The High Court has backed the Biwater Retirement and Security Scheme trustee's decision to petition for the winding up of the scheme’s sponsoring employers and create an insolvency event that will enable Pension Protection Fund (PPF) compensation to replace scheme benefits.

The scheme trustee (Brass Trustees) emphasised that whilst this was an "incredibly difficult decision" to make, it was not taken lightly, emphasising that the sponsoring companies had been given "every opportunity to act to turn the business round".

Estimates from the scheme's actuary, XPS Pensions, revealed that the Biwater Retirement and Security Scheme held a £28.3m deficit as at 31 December 2022, based on asset value of £41.6m and total liabilities of £69.9m.

According to the court documents, the sponsoring employer, Biwater, also owed the scheme over £39.74m, £8,516,231 of which was due by way of outstanding contributions for deficit recovery, expenses, insurance and exceptional contributions.

In addition to this, evidence from the Brass trustee chair, Nick Chadha, revealed that Biwater failed to meet its obligations to the scheme from March 2020 onwards.

Indeed, in his decision, Justice Richard Smith noted that evidence from the trustee painted a “bleak picture” of Biwater’s financial position.

And whilst the court acknowledged that this information was “second hand”, the Judge said that he was satisfied that the trustee had been “assiduous” in its efforts to understand Biwater's financial position and prospects and ability to pay the debts due to the scheme.

“Moreover, given Biwater's generally unforthcoming approach, its 'drip-feeding' of information to the trustee and its efforts to project positively its prospects, albeit ultimately not borne out, I am also satisfied that, if anything, the trustee's evidence likely understates the full extent of Biwater's financial problems,” he stated.

Conduct concerns

In addition to concerns over the sponsoring employers ability to support the scheme, the trustee raised two broader concerns as to Biwater’s conduct towards the scheme.

First, that Biwater had "repeatedly failed" to provide the trustee, The Pensions Regulator (TPR) or the PPF with information, whether requested by the trustee or even promised by Biwater, to such an extent that the trustee's advisers, EY, began to maintain a tracker of questions asked and unanswered.

In addition to this, the trustee said that Biwater has breached a negative pledge obligation under the 2020 Pensions Agreement, which prevented it from issuing further loan notes, repaying shareholder loans early or granting additional security without trustee consent.

Although these unauthorised actions left the total amount of debt the same, it also resulted in other creditors being preferred over the scheme. The court also heard evidence from Chadha that other creditors were becoming “more aggressive”, with some “shouting for payment”.

Concerns over the sponsoring employers' ability to support the scheme were compounded, as the scheme was experiencing a significant level of “scheme drift”, where the funding level deteriorates with the passage of time.

Whilst this presented a challenge for the trustee in continuing with the scheme, 'PPF drift' meant that the longer they delayed their wind-up decision the greater the PPF compensation would eventually be provided.

A key issue in the case was therefore the fact that, in reaching its decision to petition for wind-up, the trustee took account of the scheme drift issue, but not the PPF drift issue.

However, the trustee suggested that any interests of the PPF were not relevant considerations for the trustee exercising its fiduciary powers, also confirming that, whether or not regard is had to the PPF, the decision was the same.

This approach was backed by the court, which concluded that the trustee could not have sought to take advantage of the existence of the PPF to justify failing to take steps to prevent the scheme’s deficit and drift increasing further.

Instead, the Judge agreed that the trustee had been left in an "unenviable – in fact, invidious – position", with no alternative than to take steps to protect the interests of the members of the scheme as a whole.

He stated: "It is important to acknowledge that the trustee recognises the momentous consequence of deciding to place Biwater in a liquidation process, with a view to the scheme being wound up.

“The trustee is well aware of the likely effect of the decision, including Biwater staff losing their jobs and the financial impact on scheme members.

"However, the trustee finds itself in an unenviable – in fact, invidious – position, created by the deteriorating financial position of the scheme, itself the product of Biwater's financial problems, leaving it with no alternative in its view than to take.

Placing members' interests first

Commenting on the outcome, a spokesperson for Brass Trustees said: “The trustee has had to take the incredibly difficult decision to petition for a winding up order of Biwater to protect the members of the pension scheme. In doing so the trustee sought the court’s blessing for the action it was proposing to take.

“This is a decision that the trustee has not taken lightly. Over the past few years, the trustee has been working with the companies, as they tried to improve the business’ fortunes, and to put the scheme on a more sustainable footing, including seeking recovery of significant, and increasing, monies owed by the companies to the scheme.

"However, there comes a point where members’ benefits are at undue risk and the trustee has to act to safeguard those benefits. The trustee has given the companies every opportunity to act to turn the business around.

“The trustee has worked closely with both The Pensions Regulator and Pension Protection Fund in getting to this point and is grateful for the support provided by both organisations. Subject to meeting the qualification criteria, the trustee expects the scheme to enter the Pension Protection Fund on insolvency of the companies.”

The PPF has also welcomed the decision, confirming that it will be looking to issue further guidance to support trustees on their decision-making in situations where employer failure is a risk.

PPF director, restructuring & insolvency, Malcolm Weir, stated: “The PPF exists to protect the interests of all those who rely on us. We welcome this judicial decision which illustrates that the “no gaming” principle established in ITS v Hope applies equally to trustee decision-making in the context of potential employer insolvency.

"We strongly supported the trustees’ decision on this occasion to wind up the employer. The simple message to other trustees is: if you wouldn’t risk your members’ own money by running the scheme on, then please don’t risk the PPF’s.

"We will shortly be issuing further guidance to support trustees on their decision-making in situations where employer failure is a risk.”

A spokesperson for The Pensions Regulator added: “We are working closely with the trustee of the Biwater Retirement and Security Scheme and are closely monitoring developments as part of our role to protect pension scheme members.”

The court judgment confirmed that although Biwater was invited to participate in the proceedings, it declined to do so.

Biwater has also been contacted by PensionsAge for comment.

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