Ruth Bamforth from Walker Morris explains what we can expect from current efforts to bring more companies planning mergers and acquisitions to go through the Pensions Regulator.
Since then much ink has been spilt on the subject of how the government might legislate to prevent another BHS.
Will there be much change to mergers and acquisitions in practice? The short answer is no
The publication of the December 2016 Work and Pensions Committee report and the recent green paper looking at defined benefit schemes provide the beginning of the answer: more regulatory scrutiny and a tougher, more interventionist Pensions Regulator. But what will this new approach look like, and will it make that much difference in practice?
The rationale for clearance
Malcolm Wick MP announced the introduction of the current anti-avoidance regime in April 2004. He said the new powers “should act as a deterrent to employers who are considering dodging their pension obligations”.
To combat concern within both the pensions industry and the wider corporate community about the use of the anti-avoidance powers, the voluntary clearance regime was introduced. Initially, it was not unusual for parties to a corporate transaction or restructuring to seek clearance. In 2005-2006 there were 263 clearance applications.
However, as time went on and the corporate world began to understand the regulator’s approach and the ‘clearance price’, applications dropped to just nine between 2015-16.
The select committee’s proposals
The select committee was clear that while “clearance has the clear benefit of enabling TPR to tackle potential moral hazard implications of corporate transactions head-on rather than after the event”, the incentives for seeking clearance are weak.
To combat this weakness, the committee recommended that the government consult on proposals:
• to require advance clearance for certain corporate transactions that could be materially detrimental to the funding position of a DB scheme. The circumstances in which clearance was compulsory would have to be narrow, to prevent a disproportionate effect on normal economic activity. They might include the sale or merger of a scheme sponsor where the pension deficit is higher than a fixed proportion of the value of the company. It is also reasonable to expect any prospective purchaser to have a credible plan for tackling a substantial pension deficit.
• to give the regulator powers to impose punitive fines in addition to the current anti-avoidance powers (contribution notices and financial support directions). The intention would be that such fines would not need to be imposed: they would act as a “nuclear” deterrent to avoidance and would incentivise clearance applications.
What does the future hold?
When the anti-avoidance powers were first announced, the corporate world was up in arms that the powers would bring UK plc to a standstill. Voluntary clearance was the answer.
At first blush the demise of BHS looks likely to lead to tougher regulatory powers and mandatory regulator involvement in certain transactions, but will there be much change to mergers and acquisitions in practice? The short answer is no.
Only a narrow class of transaction will be affected, perhaps reflecting the unusual nature of the BHS case. Mandatory clearance and penal fines will be the exception rather than the rule.
‘Greenest of green papers’ explores DB sustainability options, but lacks urgency
A wide-ranging government green paper is exploring a number of possible changes to improve the sustainability of defined benefit schemes, but although experts welcomed the variety of issues discussed, some noted a lack of urgency.
It is also important to remember that increasingly fewer companies sponsor a DB pension scheme.
Are the select committee’s DB recommendations workable?
From the blog: The Work and Pension Committee’s DB report is exceptionally well written, but are any of its main recommendations actually workable?
At the end of the day, the approach taken by the regulator will determine any effect on corporate activity.
If nothing else, the regulator will need to ensure it has both manpower and knowledge to implement and run a mandatory clearance regime. Whether it will be able to rise to this challenge will depend on the number of clearance applications.
Just as in 2005, it is likely there will be a flurry of activity as all parties work out the parameters of any new regime. Doubtless, corporations and their advisers will be keen to ensure that pretransaction planning and restructuring keeps regulator interest to the minimum.
Ruth Bamforth is a senior associate in law firm Walker Morris
