Vol 2 (2005) - Issue 3

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An Overview of the New Pension Regulations and their Impact on Restructurings and M&A Transactions in the UK

Overview

Introduction

A new era dawned in the UK on 6 April 2005 when the Pension Act 2004 (‘the Act’) became effective. It brings sweeping changes to the ways in which deficits for UK defined benefit (DB) schemes are to be dealt with. The importance of this issue has been highlighted by a number of recent high-profile transactions such as Alders, WH Smith and MG Rover where potential M&A transactions have been forestalled by pension deficits. This article examines the key implications of these changes, mainly from a restructuring and M&A viewpoint.

Historical perspective

The Act is hailed in the Ministerial foreword of the Guide to the Pensions Act 2004 as ‘a landmark in securing and strengthening the UK’s tradition of private pension provision and a major stepping stone on the road to meeting the demographic challenges posed by an ever healthier, but increasingly ageing, population.’ Whilst this may be a very admirable goal from a social point of view, its impact on the corporate world is more uncertain.
The Act itself is lengthy and complicated and a number of guidance notes are not yet published. This article concentrates on 3 key aspects of the Act.
First, the Act creates the Pension Protection Fund (‘PPF’), a major new institution that radically transforms the nature of protection offered to members of DB schemes even if their company becomes insolvent and leaves the pension scheme underfunded. Second, the new Pensions Regulator (‘TPR’ or ’the Regulator’) will have a range of new powers designed to protect the interest of scheme members. Third, a new clearance procedure has been set up for those involved with M&A or restructuring transactions and concerned with underfunded schemes and who are worried about being pursued by TPR (to seek advanced clearance from TPR).

Moral hazard

Under the Act, TPR has replaced OPRA as the Regulator of work based pensions. TPR has powers to help reduce risks to members’ benefits and to the PPF, helping to limit costs for PPF levy payers.
On 11 June 2003 the Government announced the creation of the PPF and the introduction of a full buyout debt on scheme windup where the employer is insolvent. The Government subsequently announced that powers were to be given to TPR from April 2005 onwards to act where employers and other companies have avoided their obligations to fund DB liabilities.
Actions or inactions by the sponsoring and other employers may put at risk the employer’s ability to fund a deficit on its DB scheme in the event of the scheme being wound up. Sometimes these risks are caused by changes to the sponsoring employer as a result of corporate transactions. In a few cases these changes may be a deliberate attempt to avoid the statutory debt on a scheme’s wind-up, in the knowledge that the PPF will after April 2005 compensate members if their employer becomes insolvent when the scheme is underfunded. This represents a risk to the PPF and PPF levy payers.

Pensions Regulator’s powers

The Act gives TPR specific powers to help reduce risks to members’ benefits caused by employer actions. A summary of these powers is set out below.

Contribution Notices (‘CN’)

These will allow the Regulator to recover when reasonable an amount up to the full statutory debt from one or more persons who were involved in an act or failure to act after 26 April 2004 which had as one of its main purposes the avoidance of pension liabilities. The amount would be payable to the trustees of a scheme (or to the PPF if it has assumed responsibility for a scheme).