US owners or would be owners of UK companies should take extra care in the case of a UK defined benefit pension scheme ("DB Scheme"), sometimes known as a 'final salary' scheme, in the UK group. This note provides suggestions as to how US acquirers/owners ("US Acquirer") should seek to manage the pension risk of UK DB Schemes.
Deficits in UK pension schemes have increased dramatically in recent years for a variety of reasons. Increased longevity, poor investment returns and particularly the steep decline in UK gilt yields (greatly increasing pension liabilities) have all contributed to this. Under UK law the sponsoring employer is liable for the scheme's deficit. In some cases this has resulted in a severe strain on the employer's business and/or its total collapse. In this event scheme members will usually be entitled to receive compensation from the UK's Pension Protection Fund but the compensation is often at levels considerably less than the scheme benefits.
The Halcrow pension scheme case
The case of the Halcrow pension scheme is an example of UK pension problems emerging for the US Acquirer after acquisition.
In 2011 a USA global engineering company, based in Denver, Colorado ("Halcrow USA") acquired the UK Halcrow engineering group ("Halcrow UK"). The only employer with direct legal responsibility for the UK Halcrow Pension Scheme under the scheme's trust deed was Halcrow UK. Halcrow USA took care not to assume direct responsibility for the scheme.
Winding the clock forward five years, the picture is very different. In July 2016 Halcrow USA and Halcrow UK reached a settlement with the UK Pensions Regulator ("TPR") and the UK's Pension Protection Fund. Under the settlement Halcrow USA contributed an additional £80 million to the pension scheme and provided a £50 million guarantee.
The alternative was for Halcrow USA to withdraw its support for Halcrow UK. Because of the large deficit in the Halcrow pension scheme this would have led to Halcrow UK's insolvency and the loss of its substantial UK business as well as job losses.
Learning points from Halcrow
Key points for a US Acquirer are to ensure it obtains specialist pension legal advice on the UK pension scheme including in the following areas:
- the extent to which changes to the scheme can be made under the scheme's trust deed;
- the powers of the scheme trustees under the pension scheme's trust deed to obtain employer
- contributions; and
- TPR's powers to obtain extra funds and/or guarantees from group companies other than the
- direct legal sponsors of the pension scheme.
TPR's powers are not comparable to the position in the US under the US Multi-employer Pension Plan legislation. Under this we understand that in certain circumstances a group company not sponsoring a scheme may find itself automatically liable for the pension scheme deficit of a scheme sponsored by a company elsewhere in the group. On 28 March 2016, in Sun Capital Partners v New England Teamsters Pension Fund heard in the Massachusetts District Court (Action No. 10-10921-DPW), two Private Equity Funds were even held liable for the scheme deficit of another company which together the Private Equity Funds controlled.
In contrast, in the UK there are many conditions for TPR to satisfy before it can impose liabilityon a group company other than the company sponsoring a scheme.
However TPR considers there is no geographic limit to its powers. In TPR's opinion any order it makes is as enforceable in Birmingham England as in Birmingham Alabama.
On the face of it, this is an unlikely legal proposition. Except in a narrow class of cases, the orders of a public body in one country are not automatically enforceable in another country, particularly where there is no mutual "enforcement" Treaty in force between the two countries. Nonetheless, TPR maintains these views but they have yet to be fully tested.
Further potential developments of UK Pension authorities' regulatory powers
Following the recent UK Parliamentary Committee enquiry into the British Home Stores Pension Scheme, there are calls (including from TPR) for TPR to be given power to intervene at the time of a corporate acquisition. For instance, it is suggested that in larger acquisitions, it should be compulsory for the parties to apply for Clearance. At present 'Clearance' applications by the seller are voluntary and in practice are seldom made. If given, Clearance means that subject to the parties meeting any Clearance conditions TPR will not seek extra contributions or other support in relation to the transaction in question.
An extension of TPR's powers is unlikely but US Acquirers will need to stay alert to developments in this area.
UK Takeover Code
Where the UK target's securities are admitted to trading on a regulated market or multilateral trading facility in the UK or in the Channel Islands or Isle of Man or it is a plc or in certain circumstances a private company, any acquirer needs to comply with the City Code on Takeovers ("Takeover Code"), including the Takeover Code's pension requirements where the target company's pension arrangements include a DB Scheme. In which case:
- bidders must disclose their intentions in relation to the target's DB Scheme, in particular, they must comment on: future employer contributions (including the scheme funding arrangements); the accrual of benefits for existing scheme members; and the admission of new members to the pension scheme; and
- target's DB Scheme trustees are entitled to receive the same documents that the bidder and target have to make available to target's employee representatives. This includes: the announcement confirming the offer period; the announcement of a firm intention to make an offer; the offer document; and any target's board circular in response to the offer document. In addition to this, trustees of the DB Scheme can if they choose have their views published on the impact of the bid on the pension scheme.
Potentially the Parliamentary Committee enquiry mentioned in 5.3 above may recommend similar provisions on takeovers of large UK private companies (not presently subject to the Takeover Code) with DB schemes. This would no doubt create a greater burden on the seller and the acquirer and such a proposal is likely to be strongly resisted by businesses.
In our view a US Acquirer (or existing owner) of a UK company with a DB Scheme needs to proceed carefully. It is no good assuming the US company is necessarily immune from the pension problems of the UK pension scheme just because the US company does not participate in the scheme.
The acquirer should ensure prior to the transaction that it fully understands the pension risks. This can be achieved by the acquirer obtaining comprehensive professional advice including legal advice.
We have considerable experience of UK schemes with non-UK ultimate owners.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.