A lack of clarity on proposed new legislation means a meeting over a cup of coffee to discuss a corporate transaction could cost an employer up to £1m in civil fines if a declaration of intent is not made in advance, according to law firm Pinsent Masons.
Under planned new laws, all employers with defined benefit schemes will have to send a DOI in advance of a range of corporate activities to the scheme trustees and the Pensions Regulator, setting out the impact of the transaction on the scheme and how any risks will be mitigated.
It forces the seller to think about the impact on the pension scheme. Pensions will no longer be an afterthought
Isabel Nurse-Marsh, Pinsent Masons
This will have far-reaching implications with regard to corporate transactions, including the sale of a controlling interest in the sponsoring employer, the sale of the employer’s business or assets, and the granting of security in priority to scheme debt.
Consequences still unclear
The requirement for DOIs was first mooted in the government’s white paper on Protecting Defined Benefit Pension Schemes, published last year.
Brexit permitting, and if parliamentary time allows, in its response to the white paper the government indicated that it will press ahead with new legislation.
The paper states that a DOI “will enable trustees to better engage with the regulator if the pension scheme is subsequently put at risk as a result of the transaction”.
However, the point at which the requirement will bite is yet to be identified. In its consultation the government suggested the signing of heads of terms, before admitting that this had some issues in its response.
According to Pinsent Masons, the powers could mean that even basic activities, such as talks between contracting parties over a cup of coffee, may result in fines.
Isabel Nurse-Marsh, partner and head of pensions litigation at Pinsent Masons, said the consequences for corporate transactions are still unclear.
“Will declarations help trustees protect pension schemes from the downsides of a transaction? Or will they hinder genuine corporate activity which, by boosting business, could also boost the chances of members getting their full benefits?” she asked.
Tom Jackman, associate director at Sackers, is more positive. “If implemented correctly, the requirement for a DOI won’t really change what we would normally expect a well-advised (and well-behaved!) company to do – engage with the trustees in advance of relevant transactions and make proposals to mitigate any material detriment,” he said.
However, he admitted that it will be a challenge to draft the requirements so that they are sufficiently objective while not becoming an unnecessary burden, such as by requiring corporates to discuss transactions that do not have a material impact on the scheme.
Pressure more intense for companies in crisis
There is very little detail in the government consultation as the practicalities have not yet been worked out on certain issues, such as how the DOI would fit in with the existing voluntary clearance regime that is set to continue.
Taking on responsibility for DOIs may make directors nervous. Ms Nurse-Marsh emphasised that “the pressure will be more intense for companies in crisis”.
She said that trustees faced with a DOI may have limited options. “They may be able to bring forward the next scheme actuarial valuation if they feel circumstances have changed significantly. But the buyer and seller may well be able to implement their transaction over the trustees’ heads.”
A buyer might think twice if the trustees voice their criticisms of a deal, but they normally have no power to block it, according to Ms Nurse-Marsh.
“Even so, a DOI could have an effect. It forces the seller to think about the impact on the pension scheme. Pensions will no longer be an afterthought,” she noted.
Employers do not need to panic
Employers need not panic unduly. Penny Cogher, partner at law firm Irwin Mitchell, said that in her view a chat in a coffee shop was unlikely to trigger the need for such a declaration.
“That said, clients beware – such significant corporate transactions shouldn’t be discussed over coffee, but in a more formal, GDPR and confidentiality compliant environment,” she said.
If done in the right way, DOIs should be good for business because they provide greater certainty to the buyer that the pension fund trustees and the watchdog will not block a transaction, pointed out Alistair Russell-Smith, head of corporate DB at consultancy Hymans Robertson.
“The requirement to prepare a DOI will therefore merely formalise good practice,” he added.
