The Pension Schemes Act 2021 represents a significant change in the powers given to the Pensions Regulator to monitor and intervene in relation to defined benefit pension schemes.

Paul Carberry, partner, and Liz Wood, principal associate, in our Pensions team, spoke to Alex Hutton-Mills and Dan Mindel of Lincoln Pensions (soon to be renamed as Cardano Advisory), to discuss how the covenant aspects of the new laws are expected to impact on corporates and corporate behaviour.

This webinar covers:

  • How the Regulator intends to assess whether a party may be subject to a contribution notice under one of the new tests
  • How the Regulator intends to prosecute the new offences
  • The latest update on the changed rules around notifiable events, including our views on what is meant by "a decision in principle" (being a trigger for the two new notifiable events) and when "main terms have been proposed" (the trigger for the new notice and statement to the Regulator)
  • How day-to-day corporate activity will be affected by these new requirements
  • How companies can best protect themselves against Regulator intervention into corporate activities and restructurings


Paul Carberry: Good morning everybody, it is nearly 11 o'clock, the numbers are still going up quite rapidly so we will just give it another moment or two and then we will get going.

OK, it is 11 o'clock so let us make a start. Good morning everybody, I hope you are all well. Thanks very much for tuning in today. I am Paul Carberry, I am a Partner in the Pensions Team at Gowling and I am joined today by my colleague Liz Wood. I am delighted to have two guest speakers, Alex Hutton-Mills and Dan Mindel from Cardano Advisory, until very recently known as Lincoln.

Alex and Dan will be introducing themselves in a bit more detail shortly. We are going to spend the next 45 minutes or so looking at the new pensions landscape for employees with DB pension schemes. The session lasts about an hour so plenty of time for questions so can I please encourage people to use the Q&A facility at the bottom the screen. Thank you.

Just to give you an overview of what we are going to be talking about today, Liz if you can just move the slide please. Thank you. A number of sections we like to cover, the strengthening of the Pensions Regulator's sanctions regime and in particular, how corporates can protect themselves against these new criminal sanctions. The corporate transaction oversight and information gathering changes, i.e. the new notifiable events regime, new notice and statement requirements. Then quickly look at the contribution notice regime before we pass back to Alex and Dan, who will give us some practicable tips about how we can protect ourselves and protect our clients and then we wrap up with some conclusions and takeaways. Thanks Liz.

So we are looking at the strengthening of the Pensions Regulator's sanctions regime and primarily the criminal offences. You will be aware, this has been the big headline grabber has it not throughout the Pensions Schemes Act development, it has always been the focus on the criminal offences but it is worthwhile taking a step back and looking at the policy intent. You will be aware now of the TPR mantra, clearer, quicker, tougher and these offences are very much part of that tougher Regulator. There are two offences we want to look at today.

The first, the avoidance of the employer debt, if an act or failure to act results in the avoidance of a debt being paid. You can be sanctioned with a maximum seven year prison sentence and an unlimited fine, but as well as the act being met, the appropriate mental element, you needed to have intended your act to have the effect it did and this can all sanction a supporter with a civil penalty up to a million pounds.

The second of the two offences, conduct risk and accrued scheme benefits, yes, very broadly drafted. Maximum prison sentence is seven years again, unlimited fine and civil penalty up to a million pounds. Again we have a mental element but it is slightly different than the first offence. You need to have known or ought to have known that your act would have had a material detrimental effect on the pension scheme.

So to repeat, really broadly drafted, they can apply to any person and that was subject to a lot criticism as things were progressing through parliament but it is clear that that was the intent, they are meant to capture a range of circumstances, but that said I think the context is really helpful. TPR has been a pain on numerous occasions to say that for the vast majority of people there is nothing to worry about here and the Regulator is not looking to prosecute business as usual, corporate activity, so that is helpful, that is reassuring. These new sanctions are intended to sanction unscrupulous directors and companies which seems fair enough.

But that does not mean the majority of corporates can just forget about these criminal sanctions. These sanctions will have an impact on the majority of corporates in the UK with DB pension schemes and in particular around your government arrangements and any decision making processes. So how can corporates protect themselves? Thanks Liz.

OK. We have been through the acts themselves so if you perform the act and then you have the required mental element behind that act, you still will not be successfully prosecuted if you can demonstrate you had a reasonable excuse and the legal burden will be on the prosecution to prove the absence of a reasonable excuse. So it is going to be really important here for corporates to have procedures in place to ensure that they can demonstrate reasonable excuse as part of their conduct of normal corporate activity.

So how do they do that? Well we have now had some helpful guidance from the Regulator of how it is planning to use these criminal offences in its criminal offences policy. What is consistent throughout and a real theme for today is the Regulator will be looking for reasonable excuse to have been demonstrated in a clear way from contemporaneous records i.e. meeting minutes, correspondence, advice, so you need a robust paper trail in place to demonstrate reasonable excuse.

So that is the principle, what more detail would the policy provide to corporates that they can practically use? Well there are three key factors that the Regulator will look at when considering reasonable excuse. The first is the incidental or the fundamental test. The more incidental the detriment to the pension scheme as a result of your act, the more likely it is that your act will be deemed to be reasonable. So if the detriment to the scheme is essentially a bi-product of your corporate activity it is likely to be deemed reasonable.

