May 11
Strong and Stable Pension Schemes
The Tory manifesto is expected to include a pledge to protect workers’ pensions when it is published next week. The suggestion that pensions need protection “from irresponsible company bosses who put them at risk” appears to be a clear reference to BHS.
 
An initial statement on the Conservatives’ website says:
 
“Any company pursuing a merger or acquisition valued over a certain amount or with over a certain number of members in the pension scheme would have to notify the Pensions Regulator, who could then apply certain conditions. In cases where there is no credible plan in place and no willingness to ensure the solvency of the scheme, the Pensions Regulator could be given new powers to block a takeover. This would include the power to issue punitive fines for those found to have willfully left a scheme under-resourced.”
 
On face value, this would appear to be a substantial commitment, going further than has been suggested by the tone of the DWP’s Green Paper on the security and sustainability of the defined benefit pension scheme sector, and adopting some of the proposals advocated by the Work and Pensions Committee led by Frank Field. While the Pensions Regulator already has substantial powers to intervene where an employer has taken action which materially weakens the ability of its pension scheme to meet its liabilities (most notably through the moral hazard provisions), the suggestion that the Pensions Regulator could be given powers to block a takeover would seem to be a new power.
 
Stakeholders in the world of DB pensions who have already responded to the DWP’s consultation (which is still open for responses until 14 May) may also be somewhat disappointed that the Conservatives already seem to have decided what they intend to do, before the full consultation process has run its course.
 
However, as is often the case with manifesto pledges, the devil will be in detail. In particular:
 
  • What thresholds will be used for the size of the transaction and the number of members in the pension scheme? This will determine whether there are a handful or hundreds of such notifications each year.
 
  • Will the notification requirements be restricted to mergers and acquisitions only, rather than wider corporate activity which could weaken the employer covenant? In the case of BHS, the main action which appeared to give concern to the Pensions Regulator was the payment of dividends in the early 2000s. It is often ongoing corporate activity (e.g. dividends, other returns of capital or refinancings) which have the most material impact on a scheme’s employer covenant.
 
  • The wording of the Tory statement would suggest that notification would need to be provided in advance of the corporate activity being completed. What would the Pensions Regulator do with this notification? Would employers still be able to complete the merger or acquisition as planned, or would clearance become mandatory in some circumstances? One major concern which has been raised in the past when suggestions have been made about making clearance mandatory is that it is often not feasible to conduct detailed discussions with the trustees of a pension scheme and the Pensions Regulator in advance of a deal, given that transactions often need to be completed very quickly. Waiting for the Pensions Regulator to decide whether to apply some conditions to the deal could represent the introduction of substantial uncertainty into transactions, potentially damaging UK plc.
 
  • The Pensions Regulator will need more resources to fulfil these additional duties. Who would pay for this? Options include:
    1. The Government – perhaps unlikely given central budget cuts;
    2. Pension schemes through increased levies – likely to be unpopular with trustees and employers (as they will ultimately need to cover any levies through increased contributions); or
    3. Employers – perhaps through fixed fees payable when notifying the employer of M&A activity or submitting a clearance application.
 
Perhaps there will be more detail on these points when the full manifesto is published next week. (Although I suspect this is very unlikely.)

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