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Regulator publishes report on BMI pension scheme

Ref: PN12-15
Thursday 31 May 2012

The Pensions Regulator has today published details of its decision in the recent case of the British Midland Airways Limited Pension and Life Assurance Scheme (‘the Scheme’).

The Scheme has approximately 3,700 members and its estimated funding deficit is approximately £450 million on a ‘buy-out’ basis (the amount it would cost to secure members’ benefits by purchasing annuities) and £230 million on the Pension Protection Fund’s (PPF) s179 measure, according to the most recent figures available at the date of the clearance application.

The report (PDF) sets out that the regulator received an initial proposal which would have involved the Scheme’s liabilities being transferred to a shell company within the Lufthansa group, LHBD Holding Limited (the holding company of the BMI Group), as the sole sponsoring employer. Lufthansa, which would not have had any statutory obligation to fund the Scheme, had committed to provide a conditional and capped level of support on a voluntary basis over a 25-year recovery plan.

The future contributions proposed were insufficient in isolation to prevent a deterioration in the Scheme’s funding position. The proposal was therefore almost wholly reliant upon investment outperformance to reduce the existing funding deficit and limit further deterioration.

In the regulator’s view, the proposal posed unacceptable risks to members’ benefits and PPF levy payers. It therefore declined to provide clearance but worked with the parties involved, their advisers and the PPF to explore alternatives.

Following further discussions, the regulator issued a clearance statement for a second proposal which involved a controlled entry to the PPF via a rarely used mechanism called a Regulated Apportionment Arrangement (RAA). Under the arrangement, the Scheme (and therefore PPF) received £16 million, significantly more than would have been received from the insolvency of British Midland Airways Limited (BMAL), the Scheme’s statutory employer. In addition, Lufthansa provided a further voluntary contribution of £84 million to top up members’ benefits outside the PPF. Whilst the regulator was aware of the proposed voluntary payment, it did not form part of the regulator’s consideration as to whether approval of the RAA was appropriate.

The regulator’s report, published under section 89 of the Pensions Act 2004, also explains that the regulator’s ‘moral hazard’ powers (Financial Support Directions and Contribution Notices) were not available in this case because, in the regulator’s view, not all the relevant legal tests were met. Amongst other issues, consideration was given to the benefit received by BMAL in view of the significant funding provided by Lufthansa during the period of its ownership that had enabled BMAL to continue as a going concern and pay contributions to the Scheme.

Stephen Soper, executive director for defined benefit regulation, said:

“Members of the Scheme are understandably disappointed that they will not receive their expected pensions in full. However, in the absence of an employer to stand behind the Scheme to fund any shortfall, we felt unable to agree to proposals that exposed PPF levy payers and younger scheme members to all the downside risks. All parties continued with constructive discussions to reach what the regulator believes was the best possible outcome for members and PPF levy payers in the circumstances.”

Editor's notes

  1. The Pensions Regulator is the regulator of work-based pension schemes in the UK.  We have objectives to: protect members’ benefits; reduce the risk of calls on the Pension Protection Fund (PPF); and to promote, and to improve understanding of, the good administration of work-based pension schemes.  From 2012, the regulator has the additional objective of maximising employers’ compliance with their duty to automatically enrol staff into a qualifying pension scheme.


  1. Section 89 of the Pensions Act 2004 gives the regulator the ability to publish a report of the consideration it has given to the exercise of its functions in relation to a case.

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