So you have got through the incidental or fundamental test. But then even with that there may be some detriment to the pension scheme. So if you are going to be behaving reasonably you need to demonstrate that albeit there was a detriment you put in place an appropriate level of mitigation, so the more mitigation you put in place the more likely it is you are to be deemed to be behaving reasonably. And in this context the Regulator has consistently said it expects schemes to be treated equally with all the stakeholders and also the earlier that the mitigation is put in place, the more likely it is deemed to be reasonable. The Regulator does not want to be pursuing corporates who begrudgingly put in place the minimal level of mitigation.

So that is the second of the two. The third is well what happens if there is no mitigation or there is inadequate mitigation? Well you need to look at whether there is a viable alternative. If you could have got to the same place as a corporate through the viable alternative and it would not have been detrimental to the scheme you have got quite a difficult argument to make that your behaviour is reasonable. Why do the act that is detrimental to the scheme when you have a perfectly good alternative? So that theory is fine but the Regulator has helpfully set out that in some circumstances it will not be possible to consider every conceivable viable alternative and in particular you are looking at a distressed situation or a restructuring that needs to be done very speedily. You just have not feasibly got the time to look at every viable alternative but you did need to look at a range of viable alternatives before you proceed.

Well one of the three key factors in the policy it is clear from the Regulator that engagement with the trustees will be part of the matrix when looking at reasonable excuse, so early engagement, full transparent engagement with the trustee before an act is likely to move you towards the reasonable end of the spectrum. If there has been no engagement with the trustee and if there has been no intent to keep them abreast of developments then you have got a difficult case to make about why your behaviour is reasonable.

And the final point I wanted to note on this slide is what about contact with the Regulator? You cannot apply for clearance in respect of criminal offences but you can apply for clearance in respect of contribution notices and the transaction as a whole. If you get clearance around a transaction and then put in place the mitigation that is being required, I think in the vast majority of cases it is going to be very difficult to demonstrate that your behaviour was not reasonable, you have a reasonable excuse.

So while it does not get you home on every circumstances it is a practical step corporates can consider taking, they are looking to build a reasonable excuse defence. Thanks Liz.

So bringing it back to practicalities, what can employers now do to protect their position? I think fundamentally and this headline will come up a number of times today, pensions need to move up the agenda as part of your consideration of a range of corporate activity. Decision makers need to be aware of the new powers and they need informed thinking and corporate governance in reliance of that. We have the new TPR criminal sanctions policy which is helpful as far as it goes but as yet that policy has not been implement so corporates with their advisers need to monitor how the policy is being implemented by the Regulator and then you can react accordingly.

And then the two final bullets, another theme of today, expect more management time and costs in considering pensions issues as part of day to day corporate activity and potentially spending more time engaging with trustees and the Regulator, but absolutely key a clear documentation of your decision making process.

So just to conclude this section, we are not expecting there to be many successful criminal prosecutions, it will be at the extreme end of things but we do expect a change in corporate governance. Even if you can successfully defend the prosecution and you get through the process and you are not prosecuted, you just do not want to go there. It is a stressful experience, it is costly, it takes up time and it is reputationally damaging, you want to cut this off at the pass if you possibly can. So how do you do that?

Appropriate policies in place to identify when pensions might be impacted by a corporate activity. Identify that the impact of your actions on the pension, if mitigation is required put it in place good and early and have a really clear paper trail about your decision making and your processes and why you believe that level of mitigation to be adequate.

OK, over to you Liz. Thank you.

Liz Wood: Thanks Paul. I think we can move that slide on. It does not seem to want to move, OK, there we go.

So as Paul has mentioned whilst the new criminal sanctions are undoubtedly headline grabbing and should be taken seriously. It is the changes to the existing notifiable events regime which have the potential to really force employers with DB schemes to actively consider the potential impact of certain corporate activities on the scheme and to do so earlier than might previously have been the case.

We already knew that the government intended to broaden the scope of the existing notifiable events regime but what we did not have until recently was the detail. We now has this in the form of draft regulations alongside a live DWP consultation which runs until the end of this month. Under this new regime which we expect to come into force in April next year, there will be an obligation on employers to firstly notify the Pensions Regulator of certain notifiable events at a relatively early stage. Then second once those events are further down the tracks employers will be required to again notify the Regulator, this time including more detail as to the effects on the scheme, the mitigation considered and details of engagement with the trustees about the event. So let us look at this in some more detail.

So this slide shows the three new notifiable events planned to be introduced from next year. The first event, a decision in principle to sell a controlling interest in an employer. Or the offer to acquire control of the employer where there has been no such decision in principle is not strictly new, it is an existing event. What has changed is the timing of the notification because it is earlier in the decision making process, with the trigger point being when a decision in principle has been made rather than when a decision has been made and we will come on to talk about what this distinction might mean later.

But the next two events on that slide are entirely new and are intended to capture transactions which have the potential to negatively impact on the employer's ability to support the scheme, so the Regulator wants to know about them.

Firstly, we have got the decision in principle to sell a material proportion of the business or assets of an employer, so what is materiality for these purposes? Well it is more than 25% of the annual revenue of the employer in the case of a sale of business, or more than 25% of the gross assets of the employer in the case of a sale of assets, in both cases by reference to the company's most recent annual accounts. Importantly there is a lookback period for assessing this more than 25% threshold for this notifiable event and that makes it slightly more complex than first appears, because this lookback period requires employers to also take into account other disposals, which have either been decided upon or completed within the 12 months prior to the date of the notifiable event.

For example, you might see a sale of assets on 6 April 2022 which is when we think these new regulations might come into force. That sale of assets by a company might not on its own constitute a sale of more than 25% of that company's assets, but may well do so taking into account one or more sales by that same business in the preceding 12 months. It is important to note that transactions that are already taking place may well be relevant to this new notifiable event once passed into law. It is also just noting that this lookback period does not just take into account sales of assets or business that have actually taken place, it interestingly includes those decided upon but not yet happened, so potentially bringing an even wider remit of transactions into the calculation.

