Just 21 per cent of pensions and restructuring lawyers normally suggest that clients go through the Pensions Regulator’s clearing process, reflecting a similar decrease in clearance applications submitted.
The figures, obtained by PwC at an event for legal advisers, show a marked decline from earlier years’ results.
In the early days none of us really knew what the regulator was minded to do, what it could do
Rosalind Connor, Arc Pensions Law
In 2009, 56 per cent of lawyers were pushing clients towards the clearance process, due to a belief that clients were “better safe than sorry”.
Such a drastic decrease has led the Work and Pensions Committee to call for mandatory clearance “for certain corporate transactions that could be materially detrimental to the funding position of a defined benefit scheme” in December.
Just nine applications were processed by the regulator in 2015-16, down from 263 a decade before.
Does the regulator need bite?
But the PwC survey showed that lawyers were overwhelmingly against the committee’s proposal, with 86 per cent saying mandatory clearance would stifle M&A activity.
64 per cent follow the guidance around clearance without going through the formal process, suggesting that the clearance function still has some impact on corporate transactions.
“People feel that... if they follow the general guidelines that have been issued they can get a lot of the protection without actually going and getting the clearance,” said Jonathon Land, head of PwC’s pensions credit advisory service.
Source: PwC
“The second reason is that they probably see going for clearance as quite a cumbersome process [which] could take a long time and might end up in a negotiation process that they didn’t need to have,” he added.
Land also suggested the trend could be due to the regulator’s powers not being strong enough, as 55 per cent of those surveyed believed its powers did not present a real threat to their clients, up from 24 per cent in 2014.
Greater regulatory bite could be achieved by mirroring the US model, he said, in which an entire parent group can be held liable for the deficit of a subsidiary.
Positive drivers
The lack of clearance applications might indicate that advisers and employers better understand the regulator’s position and what is expected of them.
“In the early days none of us really knew what the regulator was minded to do, what it could do,” said Rosalind Connor, partner at Arc Pensions Law.
A 2011 upper tribunal hearing found that the regulator cannot consider whether clearance has been sought when deciding whether to use its powers.
Employers also have a statutory defence against an accusation of material detriment if they can show they had come to a reasonable conclusion that none would be caused.
Connor said these factors meant employers are largely safe from regulatory pursuit if they have ensured that trustees are independently advised and have no concerns about the transaction, negating the need for clearance.
The lack of applications is also driven by the regulator itself, which will not complete a clearance process where companies are unable to show they have a problem that needs clearing, she explained.
Boost clearance figures
Nonetheless, experts agreed that more companies should be seeking clearance.
Connor said anonymised case studies on previous applications would help advisers be better informed, but that the regulator has so far been reluctant to do so.
Will M&As change in the post-BHS era?
The collapse of BHS saw another household name disappear from the high street. The headlines about pensioners having their pensions cut back caused a public and political outcry.
“It’s... very worried about setting a precedent,” she said, although she conceded that the organisation had recently shown itself to be open to reviewing its processes.
For Simon Kew, assistant director at Deloitte’s restructuring services practice, greater clarity was also a priority.
“It would be helpful for the regulator to be able to negatively clear, [to] say, ‘There’s nothing for you to come to us for clearance for’,” he said, adding that nothing in statute prevented them from doing so.
That move would encourage interaction with the regulator, which in turn could see companies more prepared to come forward with problematic transactions.
And he reiterated the belief that mandatory clearance would be unworkable, unless a very narrow definition of the triggering circumstances could be found.
“In the current guise of the regulator... the number of staff, the resource that they have, then they simply wouldn’t have the numbers to do it,” he said.
