Current practices at Flybe (and many other firms) mean employees risk losing their pensions too when companies collapse.
The collapse of Exeter-based regional UK airline Flybe means the loss of nearly 2,200 jobs. Employees also risk losing their pension rights.
The most recent accounts held at Companies House for Flybe Group Plc are for the year to 31 March 2018. The accounts, audited by Deloitte for £600,000, stated that the company is a going concern. Its defined benefit (DB) pension scheme had liabilities of £169.5m and a deficit of £18.8m.
2017/18, the DB scheme was closed and replaced by a defined
contribution (DC) scheme. Some 1,350 employees are in the DB scheme
and it is their pension rights at risk.
November 2018, just before a takeover, Flybe published unaudited
for the period to 30 September 2018. These show the pension scheme
deficit to be £11.6m. The reduction is due to changes in accounting
methods rather than any payments by the company.
entered administration on 5 March 2020 and Ernst & Young were
appointed administrators. The pension scheme deficit at that date is
not known and may have worsened.
DB pension schemes require employers to make good the deficiency in
the pension scheme. If the scheme has a surplus, employers are
permitted to take a pension holiday and are also allowed to
February 2019, Flybe was bought for £2.8m by a consortium
consisting of Virgin
Atlantic, Stobart and hedge fund Cyrus Capital, with a promise of
loans. Numerous fixed charges on assets of the company were
registered in favour of banks and hedge funds. These included DLP
a Luxembourg-based company owned by funds managed by Cyrus Capital
such processes shareholders became secured creditors. The security
eliminates or reduces the risk to shareholders arising from
bankruptcy of the company.
creditors with a fixed charge, usually banks and other providers of
long-term finance (such as DLP Holdings), are paid first from
proceeds of the sale of assets. Pension schemes are ranked as
unsecured creditors and have a lower ranking and usually recover
little or nothing of the amounts owed to them.
Flybe pension scheme members face a hit on their pension rights.
(TPR) can issue a contribution notice and require that a specified
amount of money to be paid into a UK pension scheme by an individual
or a company. The Pension
(PPF) can bail out UK schemes with deficits. The bailout is generally
restricted to 90%.
neither the TPR nor the PPF can help Flybe employees because the
pension scheme, the British Regional Airlines Group (BRAG) pension
scheme, is registered in the Isle
a Crown Dependency, not
part of the UK,
the jurisdiction of the TPR and PPF.
Benefits Schemes Act 2000
governs schemes registered in the tax haven and do not seem to have
arrangements for bailing out stressed pension schemes.
offshoring of pension schemes will hit Flybe employees hard. There is
that the company may be unable to meet the entire pension liability
the time of the February 2019 takeover (see above), the Virgin,
Stobart and Cyrus Capital must have discussed the financial position
of the pension scheme. What guarantees, if any, were given about
addressing the deficit or transporting the scheme to the UK to
enhance protection for employees?
January 2020, the UK
was considering bailing out Flybe. Such negotiations should have
focused on the pension scheme predicament as well. What assurances
did the government secure about the solvency of the pension scheme?
does the government permit UK employee pension schemes to be held and
managed from tax havens which offer lower protection? How many such
schemes are there?
of the Companies Act 2006,
UK company directors are required to have regard to “the interests
of the company’s employees” in making decisions. How did they
discharge this duty?
parliamentary inquiry is needed into the above.
is the latest example of how employees can be shafted by corporate
bankruptcies — see also what happened at BHS, Carillion, Bernard
Matthews, Toys R Us and Maplin, to mention a few. The Pension
Schemes Bill [HL] 2019-21
going through parliament fails to protect employees and needs
current law enables secured creditors to walk off with most of the
assets of a bankrupt business, leaving little or nothing for pension
is effectively a wealth transfer from employees to secured creditors
and will bolster the returns to Flybe shareholders. The risks of
bankruptcy are not equitably shared.
than being ranked as unsecured creditors, pension schemes need to be
treated as priority creditors — that is, they should be paid before
any other creditor.
to age and other factors, employees cannot rebuild their pension pot
and face retirement insecurity. In contrast, banks and hedge funds
hold large diversified portfolios and are in a better position to
absorb losses. So this is desirable from a risk management
perspective as well.
Prem Sikka, contributing editor at Left Foot Forward, is a professor of accounting and finance at the University of Sheffield and Emeritus Professor of Accounting at the University of Essex. Follow him on Twitter.
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