This sale or proportion of business or assets could come up with some interesting outcomes so you could have, for example, in a multi-employer scheme a scenario in which you have a small group company that has to notify the sale of more than 25% of its business or assets even when that actually has no impact on the overall employer covenant, whereas you might have this main sponsoring employer supporting the scheme selling up to 25% of its business or assets and not required to notify here. But in any event employers will need to consider this definition and threshold when a corporate transaction is being considered, to know whether this notification requirement has been triggered and that will also obviously need to include corporate activities in the last 12 months and not just this immediate transaction for the purposes of this reporting.

The final new notifiable event is the decision in principle to grant or extend security over assets, which results in the secured creditor being ranked above the scheme in order of priority for debt recovery. It applies in relation to an employer with a DB scheme but also its subsidiaries. The idea being that if an insolvency event were to follow the granting or extension of security, the scheme is lower down the pecking order for payment by the company of its creditors and less likely to recover the debt than had the security not been in place.

Security for these purposes includes fixed or floating charges, and the materiality threshold is more than 25% of either the employer's consolidated revenue or gross asset. Importantly the DWP consultation documentation says that this event does not include the refinancing of an existing debt but the draft regulations are not entirely on this point. That is something that we are responding to in the response to the consultation because it will need to be clarified in the final of regulations, as obviously a refinancing, particularly if it is a like for like basis has the potential to bring in a much wider range of agreements than we are currently anticipating.

So moving on. There has been quite a bit of interest in this decision in principle wording that has appeared in the draft regulations and this is a new concept for the notifiable events regime. The key point to note is it brings forward to a significantly earlier point the notification requirements for these three notifiable events that we are talking about.

So the regulations say a decision in principle is a decision prior to any negotiations or agreements being entered into with another party. So clearly intended to coincide with the point at which there has been a decision by an employer to go ahead, so to sell the business, to enter into a finance agreement, and before the key terms are drawn up or the contract is negotiated. But I think there are some real practical questions here around how and when this notification is triggered. How do you decide the stage at which a decision in principle is made? What constitutes the decision? How specific does that need to be? So you can imagine a scenario in which, you know, does this apply to two business owners down the pub having a conversation about the sale of business? Does it apply when an FD has picked up the phone to speak to their lender about an in principle new security? Is it something agreed in writing? Would an email suffice? So all these questions have yet to be clarified. Another point is that the regulations do not make clear who the decision maker is for these purposes. Certainly in our experience there are plenty of examples where the decision is not made by the scheme's sponsor, it is made higher up the food chain in a corporate structure and in any event can only be someone who has the necessary corporate authority to do so. Again these points are not clear and have yet to be clarified in any kind of Regulator guidance. Hopefully we will get more clarity in due course on those.

So moving on to the second part of the new notification requirements, the second stage statement must describe the impact of a transaction on the scheme and what action is being taken to mitigate any detrimental effects including details of communications with the trustees about the event. It must be provided to the Regulator with a copy to the trustees and it is absolutely clear that the Regulator wants that greater visibility on how corporate activities are being managed in practice and what types of mitigation are being offered to DB schemes. Just to flag this second stage requirement only applies to these new notifiable events we are talking about today, not existing notifiable events under the Pensions Act 2004.

Again we have identified some potential issues around this second stage notification, in particular how to identify at what point the main terms have been proposed, it is potentially quite subjective as with the decision in principle. Is this the point at which, for example, the heads of terms have been agreed, or is this the point at which detail of, for example, an SPA are being negotiated and who decides that the parties have reached that stage? Another point to note is that the regulations require an update to the Regulator if material changes are made in relation to either the transaction or the mitigation that has been put on offer to the trustees and again we do not have a lot of detail about practical examples of what might be material for these purposes. But again I think there is a real risk here that employers err on the side of caution, both in relation to whether a decision in principle has been made for that first notification but also for the second stage notification that actually we might have multiple notifications going to the Regulator erring on the side of caution. Particularly when I note, come on to note, the increased penalties that apply to corporates for failure to comply with this new regime.

A final point to note here, it is not clear at the moment whether these new events are intended to apply to takeover offers for listed companies, draft regulations and DWP guidance do not mention a takeover panel, do not mention price sensitive information, so again it is an area that we need clarification on. So consultation ends, as I mentioned, at the end of this month. We are hoping for more clarification on a number of areas, but key takeaway is the new strength and penalties for failure to comply with the existing notifiable events regime is already now in force under the Pension Schemes Act. That came into force on 1 October and instead of what we have before that date which was penalties for failure to comply with notifiable events of £5,000 for individuals and £50,000 for corporate, we are now looking at regulatory power to impose a financial penalty of up to a million pounds for non-compliance with this regime. So it is another area where we see this really exercising employers minds to make sure that they get it right.

And on that note how can employers' best protect their position? Well there is a piece here around waiting for the final form regulations and accompanying guidance. I think there will also be a big piece certainly initially around taking advice so what does in principle mean. When do we need to update notifications because the nature of the deal has changed materially. There are a number of areas where we can provide input. Also continued engagement with trustees. I think absolutely key from a corporate perspective will be adopting internal governance procedures to capture these potential notifiable events triggers so really employers getting their house in order to make sure that they can be aware of and then make sure that they are notifying the Regulator accordingly.

So I am now going to hand back over to Paul to just look at the new changes to the contribution and notice structure.

