Key points
At a glance
- The proposed power could have a number of intended consequences that could worsen the sponsor covenant
- Not all transactions and corporate activities are detrimental to a DB scheme; many improve the covenant
- There is a question of whether TPR has the resources to deal with it, and make it practical and workable
The government's proposed framework could hamper good corporate deals, which could affect the sustainability of DB sponsoring employers, writes Stephanie Baxter
The government is introducing new rules to strengthen The Pensions Regulator's (TPR) hand in protecting members of defined benefit (DB) pension funds.
One such rule is a requirement for employers to issue a declaration of intent prior to corporate transactions to the trustee and regulator; companies that fail to comply will face a fine of up to £1m. It is one of 10 new powers set out in the government's response in February to its consultation paper - Protecting DB pension schemes - a stronger pensions regulator.
A new report by Pinsent Masons says not only could this power expose employers to hefty fines for basic activities, such as a discussion over coffee between contracting parties, it could also affect the sustainability of sponsoring employers.
The transactions it covers are the sale of a controlling interest in the sponsoring employer, sale of the employer's business or assets, and the granting of security in priority to the scheme debt. The declaration will set out the impact of the transaction on the DB scheme and how any risks will be mitigated; there will be further consultation on this.
Sponsor covenant
Pinsent Masons head of pensions litigation Isabel Nurse-Marsh says: "There's not that much detail on it, so we don't really know how it's all going to work. We have tried to give a balanced view in the report as there are good things about it, but also issues."
There are concerns it could cause delays in transactions and even hamper them, which could have unintended consequences such as impacting the sponsor covenant. Sometimes the speed of a deal may be necessary to protect jobs and pensions - for example, Pinsent Masons said when holiday and travel companies face difficulties, quick action is crucial to avoid the loss of consumer confidence and business failure.
The seller will need to think carefully about the impact of the transaction on the DB scheme, and what steps can be taken to mitigate detriment. These will then need to be evaluated by the trustees and TPR upon receiving the declaration; they will be more likely to raise objections if they feel they are being put under pressure, says the report.
Deloitte director of financial advisory in pensions Simon Kew says it might prevent some good corporate deals: "All the work around declaration of intent is to prevent bad transactions. But not all transactions and corporate activities are detrimental to a scheme. A great deal of corporate activity is beneficial to a scheme - it could be getting a much stronger sponsor. For instance, as part of a deal they may be getting mitigation, putting themselves in a much stronger position."
If delays become common for transactions, it could become more difficult for employers to find buyers, which could affect the sustainability of employers and have an unwelcome impact on the economy more generally, the report warns.
However, the report also points out if a deal falls through due to problems raised by a declaration of intent, it could turn out to have been the best outcome for all concerned. It could also lead to deals being agreed on a basis that appeals to all parties, reducing the risk of run-ins with TPR and the trustees further down the line. Another positive is it could force the seller to really think about the scheme and how to deal with it; pensions will no longer be an afterthought. "The possibility of bad publicity makes the sponsoring employer think more," Nurse-Marsh adds.
There is lack of detail over several things, for example at what point the obligation is triggered.
"There has been a suggestion that it might be at the heads of term stage, but that's not a defined term. It could be earlier, it could be later. We need clarity over what the trigger is so that the companies, trustees and the regulator are very clear."
Declarations could also jeopardise the confidentiality of a deal.
"There's an issue about confidentiality because the sponsoring employer may be already under confidentiality restrictions, for example, with its lenders about what it can say," she says. "And so it's possible that the confidentiality obligations might conflict with the need to provide the declaration of intent. I don't know how that's going to work."
Bigger TPR role
Employers can currently seek voluntary clearance from TPR but the number of applications has fallen since that regime came into force. Voluntary clearance may even become more commonplace as employers have to do the groundwork in preparing for declaration of intent.
While it will help draw TPR's attention to deals of significance at an early stage, the new regime would clearly have a large impact on its resources given there are over 5,000 DB schemes.
"Some of them will be very small, but others will be very large. There are a number of transactions going on at any one time that could take up a lot of the regulator's resources," says Nurse-Marsh.
"The regulator wants to be seen to be quicker and more effective, and they've been taking on a lot of new work. What I don't know is how they're going to manage to do that with all the other demands they've got on their time. So it's a practical question of whether they have the resources to deal with it, and make it workable."
For Kew, it is really important with any proposed legislation that the people writing it look at both sides of the argument.
"Pensions, of course, is a really emotive subject - it's had a lot of press and political attention. The intent is absolutely sound: it's preventing the pension schemes being side-lined or unfairly treated by a sponsor when there's a corporate transaction or deal or something along those lines. But it's important not to react too quickly and unintentionally do the wrong thing. I wonder if the means that they're trying to implement to ensure the scheme isn't left out need to be looked at a bit more carefully."
There will need to be further consultation on the final details of the proposed regime, and any new legislation is now unlikely to be written before 2020.
Kew says: "The consultation needs to be wide-ranging and get views from industry experts with experience of corporate activity and how it actually works, but also people outside of the industry as well - insolvency practitioners or people that deal with these corporate transactions on a daily basis."
He warns if the pensions industry alone, including the regulator and Department for Work and Pensions, come up with this legislation, then "they're bound to miss something."
"Is what they're proposing going to stop or prevent issues happening that we've seen in the past - the ones that are getting a great deal of profile? That's the major question, because if the answer is no, then is it the right thing to be doing?"
Until the final details of declaration of intent are clear, it is uncertain how the new regime will pan out; the final design will be crucial to ensure any pitfalls are avoided. As Pinsent Masons concludes in the report, the regime will likely prove to be a "mixed blessing".
