Security bypass

On 1 November 2009, Great Places Housing Group merged three of its subsidiaries, Manchester Methodist Housing Association, Ashiana Housing Association and Space New Living.

Why is this merger special?

MMHA, Ashiana and Space each have many staff who participate in the Social Housing Pension Scheme and the Growth Plan, both of which are administered by the Pensions Trust.

On 1 November, Ashiana and Space merged with MMHA by transferring their engagements to it, under the provisions of the Industrial and Provident Societies Act 1965. The normal effect of such a move is that a pensions debt is triggered under section 75 of the Pensions Act 1995, in both the SHPS and the Growth Plan. This combined debt for Great Places would be more than £10 million.

Until recently, the trustees of SHPS and the Growth Plan would agree to apportion that debt to the receiving employer - in this case, MMHA - in advance of transfer (save for £1), which would mean that the debt that crystallised would be £1. However, to do so, the receiving employer would be required to put up security for the debt - in this case, for £10 million.

Why is security a problem?

While the Pensions Trust will accept cash, a bank bond or a charge over property as security, the Tenant Services Authority has been reluctant to give consent to security over social housing assets. As such, property security has in practice been primarily restricted to commercial property.

With many housing associations having limited commercial assets, and with the cost of bonds becoming prohibitively expensive, security has become more difficult to find. While associations can give cash as security this hardly seems the best use of these resources.

So why don’t housing associations just amalgamate?

Before the credit crunch, many housing associations seeking to merge or consolidate their group structure had used amalgamation as an alternative route. The reason for this is that, unlike a transfer of engagements, no cessation debt is triggered under the Pensions Act.

But where a transfer of engagements requires the consent of shareholders and lenders of the transferring association, an amalgamation requires the consent of each association’s lenders/shareholders. Since the onset of the economic downturn, lenders’ consent without repricing of loans has become more difficult to secure and, as such, more expensive.

What’s the alternative route?

Following an announcement by the Department for Work and Pensions late last year, a written proposal was put to Great Places’ trustees in December 2008 that allowed the three subsidiaries to merge through transfer of engagements, and the liability to be apportioned without security. This proposal was accepted subject to the outcome of a positive employer covenant review.

As part of the review that was undertaken for the trustees, its financial advisors considered the impact on liquidity and stability - both in terms of borrowing covenants and risk profile - and on solvency and affordability.

Having obtained a favourable outcome, Great Places has been able to merge three operating subsidiaries without having to tie up more than £10 million in security.

By Maggie Shannon, director of performance and innovation at Great Places Housing Group and Amanda Harvey, a partner at law firm Devonshires

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