The Pensions Regulator’s exercise of its powers has been in the spotlight recently. The Work and Pensions Select Committee has been vocal on the way in which some corporates have treated their pension schemes. A pensions White Paper and a consultation paper on corporate governance and insolvency both suggest more scrutiny and tougher penalties where pension schemes suffer as a result of corporate activity, and some provisions may have retrospective effect.

What does all this mean for corporate groups with a DB pension scheme? Now, more than ever, businesses need to understand what might give rise to regulatory intervention or reputational damage.

Most companies are aware of the Regulator’s “moral hazard” powers – which allow it to impose liability where actions result in a scheme being less able to meet its benefits in full and to impose group-wide liability for pension scheme underfunding without any question of fault or bad faith arising.

Historically, it has preferred to encourage companies and trustees to reach agreement in private and has not imposed liability except in a handful of cases. This has led to a significant reduction in formal applications for clearance from the Regulator in recent years as businesses felt confident in predicting how the Regulator would view a transaction and factored in some engagement with trustees in many cases – or were prepared to take the risk of not doing so, judging it likely the Regulator would not seek to impose liability. This could now be going to change.

Any corporate activity which is being planned – changes in ownership, refinancing, dividend payments, group reorganisation to name but a few – should involve considering at an early stage what impact there could be on the pension scheme and if there is a potential detriment, engage with the trustees as early as possible. An audit trail of this process could provide a statutory defence against the use of some of the regulator’s powers.

Failure to ensure the pension scheme is treated equitably compared to other stakeholders could result in intervention by the Regulator or the Select Committee. Reputational damage is a significant risk to be considered.

It is more important than ever now for companies to factor in the effect of activity on their pension schemes and engage proactively with scheme trustees as soon as possible, even if that involves additional cost or a delay in implementation.

Partner Vikki Massarano
Read Vikki’s article in Acquisitions Daily