How declarations of intent might change the world of pensions

TPR can only act where it becomes aware of issues around a transaction that may affect a defined benefit pension scheme. It might receive details from concerned trustees, or it may receive a formal notification from trustees or an employer under their current obligation to inform the regulator of certain notifiable events.

The regulator is concerned that both it and the trustees of a scheme often only become aware of these issues at a late stage.

For example, tactically a company may decide not to inform pension trustees about a transaction until shortly before it is due to complete, or even in some cases after completion. Similarly, notifiable event obligations are often seen by companies as only arising when a transaction actually signs.

For those planning an affected transaction, the new declaration is likely to require consideration at an early stage of both the impact on a scheme and of how to deal with any likely concerns from the trustees and the regulator

Declarations of intent: The story so far

Declarations of intent sit alongside upcoming changes to the notifiable events regime. These changes will require companies to notify trustees and the regulator of certain transactions at an earlier stage. A government consultation has recently been launched setting out the details of the new declarations of intent.

Declarations of intent will have to be made in relation to:

• a sale of a controlling interest in the shares in a scheme employer;

• a sale of, broadly, more than 25 per cent of the business or assets of the employer; and

• the granting of material security by the employer in priority to the scheme.

The obligation to make the declaration will fall on the sponsor of the pension scheme, and those associated and connected with it.

Declarations must be sent when “the main terms have been proposed” for the transaction, which is not a standard term.

Declarations must be sent to the trustees and the regulator. The employer making the declaration must consider and state the impact on a DB scheme of a transaction at an early stage, and set out proposed mitigation for any detriment caused.

The impact on transactions

A declaration of intent has the potential to convert a two-party transaction into a multi-party transaction from the outset whenever a DB scheme is present.

After submitting the declaration for a share transaction, for example, the buyer and seller would face potential input from, and meetings with, the pension trustees, TPR and all of the related specialist advisers on all sides.

There is a practical issue for the regulator here. Without any great increase in its resources it will have to review potentially multiple declarations at any one time to identify which ones present a risk to a scheme, and then dedicate resources to intervening.

Anyone who has been involved in a transaction with TPR’s involvement will be aware of the time and costs that result from this, as well as the pressure that the trustees and regulator can seek to apply.

This type of informal involvement is how TPR seeks to have the greatest influence in protecting pension schemes, rather than using its onerous formal powers.

For those planning an affected transaction, the new declaration is likely to require consideration at an early stage of both the impact on a scheme and of how to deal with any likely concerns from the trustees and the regulator.

Where the risk of TPR involvement is seen as high, this may make a deal less appealing, or at the very least require a much higher budget for adviser costs.

Known unknowns

It is perhaps not surprising that a change with such potential to affect corporate transactions, and such potential for unintended consequences, has proved a challenge in the details, which have only recently been published for consultation.

Among the unknown aspects of this new regime is the point in time when a declaration must be given. When can an employer conclude that the “main terms have been proposed” on a transaction?

Above all, the greatest unknown is how employers and the regulators will deal with the new declarations in practice.

Craig Looker is legal director at DLA Piper