ON MONDAY 20 MAY, the Takeover Panel introduced amendments to the City Code on Takeovers and Mergers, giving trustees of defined benefit (DB) pension schemes new rights during corporate acquisitions. The amendments were generally welcomed by representatives of UK pension funds and trade unions but opposed by some acquirer groups.
Finance directors will already be aware that pensions have long been seen as a potential stumbling block during M&A.
Elements such as widening deficits, layer upon layer of regulation as well as the increasingly common occurrence of ‘hidden liabilities’ have all given many acquirers very good reason to proceed with extreme caution.
However, while it has long been considered good commercial practice to investigate the financial implications of pensions within due diligence, deal teams will now also need to place a much stronger emphasis on anticipating the trustee reaction.
Pension liabilities are often one of the largest financial elements within a deal. And trustees commonly have key decision-making powers, for example on employer contribution rates and the plan’s investment strategy.
They can also involve the UK’s Pensions Regulator – a route that can potentially lead to penalties or a financial support direction.
Given this, trustees often have the ability to derail a deal if they believe it would not be in the best financial interests of their scheme’s members. Conversely, when it is handled well, a strong and positive working relationship with the trustees from the outset could lead to a more relaxed set of funding requirements and enhance the post-deal cash-flow prospects of the target.
The new rules will, in many cases, give trustees far greater insight into proposed deals at a much earlier stage, and they will have more prominent platform to air their views. This will inevitably strengthen their position and their ability to respond to any unwanted interest in their sponsor.
The new rules also increase the likelihood that the opinion of the trustees will be picked up and magnified by other interested parties, such as unions, employee groups or the media.
It therefore becomes essential for deal teams to understand and appeal to the objectives and concerns of trustees. Doing this will require a full understanding of the roles and responsibilities of trustees as they focus on both their financial responsibilities and on their long-term duty of care to their membership.
Further, trustees will also need to be mindful of the expectations of the UK Pensions Regulator.
Therefore, deal teams need to consider how the acquisition might affect the pension scheme, from the trustees’ perspective, and formulate a clear plan for engaging with them.
A further complicating factor is the fact that the new regulations apply to both UK and overseas plans sponsored by the target.
This means, for example, that deal teams could find themselves obliged to reach out to overseas pension fund trustees (or similar pension representatives). This creates both practical and financial complications – not least that global businesses commonly have numerous pension arrangements covering the various countries in which they operate.
These will need to be identified, considered and potentially consulted with during the offer process.
To adapt to the new rules, buyers should therefore ensure that their deal teams have processes and support in place. This will include compliance but it should also extend to proactively considering the trustee position.
This will limit the potential downside of the new rules and enhance the chances of starting off with a productive and positive relationship. ?
What are the Takeover Panel’s new requirements?
• The Takeover Panel’s aim is to ensure that pensions are considered at an appropriate time during the bidding process.
While considering pensions at an early stage is generally considered to be good commercial practice, the Panel clearly felt that a stronger set of ground rules was needed.
• The acquirer will need to share specified information in relation to the offer with trustees, and it must state its intentions for the pension scheme with regard to any contributions, the future accrual of benefits as well as the admission of new members – and these stated intentions will be binding for twelve months.
• Trustees will be provided with the right to have their opinion on the offer and its implications for the pension scheme appended to the target company’s board circular.
• The new rules will apply to both UK and overseas funded defined benefit pension arrangements.
Steve Allan and Stephen Postill are senior M&A consultants at Towers Watson
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