Paul: Great thanks Liz. You will be aware we already have a contribution notice regime in place and you will be familiar with the main purpose test and the material detriment test. You will also be aware that the Regulators use the contribution notices quite sparingly to date and so the argument is well he has not needed to use the contribution notices, the mere threat of them has been sufficient. However, in the Regulators view, at times it has been difficult to use the existing contribution notice powers so he has been looking for some additional support there.

So what is the issue with the existing powers? Well they are very employer focused, sorry they are very scheme focused. The Regulators are having to look at an employer act and then extrapolate the consequences of that act and how it impacts on the scheme and evidentially that can be quite challenging. So to support the main purpose and material detriment tests we are now going to have two new tests which I will come on to in a moment. The headline is these two new tests are employer focused, so they do look at the impact on the employer itself so that allows the Regulator to take a snapshot of a particular event. What was the strength of the employer before the act, what was the strength of the employer immediately after the act and that supports a quicker Regulator, he can intervene more readily so feel the need to do so.

So that is where we are with the law, the two new requirements. We have a body of guidance to support it as well. We have an updated Code 12 which sets out how the Regulator anticipated using its new powers. We also have updated clearance guidance so that is helpful as far as it goes until we have some practical examples about how the Regulator intends to use these new powers we do not really understand the rules of the game.

Just a very quick summary of the two new powers.

The first is the employer insolvency test. So this enables the Regulator to issue a contribution notice where it is of the opinion that immediately after an act or failure to act the scheme had less assets than liabilities and if a sector 75 employer debt has fallen due that act or failure to act would have materially reduced the amount that could be recoverable. So we are essentially measuring an act against a hypothetical insolvency. So act has been established that has happened but the Regulator can only then issue a contribution notice if it agrees it is reasonable to do so. It can only do so if the individual does not benefit from a statutory defence and in summary that is having identified those detriment to the pension scheme and appropriate mitigation has been put in place. So that is the employer insolvency test.

The second are the two new grounds is the employer resources test. So Regulator can issue a contribution notice when an act or failure to act reduces the value of the resources of the employer and we will come on to that in a moment and that reduction was relative to the amount of the estimated employer debt. So there is a myriad ways of measuring employer resources and there is much debate about that but it has been settled under normalised profit with exceptional items and non-recurring items being excluded. Some criticism of that is the feeling that gives the Regulator a little bit too much flexibility, a little bit too much discretion. But that is where we landed and again if the test is met that is one stage but the Regulators will need to demonstrate it is reasonable to impose a contribution notice on an individual must not be benefiting from a statutory defence.

So that is the law again but just a final slide before we hand over to Cardano and what this means in practice. These new powers are there so in theory it should be easier for the Regulator to issue more contribution notices should they wish to do so that means employers and their directors now need to give more thought into pensions issues in more corporate activity. We flagged there the payment of dividends potentially that needs to be given more scrutiny before the dividend payments are made and that is right. You can equally apply that to the granting of security repayment and inter-company loans disposals, restructurings, all of these things allow me to have an eye on the pensions implications and whether it is appropriate to carry on as you are or whether there is scope for the Regulator to get involved.

Obvious question is, is that likely to result in more clearance applications? I think there is free consensus that initially probably yes but then longer term where there is going to be more clearance applications I think we will be highly dependent on how the applications handle clearance is addressed and how the clearance notice test are applied and how the Regulator is using those new powers. It may well be like the previous regime, there is a change in behaviour everyone understands the parameters, the activity the Regulator is comfortable with but we will see how these things develop.

So a final comment from me on this section, what can we do to protect ourselves as employers? Same message as in the previous section, move pensions up the agenda, fully understand the implications for your pension scheme of day to day activity. If mitigation is required, put it in place in a timely way but fundamentally have a really robust set of governance and decision making procedures in place. You can demonstrate your reasonableness and your behaviour to the Regulator. I was just about to handover to Cardano and we are saving questions until the end but there was just one here I would not mind picking up if that is okay? I thought it was quite apt.

Where the UK corporate is part of global group and some way down the group structure do the directors at group level have to assess the UK pension plan implications and mitigation or the UK corporate directors. What if the UK directors are not in the loop?

I think for me that all goes to your corporate governance arrangements. Ideally, your parent will be aware that the restructure may have an implication on the UK business and therefore the UK pension scheme. It will either directly engage with those implications and consider whether the reasonable or it will keep the UK directors very well informed. The flip side is the UK directors are always in the loop and they are constantly reminding their parent that activity in the UK as a pensions dynamic and that should be built into the processes and decision making.

That is me, I will hand over to Dan and Alex.

Alex Hutton-Mills: Sure, Paul it is Alex and maybe just as you had picked up that comment, it is worth us reflecting on that as well. I suppose one of the things to bear in mind is for UK directors where they are part of a broader group be that a UK group or an overseas group. I do not think because of the risk of the criminal act and the fact that it is broad enough to apply to any person that it is going to be good enough to say I did not know. So it goes back to your point around corporate governance and really corporate benefit for whether it is a restructuring or some other corporate activity. So the lines of communication just need to be improved. There is a slight irony in the fact that because of the way that they have crafted the tests, the smaller the pension scheme in the UK in the context of the bigger group, the bigger the chance there is that you trip one of the tests because its materiality relative to the size of the section 75 debts.

So it all goes back to, I think the thing you are going to hear from all of us today that the pension just needs to be higher up the agenda in terms of corporate governance to make sure that you do not accidentally trip over one or some of the tests and some of the notification requirements.

