How to manage an overseas parent company

However, where that employer is based in another country, it can raise questions about the enforceability of the scheme's guarantees and the ultimate security of the members in the event of an insolvency.

The drama surrounding the sale of Tata Steel’s business in the UK, complete with rumours its £15bn British Steel Pension Scheme would have to enter the Pension Protection Fund, reinforced the importance for trustees of schemes with an overseas parent company to have strong guarantees in place, but how can trustees be sure they are covered when dealing with a sponsoring employer in another country?

It’s important for them to get as much dialogue and visibility as possible if there is likely to be any merger or acquisition activity

Simon Kew, Deloitte

Jonathan Reynolds, client director at professional trustee company Capital Cranfield, said the first step was for trustees to ascertain where the UK business sits within the wider company’s structure.

He said: “You absolutely have to understand the nature of their business in the UK, and whether it’s possible to have a UK insolvency event.”

“If it’s just a UK branch there are serious question marks as to whether it’s eligible for entry to the PPF.”

He added that this was important, as often eligibility is not tested until a scheme applies for admission into the lifeboat fund.

Trustees also need to assess their covenant and who they can rely on to ultimately pay their benefits, Reynolds said.

“Have you actually got any recourse to them?” He said. “If push came to shove, what power do we have? Is there any realistic chance of recovering anything?”

Asking this question of the scheme sponsor can be uncomfortable, he added, but it is important.

Simon Kew, assistant director of pensions advisory at consultancy Deloitte, said it was crucial for schemes to understand the importance of the parent company’s UK business to the wider group.

“They need to understand as best they possibly can the overseas parent,” he said.

He added it was important to judge the sponsor's level of involvement with the UK business and scheme.

“Are there trustees from the parent company on the UK board?” he asked. “That can be helpful because it helps the parent understand the UK pensions legislation."

Open dialogue

Transparency and communication is also important, Kew said, as it can help trustees stay up to date with any potential changes facing the scheme.

“It’s important for them to get as much dialogue and visibility as possible if there is likely to be any merger or acquisition activity," he said.

"If there’s a good relationship they may get a heads up that there’s a transaction in the offing and be able to position themselves accordingly.”

Alex Hutton-Mills, co-founder of covenant advisor Lincoln Pensions, said: “When you’re looking at the overall strength of the covenant… you can only count the strength of the group to the extent you have legally enforceable access to guarantees.”

He said a guarantee that relates to the scheme’s recovery plan would be inferior to an “evergreen section 75 guarantee”.

Like Kew, Hutton-Mills also highlighted the importance of engaging with the sponsor, especially due to the need to continually educate them about UK pensions issues as finance directors and other decision-makers leave the company and are replaced.

“There tends to be an education piece, in that you’re trying to help the overseas parent and their management team,” he said.

“Trustees need to try and make sure they have a good, regular and ongoing dialogue with the local and group management.”