We looked at The Purple Book, the Pensions Regulator's ("TPR") and the Pension Protection Fund's ("PPF") view of pensions and insolvency risk, in an earlier post. Further analysis reveals a strikingly high risk of insolvency for the sponsors of a number of schemes.

Of the defined benefit schemes examined by TPR and the PPF at 31 March 2006, the 82 schemes (1.4%) whose sponsors are most likely to become insolvent within 12 months have an average insolvency probability of 35.7%.

24 of those companies can be expected to have failed already and 5 more are expected to fail in the next two months.

75 of those 82 schemes are underfunded and they represent 41% of the combined insolvency and underfunding risk identified amongst underfunded schemes. They have an average insolvency probability of 37% and combined risk of £226m (£3m per scheme).

The trustees and the management of sponsors of these schemes risk severe criticism or potential personal liability if they do not take insolvency advice from a suitable professional. Many have, but now may not be too late for the rest to act.

Having a significant pension fund deficit is not necessarily terminal to a company whose business is viable, but the earlier all options are explored the more likely it is that a solution will be found.

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The Pensions Regulator ("TPR") and the Pension Protection Fund ("PPF") issued The Purple Book in November 2006, revealing, in addition to much wider pension risk issues, the PPF's perspective of insolvency risk, largely on the basis of Dun & Bradstreet's methodology and data.

Key relevant messages include:

• insolvency risk is higher in companies with poorly funded or small pension schemes or in traditional industries;
• 0.7% of active companies go into insolvent liquidation each year, but the risk of insolvency is dramatically higher for the 5% of companies with the lowest Dun & Bradstreet failure score (ie those scoring 1 - 5).

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Filing s120 (Pensions Act 2004) notices with the Pension Protection Fund is now commonplace for insolvency practitioners. Where there is a defined benefit scheme, most go on to report scheme failure - or occasionally rescue. But what if there is no liability, perhaps because despite the employer's insolvency the scheme was exceedingly well funded (unlikely), or perhaps there was a compromise agreement for which The Pensions Regulator gave clearance?

There is something of a gap in the law, which appears to have been drafted on the assumption that all schemes have net liabilities. The problem is in regulation 9 of The Pension Protection Fund (Entry Rules) Regulation 2005.

In the examples given above where there is no liability, the company has not been rescued as a going concern and no other person has assumed responsibility for the employer liabilities, so on the face of regulation 9(1)(a) the IP has no duty to issue a rescue notice. On the other hand, because no-one has assumed or will assume responsibility for the employer liabilities, regulation 9(2)(a) suggests a duty to issue a failure notice.

Common sense says that to push a scheme with a net surplus into a PPF assessment period by submitting a failure notice must be wrong, given the restrictions that will be applied to scheme members' benefits during the assessment period. And is anyone going to challenge the IP who takes this view?

Probably not, especially as I gather the PPF doesn't see that sort of challenge as its role. But why should the IP be left having to interpret legislation liberally to overcome its deficiencies?

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