Liz would you mind perhaps slipping on to the next slide. Just quickly by way of introduction I am Alex Hutton-Mills, I am a managing director and one of the cofounders of Cardano which was previously called Lincoln Pensions as Paul had mentioned. I head our pensions corporate finance business and had previously been at city group in their special sits and insurance and pension structured solutions group. I tend to play in the corporate finance at the more stressed end but not quite distressed which I leave to Dan and of corporate transactions and I have got a pretty broad-church of clients from corporate to provide us with capital and also the Regulator itself as an expert from time to time.

So what could be caught, and I have seen there is quite a few questions that we will pick up at the end but picking up on some of these points. Essentially you have got the existing arrangements in place for the existing contribution notice test around material detriment and principle purpose. Those still exist and they will continue.

However, the new resources and insolvency tests, effectively lower the bar because the Regulator through the legislation has deliberately made the threshold quite low. So it is just a reduction in resources as Paul has said that is calibrated by reference to normalised profit before tax and then from an insolvency perspective it is a material reduction in a hypothetical insolvency where relative to the section 75 deficit.

What is not clear is which of those tests has priority when you are looking at both at the same time but as we have tried to capture on this slide here it is a pretty broad-church which is just going to involve the Regulator earlier and in more transactions than you might have anticipated. Any list of transactions is going to be necessarily non-exhaustive. You do have to think about something as simple as a disposable spin off or transfer pricing changes because of the effects that might have on the profitability of employers, through to on the insolvency test side. Refinancing is where you are either refinancing to increase the level of debt, or change the level of debt with or without security and then things like special dividends which is value leaving the employer group albeit there may be perfectly sensible reasons to move value up into a broader group in order to pay dividends to shareholders.

So there is deliberately a pretty broad-church. I think just to reiterate one of Paul's comments earlier, whilst these tests are drafted quite widely, the Regulator has been pains to try and say they are not trying to get in the way of business as usual. I think again one of the other key aspects here is we are just going to need to develop market practice and precedent by feel which is going to need more contemporaneous advice to make sure that directors and other parties are not necessarily tripping up where they have not considered the pension scheme in the context of a potential transaction at the right point in time.

So Liz could we maybe move on to the next slide. What does that mean that we may need to think about and what are the issues? Well the first of those is there is not any clarity at the moment as to what materiality means? I mean I have alluded to the fact that there is a slight irony in that if you are part of a large corporate group and you have a relatively small pension scheme there is just mathematically a risk that any changes that you are making to either the resources or insolvency tests will almost by definition be caught because of the relevant size of the movements of the corporate transaction to the section 75 debt. Whilst for the notifications they have used 25 percent and that is similar to the threshold for those of you that are familiar with the UK listing rules around class 1 tests there is not any real definition so I think it is going to have to be taken on a case by case basis. What that then means is because you are involving the Regulator earlier you are having to think about how much subject to activity and control might they have where they think they have an ability to issue a contribution notice. Is it reasonable for them to do so? And again the reasonableness based on current precedent and their current ability to think about their warning notices and the moral hazard powers again they have a pretty broad-church to make sure or to try and capture something as reasonable in order to threaten to use their powers in a particular way.

That all says and these are the next two points on the slide. It actually makes more sense as you are planning transactions to engage earlier with the trustees and with the Regulator. Just think carefully from a risk perspective around how to calibrate any mitigation that may be required. And that all goes into transaction planning and I think just picking up on the last point around clearance I think we agree that there is likely to initially be a bump in clearance applications as people are trying to feel their way to understand what are the parameters of these two additional tests. I mean, we are actually advising a European corporate at the moment that is looking at a spin-off of parts of its group, and we are going through the process of submitting a clearance application and the current clearance application covers the current contribution notice powers but we are having to run something in parallel because the new regime, whilst it is in place the practical elements of a new clearance form haven't yet been put together. So we are having to sort of feel our way through that and I think that is going to be consistent with the approach that we are collectively going to have to take in the early period of the new regime.

Liz can I trouble you to move on to the next slide. So when you are thinking about tailoring mitigation and the adequacy of mitigation. I think the good news is that there is still flexibility in how you can potentially consider mitigation packages. There is clearly cash funding, there is still the availability of non-cash funding solutions, so things like contingent contribution structures, escrow arrangements but I think we may find that the ask from trustees and the ask from the Regulator probably is more around retaining value within the covenant structure, subject to other support. So, I think there is going to be more engagement and more tailoring of mitigation packages once an assessment of the extent of that detriment has been considered. But I think all of that says you just need to think about these things a little bit earlier to give yourself time to plan and also to give yourself potentially some negotiating room in any structures that you are putting together. I think the other thing that has become pretty normal is memorandum of understanding as a way of documenting your solution before you then move into full transaction documents. I think will be consistent with wherever we end up landing on decisions in principle and some of the inconsistency at the moment between when is a decision in principle made and what are the terms of the deal that you have agreed and how does that fit with or without having discussions with the Regulator?

So I think we are slightly in brownfield territory rather than greenfield but I think as with most things we will definitely look through market practice, help find ways through this.

I might just handover to Dan because there are a couple of interesting case studies that we wanted to share with you and then hand back to Liz.

Dan Mindel: Thank you Alex. So, again, as a brief introduction I am Dan Mindel, I am a managing director at Cardano. My background is actually more in restructuring and you will normally find me advising stakeholders in situations where the scheme employer is stressed or distressed. But as you have heard, because of this new insolvency test that has come into play from the act, my skill sets are now required for regular M&A activity to determine whether there is any detriment caused by painting the pre-transaction picture in its hypothetical insolvency and a post thereafter. So that is me.

