Requiring companies to prepare a formal statement on how corporate activity might affect their pension schemes could help protect members from being put at risk, a survey of restructuring professionals has suggested.
Floated in the government’s defined benefit white paper, the measure would require executives to document their thinking on a merger or acquisition and detail what steps they would take to mitigate a deterioration in the covenant.
Eighty-two per cent of respondents to a Taylor Wessing survey on the issue either agreed or strongly agreed with the use of such a system instead of introducing mandatory clearance.
It marks a further rejection of the idea that all mergers and acquisitions should be subject to approval by the Pensions Regulator, an idea floated in the government’s green paper but dropped by the white paper, published in March.
Mark Smith, partner at Taylor Wessing, welcomed the decision not to force employers down this route.
“The idea of mandatory clearance has many challenges, not least whether the regulator has the resource,” he said, adding that it could also stifle UK business if other creditors take the view that they are not being treated fairly.
The white paper proposal to require “sponsoring employers or parent companies to make a statement of intent, in consultation with trustees, prior to relevant business transactions taking place that they have appropriately considered the impacts to any defined benefit pension scheme affected”, would essentially formalise current best practice, said Smith.
“The proposal probably reflects the broad sense of what happens now anyway, which is that people take a look at what the impact on the pension scheme will be and take a decision about how to proceed based on that,” he added.
Companies will take notice
Of course, merely preparing a statement does not force a company to mitigate a detrimental action to the scheme.
But the obligatory nature of the statement could make it more effective than the regulator’s voluntary clearance function, which enjoyed significant use in its early years but is now rarely consulted.
Between April 2005 and March 2006, 263 clearance applications were filed, compared with just nine between April 2016 and March 2016.
Donald Fleming, partner in the restructuring advisory practice at audit, tax and consulting company RSM, said the formal statement would make bosses think twice about the pension scheme, and potentially seek proper advice before proceeding.
“It forces companies to really think about this because they’re signing a document,” he said, although he added that executives naturally believe in the merit of their actions and do not always see detriment.
Regulator could use statements
The statement may also be of some benefit to the regulator as evidence, according to Fleming.
PPF weeding out poor CVA applications
If the regulator does not have enough applications coming through for clearance, the Pension Protection Fund appears to have the opposite problem.
The lifeboat issued updated guidance on company voluntary arrangements last week, in a move experts said was likely due to high volumes of poorly thought out applications. The PPF takes on the pension scheme's creditor rights in CVA negotiations.
"They've more or less.. said 'look, if you're going to come up with a proposal it's got to be one that's going to fly and treats the scheme fairly'," said Favier.
“For a company to say we formally don’t think this is detrimental and we aren’t proposing to seek clearance, that’s a definite statement that might be used by parties including the regulator,” he said.
However, details are important. For example, Fleming hoped the precise meaning of “relevant transactions” would not be defined in a mechanistic way, or else sponsor behaviour may begin to group around the minimum required not to submit a statement.
Similarly, Richard Favier, founder of Favier Ltd and a trustee representative at Dalriada, said the policy’s success would hinge on whether “it was done in a way that caused the corporate to engage with the trustees earlier so the trustees had a reasonable amount of time”.
However, the former Pension Protection Fund head of restructuring and insolvency said these details had not yet surfaced: “It’s clear to me from what the white paper says that they haven’t… actually worked the detail out.”
