Anne-Marie Winton: New risks attached to M&A activity involving DB pension schemes
After the Queen’s Speech on 14 October last year, a new Pension Schemes Bill started working its way through the Parliamentary approval process, starting with review by the House of Lords as it was deemed politically uncontroversial.
Legally and commercially, however, it’s a blockbuster which makes dealing with the pension scheme one of the first things to consider on any corporate activity (‘normal’ or distressed). The Bill is due to come into force this year.
The Bill follows years of headline grabbing Parliamentary scrutiny led by, now former MP, Frank Field, of complex distressed corporate transactions involving defined benefits (DB) pension schemes, starting with Bhs, and continuing with British Steel, Carillion and Johnston Press.
The Government is following up on its manifesto promise to introduce a far tougher approach to those who make what are perceived (and, with hindsight, judged by the Pensions Regulator and potentially also the courts) as irresponsible decisions concerning their DB schemes. This is why addressing pensions will need to be done early on in any transaction to comply with the new law and address the risk of clients (and potentially also advisers – see below) facing significant sanctions.
The draft legislation strengthens the “moral hazard” powers of the Pensions Regulator powers (i.e. the ability to pierce the corporate veil to impose joint and several liability on other group companies, and in extreme cases individual directors, to fund the liabilities of a DB scheme) and introduces new criminal offences punishable by imprisonment for up to 7 years.
This means that all groups with a UK employer (or employers) participating in a DB scheme – and their advisers – will need carefully to navigate the new legal requirements in relation to future commercial activity (including group restructurings, refinancing, routine M&A, pre packs and other insolvency processes).
There will be two new notifiable events, which are statutory obligations to engage with the Regulator as an early warning of certain transactions. The first is the sale of a material part of the business of any company participating in a DB scheme, where that company has funding responsibility for at least 20% of its liabilities. The second is the granting of security giving priority over the pension scheme as a creditor. Share sales, where the change of control of a scheme employer is by a controlling company, continue to be notifiable under current law. So the Regulator will find out about more deals and therefore have more opportunities to intervene and investigate if it does not like how the DB scheme is being treated as a stakeholder (usually the major unsecured creditor). There’s no requirement to tell the Regulator about paying dividends, but it has made clear that it expects equitable treatment of DB schemes, relative to shareholders, so dividend payments could also be the subject of regulatory investigation.
The Bill also provides that where a group intends to sell a controlling interest in a scheme employer or either of the two new notifiable events occurs, the ‘corporate decision maker’ must issue a declaration of intent to the scheme trustees as early as possible, copied to the Regulator. This reflects current best practice of voluntarily engaging with trustees in advance to agree any mitigation needed as a result of corporate activity, but the Bill – once enacted – will turn good practice into a legal requirement and require very early, and meaningful engagement with the trustees of any DB Scheme (even if its employer is not directly involved in the deal).
The Regulator can also issue fines of up to £1million for failure to notify events to it or to issue a declaration of intent. And there will be new criminal offences punishable by up to 7 years in prison, broadly, for wilful or reckless behaviour in relation to a DB scheme. This does create a new, unexpected risk for advisers. The targets of the criminal offences are not limited to group companies or their directors. As drafted, any person can be a target, so lawyers, other advisers, banks, investors, commercial counterparties and all other third parties are potentially in scope. To date, pensions industry lobbying to the House of Lords has not succeeded in this drafting being changed.
Read Anne-Marie’s article in Winslows Tax Ltd’s June newsletter The Wize.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.