So what we have tried to do here, we have picked a couple of case studies that we think bring to life some, there are a multitude of issues arising from PSA but some of these tend to be more common from case to case. We have seen this month since the law has come into force a change of behaviour but even before that in the preceding months, probably through the summer in transactions, there has been a pattern of behaviour from all stakeholders, the corporates and the advisers and the Regulators as to how to approach transactions in light of the new rules.

So the first case study that we have picked, something that happened quite recently, so you had a large international engineering company in the defence sector listed in the UK, subject to a takeover from a PE owned company in the same sector. Now pension scheme was small in the overall context of the deal but obviously a very significant part of it because of the new rules. One of the key points of this deal is that you are moving from a company that was a low level of debt and no security, to a proposed structure where it is going to be highly leveraged and secure debt. That peaked the Regulator's interest. What you will find is that the Regulator cannot be across all cases, that does not mean that you should ignore all the new rules of course but the Regulator looks particularly at public interest cases. Things that are high profile, particularly listed companies and it has a real issue around PE backed deals with high leverage so it is exactly what we had here. So what happened actually is that the buyer which had already been purchased itself through PE was a very well aware of pensions issues and came with their eyes wide open. Understanding the requirement to look at detriment and I think that is probably lesson number one which you have already heard a number of people say, come prepared and put the pension scheme on your critical path for the deal.

So they came in, they acknowledged there would be detriments and they acknowledged there was a risk of that detriment actually occurring because of the very fact that the deal would be leveraged. So the first challenge before we even get on to the Regulator aspect is how do you actually determine what that detriment is? So how do you assess what a hypothetical insolvency might look like for a company that is nowhere near the point of insolvency. It is very much an arts rather than a science and it is people with my experience of looking at it. In this situation, I think everybody came to the table with the idea of being open and collaborative and we had two other professional service firms look at this to try and reach a consensus of what that hypothetical insolvency might look like. We had a good debate and we came to a conclusion. That is fine but I think what you may find, particularly when schemes are sort of more material in the context of the deal or there is more sensitivity around pricing that you may not necessarily agree and we do have an ongoing case at the moment where we have a very different view of what an insolvency might look like.

We are unable to move on at the moment so there are risks with this new case because with this new law, because it is not clear cut and it is not necessarily obvious in each case what insolvency might look like that you can get stuck so all the more reason to put it on the critical path.

So anyway we came to a consensus between the parties here and a mitigation package that looks reasonable from everyone's perspective. But playing a Regulator they are taking, certainly at the moment, more of a harder stance on how to treat detriment and their view was that the detriment albeit they took it at face value what that detriment might be they relied on the work of others but that detriment has to be dealt with from day one. What they were looking for was not a security package with some improved funding which is what is on the table but they wanted funding that it automatically dealt with the detriment on day one.

Now it did not quite go there but it did push the buyer to up their offer. Now the question is how sustainable is that approach? Some people might say that it is great negotiating tactics from the Regulator. Some people say it is uncommercial from their perspective. That depends on your point of view but that is the line that they are taking. The issue will come to the fore in situations where the scheme detriment is much larger or there is a restructuring situation where money is tight and being able to deal with these detriments quickly and substantially from day one may not be an option.

We see some potential hurdles, bones of contention, down the line in these situations where it is not so straightforward. I do not know if Alex you wanted to add anything to that case study?

Alex: Yeah I mean I guess the only other point that we need to be borne in mind is this was a public to private under the takeover code. There was a leaks announcement, again for those of you that are familiar with the takeover code that starts at a relatively short timetable from when the leaks announcement has been put out and you have what they call the put up or shut up statement. To some extent if that announcement has come out and you then need to try and do the analysis as trustees and with the their stakeholders and agree some sort of deal in principle and notify the Regulator. You are getting quite a lot of deal and timetable compression and I am not sure that has necessarily fully thought about as we come to the notification on what is actually coming into force and that I think one of the questions was when that comes in. I will leave Liz and Paul to pick that up in a little while. So there is deal compression and timetable compression. I think as the market becomes more challenging in restructurings again you do not necessarily have lots of time to do these things so what we need to try and work out is how can you come up with practical solutions that will satisfy the Regulator where it has got the threat of the criminal powers and the use of the contribution notices as in parts with these two tests and I think that is going to be a point that we need to deal with.

Dan: Okay thanks. If we go on to the next one. So this one was a restructuring that took place at the end of last year, the beginning of this year, but equally applies to any type of group refinance or reorganisation. Again I will say right up front one of the key lessons here is again put your pensions on the critical path, particularly in situations which are tight for time because they are particularly stressed or distressed. So in this case what you had was a company that's in the brewing industry obviously significantly impacted by COVID-19 and was suffering from significant cashflow problems.

The company had a plan to reorganise itself. It was at the time the freeholder and the operator of the business, their plan was to actually just become landlord and get rid of the operating risk by getting in an investment grade tenant to run the pubs. So thereby firstly securing future cashflow and also improving the value of the freehold by having a better covenant from its tenant. And the idea was that once that was done, once Covid has got over and pubs were trading again that the pubs would then be sold off and the bank would be repaid and hopefully there would be a rump business at the end of it that could support the pension scheme and even give some return to the shareholders.

