After the BHS debacle, the Pensions Regulator (TPR) announced it was adopting a "clearer, quicker and tougher approach". But what does that mean in practice for the sponsors of UK defined benefit (DB) schemes?
TPR recently issued a report on the GKN/Melrose bid, which not only serves as a reminder of TPR's powers and the need for proactive engagement with trustees but also acted as a call to arms for trustees to be vocal during bids that could have a significant impact on the employer covenant. TPR advocated the robust and vocal approach adopted by the GKN trustees – who made an announcement early in the bid process highlighting the DB schemes' funding levels and the trustees' potential to reassess the strength of the covenant and funding requirements.
This proactive and robust approach reflects our recent experience of TPR on a takeover bid for another UK Plc. TPR contacted the trustees of the Plc's DB schemes very shortly after news broke that the plc was in discussions with two potential bidders (and before the trustees themselves had even been approached by any of the parties), wanting to understand what impact the potential transaction would have on the DB schemes. TPR then supported the trustees throughout their negotiations for mitigation with the bidders, which certainly strengthened the trustees' hand. In a further example of TPR's tougher approach, it informed trustees involved in another transaction that they should not agree anything with the employer without TPR's say so, frustrating the deal timetable.
We are also expecting changes to legislation that will further strengthen TPR's hand when it comes to corporate transactions involving sponsors of DB schemes. Government is proposing to introduce a requirement for directors to issue declarations of intent to trustees and TPR when a transaction is proposed, together with fines of up to £1 million for failing to comply.
- engage with the trustees at an early stage, particularly if the transaction is likely to cause detriment to the employer covenant. Protracted negotiations with trustees can impact on the deal timetable
- understand whether the trustees have any specific powers they could leverage in a negotiation, for example a unilateral power to set contributions or a power to wind-up the scheme
- while TPR can't exercise its powers until a transaction has completed, it may issue a "shot across the bows" if it's not happy with the proposal for mitigating any detriment to the DB scheme – consider being proactive with TPR
- keep abreast of changes to legislation.
TPR is also taking a tougher stance when it comes to funding negotiations. It does not think trustees are being treated fairly when compared with other creditors and shareholders. Indeed, it has a particular bug-bear in relation to the ratio of dividends to pension deficit contributions and has recently forced one company to stop paying dividends so that it can plug more money into its pension scheme.
This tougher stance is highlighted in its 2019 annual funding statement, which sets out what employers and trustees can expect from TPR when it comes to their triennial valuations. We have recent experience of a valuation where the trustees and employer were in agreement but TPR has pushed the trustees very hard to negotiate further improvements to the funding arrangements. We have also seen TPR force the appointment of an independent trustee to a scheme because it felt the trustees were too influenced by the employer's views on investment strategy.
- be prepared for trustees and/or TPR to scrutinise and challenge dividend payments (TPR has made it clear that even schemes with a strong covenant will not escape scrutiny)
- be prepared for challenge (even if the trustees agree) if you have a long recovery plan or aggressive funding assumptions.
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.