A legal loophole which allowed companies to avoid their pension fund liabilities by filing for insolvency in Britain closed this week, meaning creditors can expect less money from insolvent companies in future, analysts say.
Britain is increasing pensioner protection at a time when most funds are still in deficit, and after bankruptcies at companies such as Allders and T&N left underfunded schemes and thousands of pension fund members in limbo.
Until last Monday, a bankrupt company could place a lower valuation - the minimum funding requirement (MFR) - on its pension fund liabilities than a solvent company, allowing unscrupulous firms to use bankruptcy as a tool to reduce payouts to underfunded schemes.
"For a handful of FTSE 100 companies the pension scheme would go from having no claim to being the largest unsecured creditor if the firm became insolvent," John Ralfe, independent consultant at RBC Capital Markets, said in a research note.
"This will spread the value of liquidated assets more thinly, reducing the recovery rate for all other unsecured creditors, including bond holders."
This week's change builds on earlier legislation in 2003 banning MFR as a tool for solvent companies.
"Today is the final brick in the wall to make markets realise the MFR is dead," said Richard Farr, a director at accountants PricewaterhouseCoopers, and an adviser to the government on the new pension fund legislation.
"This forces industry to recognise that there are no easy options and it has to recognise full liabilities."
Instead of using MFR, insolvent companies will now have to value their pension fund liability on a so-called buyout basis, using the full cost of buying annuities and deferred annuities for all members' promises, a much more favourable approach for pensioners.
"The MFR makes certain assumptions about investment returns and appropriate rates of discount that are more generous," said Gary Squires, a partner in the corporate and restructuring group at Kroll.
In the case of T&N - the UK arm of bankrupt US autoparts firm Federal Mogul - the trustee for 40,000 UK pension fund members has been engaged in on-off talks for years to get the best deal for a massively underfunded scheme.
Illustrating the scale of the present law change, the T&N pension fund has an MFR liability of £19 million against a buyout liability of £850 to £900 million, analysts say.
Inevitably, boosting the value of pension fund liabilities in a bankruptcy means there will now be less money left for other, unsecured creditors.