limited only to municipalities, certain state-level pension reforms have been proposed. Accordingly, public bond investors should remain focused on further developments in the law on these fronts.

Barry: It is an unpleasant reality that pension obligations can be a material cause of insolvency processes. Deficits keep expanding, even as the businesses supporting them shrink or are starved of investment. Pension plans which are never likely to get fully funded have been nick-named ‘zombie schemes’. It is argued that there is no shareholder value in such cases and that the shareholders should surrender the group to the pension plan or the Pension Protection Fund. So far, the Pensions Regulator has not been able to trigger an insolvency process and has been wary of encouraging pension ‘dumping’. There should, however, be scope for restructurings that suit all parties and enable the business to go forward. The attention generated by the British Steel Pension Scheme could lead to change. How far employers, shareholders and a younger generation of workers should be held to the task of funding ever-inflating legacy pension liabilities remains a difficult policy issue.

Squires: In the UK, there are nearly 6000 defined benefit pension funds, many of which are causing sponsors and their wider groups increasing strain on cash flow and on their ability to raise capital for investment and, where necessary, to fund their turnaround. While it may be possible to use the flexibilities in the funding regime to ensure that contributions remain affordable, ultimately plans need to be fully funded and, as schemes mature and liabilities unwind, we are likely to see greater participation of UK pension stakeholders in restructurings. There are certain restructuring options specific to defined benefit pensions, which can result in members’ interests being compromised in order to save the sponsor and preserve value for the benefit of all stakeholders.


Gary Squires is managing director in the Financial Advisory Services practice of AlixPartners, based in London. Since 2004, Mr Squires has focused on advising pension scheme sponsors and trustees regarding employer covenant, a field in which he is widely recognised as an expert. That experience has been brought to bear in certain major restructurings and leveraged buyouts, including the leveraged buyout of Alliance Boots. He also acts as an expert witness in regulatory and court proceedings. He can be contacted on +44 (0)20 7332 5220 or by email:

Steve Hessler is a partner in the restructuring group at Kirkland & Ellis LLP. He represents debtors, creditors and investors in complex Chapter 11 cases, out-of-court restructurings and acquisitions. He has counselled clients across a broad range of industries including energy, gaming, hospitality and real estate, telecommunications, financial institutions and manufacturing. Mr Hessler has testified twice before Congress on proposed amendments to the Bankruptcy Code to provide for more effective administration of a Chapter 11 filing by a major financial corporation. He can be contacted on +1 (212) 446 4974 or by email:

Camilla Barry advises corporate groups, investors and trustees on all aspects of UK pensions law and practice, including: liability and risk in respect of defined benefit schemes, funding, investment and regulation of pension schemes, auto-enrolment duties and pensions tax issues. She has particular experience of advising on pensions in the context of corporate restructurings and transactions, including management of s.75 debts and advising on the powers of the UK Pensions Regulator. She can be contacted on +44 (0)20 7849 2238 or by email:

© Financier Worldwide



Gary P. Squires



Stephen E. Hessler

Kirkland & Ellis LLP


Camilla Barry

Macfarlanes LLP

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