And the alternative to that was if that wasn't done then the company was definitely facing an insolvency. Now to most people that would seem like a good idea, a logical idea, a reasonable idea, avoid insolvency seems to be in most cases the best idea. In this particular case the pension scheme had a specific power that enabled them to block this plan through the fundamental change of the business but even without that power, given the Pension Schemes Act the trustees would need to be brought to the table in these circumstances for their view. So the issue here was that partly because the company did not realise the scheme had this power and things were all on a tight timeline, they came to the trustees late which gave the trustees significant leverage in making the deal but also the company and its advisors were not sufficiently aware of the pensions issues.

So they made assumptions like many people would that insolvency would be worse for everybody including the scheme, which was not quite correct. So what you had here was because the scheme was badly funded and because there was a risk that even this Plan A of saving the company would not work and it was a significant risk and to continue trading actually might be detrimental to the scheme. The Pensions Protection Fund were involved, the Pension Regulator was of course involved. The Pension Protection Fund position was that look, if you keep going and do not put any more money into the scheme for the next two years and it fails, the members may not be worse off but the pension protection fund will be and we cannot countenance that without some mitigation.

The Regulator was fully supportive of that so in the end because of the urgency, the company and the banks gave significant concessions to the pension scheme so funding was improved in the transition period and not only that, it was secured pari passu with the banks and the scheme were given some additional security over assets that were outside of the remit of the bank's security to give them confidence that they would no worse off. So they drove a hard bargain and the company had no choice really but to comply. So the lessons learnt there are: (1) do not make assumptions about what is in the interests of the scheme and boarding that point it shows that taking the view of what is the best for the creditors as a whole which is normal director's duties is slightly trumped actually by the new act, by saying actually you have got a special class of creditors called the Pension Scheme. They may not security at the beginning, they may not be preferential under any insolvency waterfall but they have additional influence and you have to take that into account when you are making your plans. So I think these sort of scenarios could easily come into play in the next year or so as people expect a greater activity in the restricting market. Hopefully it will not impact any or many of the people in this room but it just emphases the point that the new act is skewing the playing field towards the trustees and the Regulator standing behind them. Alex, I don't know if you want to add anything to that?

Alex: Yeah, I mean we will pass on to Liz in a second. Maybe this is just picking up again one of the questions in the Q&A, I think one of the other takeaways to this is that the squad of advisers is going to change slightly so where you would probably have an investment banker or corporate finance firm that is leading transactions and the structuring of those, and then you have got a law firm that is helping you on the company side, I think once what is going to need to happen is just thinking about pensions covenants advice as part of the structuring because those investment banks are not necessarily going to have the capabilities and do not want the risk associated with providing that advice and similarly because it is sort of numbers based then Paul and his colleagues would not necessarily want to be providing that sort of advice so there is a broadening of the advisory squad that you are going to need as you think about and certainly plan for transactions which is something to bear in mind. Liz, is it worth handing over to you for the final slide?

Liz: Thanks Alex. Seems we have got a sticky slide again. No we are ok. So it is clear from the raft of changes introduced by the PSA 2021 that employer clients with DB schemes now need to have the scheme front and centre of their minds when they are considering corporate activity and that has clearly been a key theme for today's webinar. Given that many of the changes particularly the criminal offences and the change to the contribution notice requirements are enforced and immediate action is to make sure that directors and other decision makers are aware of the new regulatory powers and the breadth of corporate activity that is going to be of interest and is already of interest to the Regulator.

So we are certainly seeing within the team here, an increase in interest for training sessions for senior management to ensure they are up to speed. Second ensuring that internal procedures and corporate governance flag up when certain corporate activities are on the cards and may fall within the scope of the new requirements and then that builds into considering the impact on the scheme and appropriate steps, what the mitigation might be in the way that Cardano have mentioned.

We are also seeing increased use of information showing protocols which is something the Regulator is very keen on but something that again can regulate that flow of information between employers and trustees and is useful in terms of an immediate step that can be done even before corporate activity is immediately going to take place. Another key theme that is coming through is obviously that trustees need to be involved at an early stage. That was already the case before the Pensions Scheme Act came into force and the Regulator is obviously clear that trustees should be treated as a creditor, frequently a significant one and not just a party to be involved as an afterthought or late in the day. So employers will need to consider on a case on case basis whether the proposed transaction has progressed far enough to justify involving the trustees, recognising that in obvious situations there are confidentiality concerns but nonetheless trustees are important. What is the significance of the transaction to the scheme? What is the potential impact? Is it detrimental and then that mitigation point. And the final piece of the jigsaw and it is worth me banging it home but it is documenting that decision making, so how have decisions been taken? What is the advice that has been received? And looking at how the engagement with the trustees and the Regulators on because as Paul mentioned right back at the beginning, that robust paper trail can demonstrate a party's legitimate intentions and the reasonableness of their actions so that is going to be relevant to both the criminal sanctions and the contribution notice regime but also when we are looking at notifiable events and what the Regulator is expecting to see in terms of documenting mitigation.

So that concludes what we planned about talking about today but I think we have got time now? Yep we have got a few minutes now to open up the webinar for questions.

Paul: Yeah, thanks very much Liz. And thanks to all the attendees, we have got an awful lot of questions today so we will try and work through them. Those that we do not get to we will follow up after the event. I will pick one question, I think Alex or Dan if you want to start with this one probably we can all have a go at. If you are advising a corporate what do you think the single best thing is that a corporate could do to protect themselves in these new pension risks?

Alex: I mean at the risk of repeating what Liz and yourself and we have been saying is. I think it really is just make sure that the pension scheme is in the right place and certainly higher up the agenda than it may have been beforehand because the less you think about the pension scheme because it might look like it is on a surplus on an accounting basis and the later you leave it in your transaction planning, the more you are effectively handing a negotiating leverage to the trustees and the Regulator.

