The Hewlett-Packard Ltd Retirement Benefits Plan has replaced its parent company guarantee following a major corporate reorganisation, resulting in improved terms for members.
When it comes to corporate activity, trustees may have to flex their muscles to ensure security for schemes, negotiating on cash contributions, contingent asset arrangements or parent company guarantees.
In November 2015, US-based Hewlett-Packard Company was split into two publicly traded companies: Hewlett-Packard Company was renamed HP Inc, while a new company called Hewlett Packard Enterprise Company was listed on the New York Stock Exchange.
Care always has to be taken to make sure that the parent offering the guarantee will always be in the position to deliver
Alan Pickering, Bestrustees
The change prompted trustees to replace the scheme’s parent company guarantee from Hewlett-Packard Company with one from HPE, the new parent company of the UK employers.
In the run-up to the split, trustees of the £1.3bn scheme “took legal, actuarial, employer covenant and investment advice and had discussions with the Pensions Regulator”, the 2016 report to members says, as well as working closely with the company.
This, the report states, was to ensure that the security of member benefits would be broadly maintained despite the reduced size of the parent company and the corporate reorganisation.
The new parent company guarantee with HPE has some improvements compared with previously: the guarantee with Hewlett-Packard Company would have fallen away when self-sufficiency was achieved, whereas the new one will remain once the scheme has become self-sufficient.
Under the new guarantee, the cap on additional company contributions has been raised to £520m, from £450m.
The funding agreement has also been updated, “to better align the actuarial assumptions used to calculate the ongoing contributions paid by the company with the investment strategy and long-term objectives which the trustees have adopted”, the report explained.
The aim of this was to “reduce the likelihood of the plan not reaching self-sufficiency in a reasonable timeframe”, and to make it more straightforward for the trustees to manage investment strategy risk.
Pick the right adviser
Alan Pickering, chair of professional trustee company Bestrustees, said that “care always has to be taken to make sure that the parent offering the guarantee will always be in the position to deliver”.
Schemes must make sure they put a lot of care into looking for the right advisers when undergoing significant company changes, he said.
As a trustee, Pickering said, “I would make sure that I had the best quality advice that I can get in terms of the deliverability of the guarantee in a number of scenarios”.
Trustees can often focus on trying to reduce professional costs. However, Pickering said: “There are instances, such as the negotiation of a parental guarantee, when value for money in terms of professional advice is much more important than getting cheap professional advice, because in the long term you might find out why it was cheap.”
Occasionally, “the incumbent advisers are not necessarily the most appropriate advisers… in such circumstances”, said Pickering. “You may well want, as a trustee, to do some market testing and have presentations from your incumbent advisers and a couple of other advisers as well.”
“You just need to make sure that they are the best people to help you with this particular challenge,” he added.
But Ben Miller, pensions partner at law firm DLA Piper, said more often than not it is best to stick with the existing advisers.
“It is often a complicated set of facts and stakeholders involved,” he said, adding, “there’s a number of different reasons why that guarantee could be there”. As a result, you may “need the context to be able to advise the trustees properly”.
However, “if you need to have more of a leadership role from your adviser and you want them to represent your interest robustly… then the adviser you’ve got may not be appropriate, but that adviser might be absolutely spot on for day-to-day advice”.
Katie Banks, partner at law firm Hogan Lovells, pointed out that when faced with corporate reorganisation, “it’s important for the trustees to have a good relationship with the company”.
"Covenant advice would be the key thing," she said. And when it comes to replacing parent company guarantees, trustees need to look at whether the new guarantee would be on the same terms.
Banks added that legal advice would also be needed for looking at the terms and drafting of the guarantee, as well as "whether it's enforceable".