Paul: OK. Thanks Alex. I think this next one might be for you Liz or maybe a combination of you and me. We have been asked to clarify which of the new provisions that we discussed earlier are in force now and which ones are coming into effect at a later date. Certainly the criminal offences and the contribution notices that I touched on are in effect now, Liz I don't know whether you want to set out where we are with the notifiable events?

Liz: Yeah so the notifiable events regime, it is the sanctions for failure to comply that are already in force so we have got criminal sanctions for a failure to provide appropriate information to the Regulator and that includes in connection with notifiable events, that is already in force. The new civil sanctions are now in force. It is just these new three or two and a bit new notifiable events that we expect to come into force next April and that is still a kind of "watch this space" because we do not know that for sure but we think the regulations that put all this in place will be April next year.

Paul: OK thanks Liz. We have got quite a lengthy question around dividends, I won't read out the whole question but I think I will try and take the theme from this because this is quite interesting. I will maybe throw it over to Dan/Alex to start with and I can chip in. If the scheme is reasonably well funded and is getting a steady level of contributions, to what extent does it need to be concerned about dividends being paid out of the company?

Alex: Yeah, Dan, do you want to kick off on that one, I'm happy to....

Dan: Well I do not think it has changed dramatically, I think the question is has TPR changed its view. I don't think so. I think to Paul's point where the business is profitable and the scheme is well funded it is business as usual, pay your dividends. I think TPR without the PSA has expected trustees and companies to have a dividend policy already agreed about what is appropriate, when is it appropriate and should there be mitigation for the scheme in those circumstances? So I think it supports which should already be in place in my view.

Alex: Yeah and I think the only additional points I would make is where the Regulator is going and what the resources test is trying to pick up is dividends are not the only way of moving value around a group so cash-pooling arrangements, transfer pricing. Those sorts of things are or can also potentially be caught by the resources test so you need to, if the trustees are being advised properly they will be thinking about the broader suite of potential covenant value leakage rather than just straight dividends.

Paul: Thanks both. I think from a trustee perspective it is just making sure you have got good information sharing protocols in place with your employer and you get a good level of transparency, not just around dividends but about general corporate activity that might impact on covenant because even if is fine for that dividend to be paid. the trustees want to be knowing about it.

Interesting question here. Many companies will have corporate advisers already but not all. Is there any responsibility or obligation for trustees to make the sponsor aware of the new obligations? I'll pick that one up first and if others want to chip in. I would not suggest that the trustees have a clear legal duty to do that. I would hope that the vast majority of DB sponsors now have some awareness of these new changes. I would suggest trustees at least raise it with them and ask what procedures the companies are putting in place to react to these new testing procedures but there is no legal duty. For me it all goes to the point of being discussed a little earlier, you just need a slightly more proactive relationship between sponsor and trustee. I don't know if others have got any thoughts on that before we maybe pick up another question?

Alex: Yeah I would only say if I was advising trustees I would be using this as an opportunity to reengage with sponsors to say you should have this in place so I think corporates should expect to receive emails and communications to discuss how corporates intend to deal with the new regime.

Paul: Ok. Thanks. Right, a relatively straightforward one for you here Liz. Does the Regulator have a mandated period in which to consider the notifications you have been setting out.

Liz: Not as far as I am aware. I think one of the key risks I think as I was alluding to in the slides was just the concern around the sheer number of notifications that a Regulator might get as a result of these new notification requirements. I think there is a risk that actually if corporates do notify as a kind of worst case scenario let's just keep notifying, there is a risk the Regulator does not actually capture the events that it really ought to know about. Particularly because of the concerns I was talking around the fact there is not actually a necessarily a connection between, there is more than 25% materiality threshold and actually the impact on the scheme. So at the moment where we are with the regulations means that the Regulator could be just inundated with all these notifications and cannot really filter them out in a meaningful way but yeah the short answer is certainly as far as I am aware there is not any particular timescales in which the Regulator has to respond.

Paul: Thanks Liz. I am just looking at time, I think we have got one more question so I will just throw this one over to Cardano if that is ok? Do you think the new Pension Schemes Act will be detrimental to UK corporates and do you think it is going to really impact on day to day corporate activity?

Alex: Dan, do you want to pick that up and then to the extent you were...

Dan: I think there is a risk, it does depend, I do not want to put it all on the Regulator because the Regulator is trying to do the job. There is a risk if it is seen as too much of a hassle, as a blocker to deals that becomes less attractive but, having said that, having seen what is going on in the market, having seen a lot of private equity purchases of companies with DB schemes out there. Morrisons is a prime example but there's been quite a few more, it does not seem to be a deterrent at the moment. My concern is actually probably more whether it impinges on the rescue culture in an economic downturn.

Alex: Yeah and I guess the only comment I would make to that is the risk is that you make pensions an additional headwind so you have got things like the national..., well currently the Enterprise Act and we are all seeing this with Meggitt and some of the other corporates that were around which will become the National Security and Immigration Act. You have got Anti-Trust and Competition Issues and making pensions more challenging potentially makes UK PLC less attractive location for direct investment and then as things become challenging Dan has made the point that it is harder from a rescue culture perspective to make the UK the sort of place to continue with business.

Paul: Thank you both. So we have just got one minute left so before everybody turns us off and gets on with their day can I just say thanks again for tuning in. Hope you found the session useful and there will be a feedback form coming around, thanks again for all the questions, we did not get to them all but we will follow them up. Have a good day everyone, thanks for your time.

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